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What is the EU’s DAC6 & What Do the Hallmarks Involve?

What is the EU’s DAC6 & What Do the Hallmarks Involve?

The EU's DAC6 and its hallmarks will be one of the topics to be discussed at #TLTaxCon19 in Barcelona this coming October. Make sure to join the discussion by grabbing your tickets HERE. Hope you can join us!

On May 25, 2018, the European Union passed DAC6, the directive on administrative cooperation in the field of taxation, which mandates that intermediaries and pertinent taxpayers disclose specific cross-border arrangements.

This directive was implemented in an effort to curtail new tax avoidance schemes prepared to circumvent reporting under the OECD's Common Reporting Standard (CRS).

This rule came into effect on June 25, 2018, and EU jurisdictions have up until to December 31, 2019, to incorporate the DAC6 into their national law. The law finally becomes applicable starting on July 1, 2020.

Bear in mind that all intermediaries and taxpayers affected by this directive will also have to report any pertinent cross-border arrangement between June 25, 2018, and July 1, 2020.

EU’s DAC6 - Who needs to report

Who Needs to Report?

All intermediaries, either persons or companies, have to report any cross-border arrangements impacted by the DAC6 to their Member State's tax authority.

According to Council Directive 2018/822/EU, intermediaries consist of "any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement," or "provides, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement."

Additionally, relevant taxpayers should report their cross-border transactions when: 1) their intermediary is not from the EU; 2) no intermediary is involved in the cross-border arrangement, or; 3) the intermediary has the right to waiver as a result of legal professional privilege.

EU’s DAC6 What Needs to Be Reported

What Needs to Be Reported?

Any cross-border arrangement that falls under one of five distinct hallmarks needs to be reported by the intermediary or relevant taxpayer involved.

As explained by the EU, these hallmarks are:

  1. Generic hallmarks linked to the main benefit test: arrangements that give rise to performance fees or involve mass-marketed schemes;
  2. Specific hallmarks linked to the main benefit test: this includes certain tax planning features, such as buying a loss-making company to exploit its losses in order to reduce tax liability or arrangements aimed at converting income into capital in order to obtain a tax benefit;
  3. Specific hallmarks related to cross-border transactions with some of these hallmarks also being subject to the main benefit test: for example, deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax. Another hallmark is about deductions for the same depreciation on an asset claimed in more than one jurisdiction.
  4. Specific hallmarks concerning the automatic exchange of information and beneficial ownership: an arrangement is reportable if it has the effect of undermining the rules, or the absence thereof, on beneficial ownership or Directive 2014/107/EU or any other equivalent agreement on automatic exchange of financial account information, and;
  5. Specific hallmarks concerning transfer pricing: these include the use of unilateral safe harbours; the transfer of hard-to-value intangible assets when no reliable comparables exist and the projection of future cash flows or income are highly uncertain.

Keep in mind that the main benefit test referred to above applies to a cross-border arrangement "where an independent third party, under consideration of all relevant facts and circumstances, may reasonably expect that the main benefit, or one of the main benefits, is the obtaining of a tax advantage."

What Information Must Be Shared

What Information Must Be Shared?

As explained by KPMG Switzerland's blog, intermediaries or taxpayers should present the following information to their Member State's tax authority: "The identification of the taxpayers and intermediaries involved, the hallmarks that generated the reporting obligation, a summary of the arrangement, details of the relevant domestic tax rules, the date on which the first step in the implementation is made, the value of the arrangement, [and] identification of any other person or Member State likely to be affected by the arrangement."

Any Challenges or Problems Stemming from DAC6?

Several challenges or problems have emerged from the implementation of DAC6.

Here we highlight some of the main ones:

  1. The directive's scope is very wide in nature, which might make it more difficult for intermediaries and taxpayers to know whether or not their cross-border arrangements fall within the vague hallmarks. This, in turn, might make compliance with the DAC6 burdensome and costly as everyone will feel the need, for risk management purposes, to report their cross-border arrangements.
  2. Given the vagueness of the hallmarks, tax authorities might be flooded with data and receive information on cross-border arrangements that weren't even on their radar. As explained by Robert Walker for Bloomberg Tax, "there are concerns that the widely targeted hallmarks catch standard transactions falling outside the Commission's sights and even some without a tax motivation," and this "uncertainty will likely lead to high levels of detailed reporting as intermediaries struggle with compliance and seek to avoid potentially significant penalties."
  3. DAC6 retroactively applies to all cross-border arrangements as of June 25, 2018, which means that intermediaries and taxpayers must keep a close tab of their cross-border arrangements even before the directive actually comes into full effect in 2020.
  4. The retroactive nature of the DAC6 will also lead to regulatory uncertainty considering that intermediaries and taxpayers do not have national rules to go by since these have not yet been implemented. An article in International Tax Review summarizes this nicely: "It is clear that no intermediary or taxpayer can fulfill their obligations and appropriately document relevant activities efficiently without a supporting database or system."
  5. Despite the DAC6's "main benefit test," certain hallmarks will force taxpayers who do not consider tax planning a component of their tax strategy to follow the directive and abide by its conditions.
  6. It is not clear whether or not in-house tax departments for large multinational companies are considered intermediaries.

Join us in Barcelona for #TLTaxCon19 where this and plenty of other topics will be discussed!

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