Complex new tax reporting requirements are right around the corner for companies with business operations in the European Union (EU).
In June 2018, the EU issued the fifth amendment to its Directive on Administrative Cooperation—commonly called DAC6—calling for “relevant” taxpayers or their intermediaries to report certain cross-border tax arrangements to authorities.1
The directive’s intent is to give tax authorities access to comprehensive information about potentially aggressive tax arrangements so they can close loopholes, undertake risk assessments, and decide whether to conduct audits.
Under the new rules, taxpayers or their intermediaries (including banks, law firms, and tax advisors) will need to:
- comply with disclosure requirements in the twenty-seven EU member states;
- navigate deviations in regulations by jurisdiction;
- file disclosures covering the past two years and then continue to do so regularly going forward; and
- overcome significant data management challenges and devise new work streams to ensure ongoing compliance.
How We Got Here
DAC6 advances the effort by the Organisation for Economic Co-operation and Development (OECD) to mitigate tax avoidance through its base erosion and profit shifting (BEPS) project.
BEPS Action 12 includes recommendations for the design of rules requiring taxpayers and advisors to disclose aggressive tax planning arrangements,2 and DAC6 directs each EU member state to enact such rules.
Specifically, DAC6 requires each EU country to adopt laws, regulations, and administrative provisions necessary to comply with the directive and to apply them beginning July 1, 2020.
A cross-border tax arrangement involves at least one EU member state and must be reported if it contains one of the directive’s hallmarks, which are characteristics or features that indicate a potential risk of tax avoidance.
Hallmarks linked to the “main benefit test” make a cross-border arrangement reportable. This test is met when the main benefit a taxpayer may reasonably expect to derive from an arrangement is to obtain a tax advantage.
Who Must Report
Intermediaries or relevant taxpayers must disclose reportable cross-border arrangements.
An intermediary designs, markets, or organizes a reportable cross-border arrangement or makes it available for implementation or manages the implementation. An intermediary must meet at least one of these additional conditions:
- be tax-resident in a member state;
- have a permanent establishment (PE) in a member state through which the services with respect to the arrangement are provided;
- be incorporated in, or governed by the laws of, a member state; and
- be registered with a professional association related to legal, taxation, or consultancy services in a member state.
Imposing a reporting obligation on intermediaries may, in certain circumstances, lead to a breach of legal professional privilege under a member state’s national law. In these cases, an intermediary may receive a waiver from filing.
The Clock Is Ticking
The new rules require reportable cross-border arrangements implemented between June 25, 2018, and July 1, 2020, to be disclosed by August 31, 2020.
After July 1, 2020, arrangements must be reported within thirty days beginning either 1) on the day after the reportable cross-border arrangement is made available or ready for implementation or 2) when the first step in the implementation of the reportable cross-border arrangement has been made (whichever occurs first).
Member states’ taxing authorities will exchange disclosed information beginning no later than October 31, 2020.
Implementing the Directive
Many jurisdictions have implemented, or are in the process of implementing, DAC6.
As of January 2020, the United Kingdom is working to transpose DAC6 into domestic law through various regulations that will require taxpayers and their advisors to provide Her Majesty’s Revenue & Customs (HMRC) with details of cross-border arrangements that have features commonly seen in schemes used to avoid or evade tax. This will provide HMRC with additional information to identify and challenge offshore noncompliance and deter taxpayers from engaging in aggressive tax arrangements.
France and Austria enacted laws to implement DAC6 in October 2019, and Germany, Ireland, and Belgium followed suit in December 2019.
To stay compliant, corporate tax departments will need to stay abreast of deviations in the rules and reporting requirements for each country.
Managing the New Regime
Compliance is a two-step process:
- First, companies should complete the one-time project of fulfilling retroactive reporting requirements. These cover reportable arrangements initiated between June 25, 2018, and July 1, 2020. Reports must be submitted by August 31, 2020.
- Next, companies need to establish operational systems and processes to identify, on an ongoing basis, internal activity that may meet DAC6 hallmarks and signal a reportable arrangement—and be prepared to file disclosures within thirty days of an arrangement’s being ready or available for implementation.
Given the thirty-day reporting requirement, it’s unlikely the data needed to comply will have been entered into an existing system, such as a company’s enterprise resource planning system, in time to facilitate DAC6 reporting.
The data is likely to be scattered across the multinational enterprise, given that reportable arrangements may involve a wide range of activities such as planned mergers and acquisitions, proposed cross-border payments, movement of personnel, various treasury activities, and business activities that impact transfer pricing.
As a result, compliance may require a monthly scavenger hunt. Companies will need a way to ask the right people the right questions regularly to unearth relevant business activity and to determine whether planned activities constitute a reportable cross-border arrangement.
Going forward, companies tasked with DAC6 reporting should do the following:
- identify people within their organization who manage the relevant data from across regions and functions—including tax, treasury, strategy, human resources, and operations;
- create a set of questions that will surface information necessary to identify relevant tax arrangements;
- analyze the information to determine if an arrangement needs to be reported and, if so, manage submission to the appropriate tax authorities;
- solicit answers to these questions monthly so reports can be filed within the thirty-day window, as needed; and
- establish new workflows to efficiently complete these steps on an ongoing basis.
An automated reporting solution built upon a database of country-specific rules can support workflow processes, including data collection, analysis, and reporting—and keep taxpayers on track as the reporting regime evolves, which it inevitably will.
Jessica Silbering-Meyer, J.D., M.B.A., is an executive editor of international tax with the tax and accounting business of Thomson Reuters.
- “Relevant taxpayer” means any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement. See Council Directive (EU) 2018/822 of 25 May 2018, Amending Directive 2011/16/EU as Regards Mandatory Automatic Exchange of Information in the Field of Taxation in Relation to Reportable Cross-Border Arrangements, Official Journal of the European Union, June 5, 2018, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32018L0822.
- Action 12 Mandatory Disclosure Rules, Inclusive Framework on Base Erosion and Profit Shifting (BEPS), OECD, accessed February 28, 2020, oecd.org/tax/beps/beps-actions/action12/.