With the objective of helping the tax authorities of European Union Member States detect new forms of tax avoidance, the Council of the European Union has introduced new amendments to one of the EU’s directives on administrative cooperation (Directive 2011/16/EU).  The amendments, known as DAC 6, focus on the mandatory automatic exchange of information in relation to “reportable cross-border arrangements,” which are transactions and tax arrangements that are considered by the EU to be “potentially aggressive.”

To politicians within the EU Member States, and perhaps many EU voters, the DAC 6 rules might, at first sight, look reasonable.  They have been designed by the EU Commission as an early warning mechanism against new forms of tax avoidance.  DAC 6 builds on similar legislation which is in existence in the United Kingdom regarding the disclosure of tax avoidance schemes, known as the “DOTAS” rules.  As noted below, however, the Directive reaches further and with greater potential for disruption than the UK DOTAS rules.

The burden of disclosing reportable cross-border arrangements which are within the scope of DAC 6 falls on “intermediaries” which have an EU nexus.  An intermediary will have an EU nexus in a number of circumstances which include being incorporated or resident in an EU Member State, and where the intermediary has a permanent establishment in a Member States through which services are rendered.  If there are no qualifying intermediaries which can report under DAC 6, the disclosure obligation will shift to the relevant taxpayer in the arrangement.  

Following the reporting of the reportable cross border arrangements, the information provided will be automatically exchanged between the tax authorities of the EU Member States. There will be penalties for intermediaries and taxpayers that do not comply.

As DAC 6 has been introduced in directive form, it requires transposition by its 28 (or 27, post-Brexit) Member States into their respective national law. All EU Member States are required to introduce DAC 6 into national law by the end of 2019.  The first disclosures, retrospective to transactions entered into on or after June 25, 2018, are required to be made in August 2020.  Notwithstanding the Brexit process, the UK’s government is publicly committed to introducing the DAC 6 Directive (and legislation doing this was included in the UK Finance Act 2019).

Who is obliged to report? To which Member State?

The primary obligation to report is on EU “intermediaries.” An “intermediary” is defined as a person involved in designing, offering, marketing and organizing or managing the implementation of a reportable cross border arrangement.  Intermediaries will also include any person providing assistance with implementation or providing advice in relation that implementation.  If there are no qualifying intermediaries which can report, the reporting obligation moves to the taxpayers.

Law firms, accounting firms, banks, corporate service providers, financial arrangers and many asset and investment managers will therefore be “intermediaries.” However, the Directive states that intermediaries who operate under legal professional privilege will not need to disclose (unless that privilege has been waived by a client, or otherwise lost).  The Directive is unclear whether lawyers are wholly exempted or are expected to disclose information which is “factual in nature.”  HM Revenue & Customs (HMRC) in the context of the DOTAS rules, had reportedly accepted the advice that factual information provided to lawyers to enable them to provide legal advice is, itself, privileged.  Will HMRC apply that same approach in the context of DAC 6?  One of the practical concerns for legal intermediaries and their clients is how far legal professional privilege extends in the context of DAC 6, and whether the protection of privilege will be consistent across all of the EU Member States in this respect.

As a transaction may involve multiple intermediaries, each potentially having nexus with multiple EU Member States, DAC 6 has provided a set of hierarchies to determine who should report to which Member State’s national tax authority. Intermediaries will need to carefully review these hierarchies (as implemented by the relevant EU Member States) to prevent non-compliance with any particular national regime, especially any national regime which diverges from the wording of the DAC 6 Directive.  For example, Poland’s rules reportedly go further than DAC 6 and cover non-EU intermediaries.

Importantly, where there are multiple qualifying intermediaries, a report is not required to be made by an intermediary which satisfies itself that a report has been made by another intermediary (or client taxpayer), and the information it would have reported has already been captured in that report. Given the tight timescale for disclosure (as further explained below), the expectation of the EU Commission in drafting DAC 6 is that intermediaries will coordinate to ensure only one of them will report on time; each intermediary can then review the submitted report to satisfy itself that there are no gaps in reportable information.  Unfortunately, there is no mechanism under which this de facto cooperation is mandated in the Directive itself.  While local market practice between intermediaries may well develop, added complexity and increased costs in determining which intermediary makes which disclosure in a specific transaction are real concerns given the unclear wording of the Directive in this area.

What arrangements are reportable?

The scope of the “reportable cross-border arrangements” is far broader than the comparable UK DOTAS rules, and is likely to lead to extensive reporting obligations for both intermediaries and taxpayers.  Reporting obligations for cross-border arrangements are triggered where the arrangement has an EU nexus and meets certain “hallmarks” (or characteristics).

These hallmarks target a relatively wide range of cross-border tax and corporate arrangements – broadly those where some form of tax avoidance or aggressive tax mitigation is present. Importantly, not all hallmarks require the existence of a tax advantage as a main benefit of the arrangement.  It is therefore possible that some specific hallmarks might catch innocent commercial transactions where no tax advantage exists for any participant.  Furthermore, there are no minimum threshold exceptions.

“Tax” in the context of DAC 6 is widely defined to be direct taxes, wherever enacted.  Most EU States, including the UK, are treating this as effectively meaning that any taxes, not just EU taxes (and therefore including United States-legislated taxes), are caught within the scope of the Directive.  So, theoretically, a cross-border structure which involved EU entities but which avoided U.S. tax would be disclosable to a European tax authority – although one suspects that EU taxes which have been mitigated and avoided are the primary focus of the EU Commission in introducing DAC 6.

Timeframe for disclosure

DAC 6 requires the reporting to be done within a 30-day period starting from the earliest of (a) the day after the reportable cross-border arrangement is made available for implementation; (b) the day after the reportable cross-border arrangement is ready for implementation; and (c) when the first step in the implementation of the reportable cross-border arrangement has been made.

Intermediaries will need to pay attention to this timescale, as the clock may have started ticking before the legal closing of the arrangement in question.

How is the market responding?

The Directive requires disclosure of reportable transactions taking place on or after June 25, 2018, with all disclosures from that date needing to be made by August 31, 2020.  Only a small number of EU Member States have so far enacted the Directive; where national tax authorities have produced guidance for intermediaries it is generally in draft form at present. 

Accordingly, the impact of the Directive on many transactions has not yet been seen.

As DAC 6 retroactively requires the disclosure of reportable arrangement which have been implemented on or after June 25, 2018, affected intermediaries and taxpayers should consider and assess whether any reportable cross-border arrangements exist in relation to which they are a qualifying intermediary or a taxpayer since that date. Any person affected (whether an intermediary or taxpayer) should then coordinate with other intermediaries and taxpayers to determine which party should make the disclosure and to which EU Member State’s tax authority such disclosure should be made.