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As tax-planning structures being more and more sophisticated, the tax authorities are struggling against tax base erosion. In that respect, the European Union (EU) recently introduced additional measures to increase the level of transparency in order to better detect potential aggressive cross-border tax arrangements. Through the Directive 2018/822, commonly referred to DAC6, EU introduced new mandatory disclosure requirements impacting intermediaries (including tax advisors and service providers) and taxpayers. The latter will be required to disclose information on cross-border arrangements that presents an indication of a potential risk of tax avoidance. All the collected data will be automatically exchanged within the EU Member States.
As the mandatory reporting to the tax authorities is required from 1 July 2020, there will be significant consequences for many service providers and taxpayers (including companies and individuals in Switzerland). Therefore, the purpose of this Newsletter is to expose the requirements contained in DAC6 and allow readers to identify which transaction may fall within the scope of DAC6 in order to fulfill their potential obligations.
First and foremost, we have to specify that the implementation of DAC6 is delegated to local jurisdictions. In that respect, DAC6 rules won’t be implemented the same way in each EU Member State. This might create some slight differences between each domestic law of EU Member State. Such differences will be ignored in this Newsletter. Intermediaries and taxpayers shall therefore always control their domestic law to consider the specificities of each local jurisdiction.
Reportable arrangements
For purposes of the Directive, « cross-border arrangements » involving one or more EU Member States, or one EU Member State and one third country, should be considered as reportable. This would especially be so if not all the participants within the arrangement are tax resident in the same State or if one (or more) participant(s) carries on a business in another State through a permanent establishment. In that latter case, the concerned arrangement shall however impact totally or partially the business of the said permanent establishment.
In order to be reportable, a cross-border arrangement shall however meet at least one of the so-called « hallmarks » mentioned in the Directive, considered as an indicative of tax avoidance risk. In this regard, a distinction should be made between the specific hallmark, which will automatically trigger the mandatory reporting obligation and the generic hallmark. For that latter hallmark, the mandatory reporting obligation will be triggered only if it can be established that the main benefit or one of the main benefits which a person may reasonably expect to derive from an arrangement is obtaining a tax advantage. In that respect, it is important to specify that DAC6 concerns only direct taxes (such capital tax, wealth tax, income tax, inheritance tax and tax on donations). Note that some domestic laws may have extended DAC6 and included indirect taxes (such value added tax).
Covering a wide range of arrangements, the mandatory disclosure rules could therefore impact standard operations, such as for examples: arrangement providing with a loan to a subsidiary where taxes are lower, arrangement involving a beneficial ownership chain with the use of persons, legal arrangements or structures where the beneficial owners of such structures is not identifiable, arrangement involving intragroup restructuring (transfer of functions and/or risks) resulting in profit shifting from the transferred company or arrangement where income is converted into capital, gifts or other categories of revenue which are taxed at a lower rate or are exempt from tax. As mentioned above, the Directive may be implemented differently in each domestic law of the EU States. Thus, the arrangements that fall within the scope of the DAC6 may differ from a State to another.
Intermediaries and taxpayers may need to report
Under DAC6, the reporting obligation focuses on the intermediaries involved in the arrangement. Such intermediaries are defined as all actors (including companies and individuals) that are usually involved in designing, marketing, organizing or managing the implementation of a reportable cross-border transaction or a series of such transactions, as well as those who provide assistance or advice for cross-border transaction. Lawyers, auditors, tax advisors and banking institutions may be in particular qualified as intermediaries.
However, the intermediaries’ definition specifies that they shall be located in the EU. This means that at least one of the following additional conditions must be met: being tax resident for tax purposes in a Member State, having a permanent establishment in a Member State through which one the services with respect to the arrangement are provided, being incorporated in, or governed by the laws of a Member State or being registered with a professional association in relation with legal, tax or consulting services in a Member State. If the conditions mentioned above are not met, the resident is not considered as an intermediary and won’t be liable to file information regarding any reportable arrangements. Thus, in principle, the reporting obligation will not lie with abroad taxpayer (as Swiss taxpayers).
In that respect, it should be specified that RSM Switzerland SA is not an intermediary under DAC6 and therefore is not liable to mandatory reporting obligation.
In case no intermediary would be involved in the process, the taxpayers themselves will be required to report themselves the relevant information. This could be the case if the reportable cross-border transaction has been managed without an external advisor, if the intermediary is forced to maintain professional duty of confidentiality or if the intermediary is located outside EU. In that respect, if a taxpayer mandates RSM Switzerland to be advised on a reportable transaction, the reporting obligation will lie with the concerned taxpayer, unless any other qualified intermediary is involved in the cross-border transaction. In that case, the reporting obligation will lie with such intermediary.
In case more than one intermediary (or taxpayer) is involved in the same reportable cross-border arrangement, the intermediary (or taxpayer) shall be exempt from filing the information if it can prove that the transaction has been already reported by another intermediary (or taxpayer).
The reporting obligation involving to share a significant amount of information, intermediaries and taxpayers should therefore be well prepared. The report shall notably contain the following information: identification of intermediaries and relevant taxpayers, details of the hallmarks met by the reportable arrangement, summary of the content of the reportable arrangement, etc.
As the implementation of DAC6 is delegated to local jurisdictions, the reporting format might be different as per each EU Member State. However, its seems that Member States chose to collect the information through standard electronic form, having to be fulfilled by intermediaries or taxpayers (hereafter: the actor). Where the actor is liable to file information at more than one EU Member State, such information shall be filed only to the first Member State in the following list : where the actor is considered as a tax resident; where the actor has a permanent establishment through the arrangement’s services are provided; where the actor is incorporated in or governed by the laws of; where the actor is registered with a professional association in relation with legal, tax or consulting services. To be exempt from the related reporting obligation in the other Member States, the actor shall then prove that the transaction has been already reported in another Member State.
Timing and retroactive effect of DAC6
Although DAC6 comes into force from 1 July 2020, the rules will apply retroactively from 25 June 2018. This means that the reporting obligation will include information related to reportable arrangements in which the first step of implementation is undertaken on or after 25 June 2018. The deadline for filing the first report is 31 August 2020. However, in light of COVID-19, the Council of the European Union has reached an agreement that allows EU Member States to extend the reporting deadline by six months. In that respect, reportable transaction where the first step of implementation is undertaken between June 25, 2018, and June 30, 2020, may be reported at the latest until February 28, 2021. Given the fact that this extension deadline is optional, the actors should refer to the relevant domestic law.
Regarding reportable arrangements where the first step of implementation was undertaken after July 1, 2020, the arrangements must generally be reported within 30 days after the occurrence of a following event : the reportable cross-border arrangement is made available for its implementation; the reportable cross-border arrangement is ready for its implementation; when the first step in the implementation of the reportable cross-border arrangement has been made. This means that a reporting obligation may be triggered by the writing of a memorandum or the application for a tax ruling.
As mentioned above and in light of COVID-19, the Council of the European Union has however allowed EU Member States to extend the reporting deadline by six months. This means that reportable arrangements where the first step of implementation was undertaken between July 1, 2020 and December 31, 2020, may be reported at the latest until January 31, 2021. Given the fact that this extension deadline is optional, the actors should refer to the relevant domestic law.
Penalties
EU Member States shall lay down the rules regarding penalties in case of non-compliance with domestic law adopted pursuant to DAC6. Therefore, there are significant differences between each Member State. Some penalty fees could vary from a few hundred Euros up to several million Euros. Besides the financial aspect of such penalties, the non-compliance with those obligations may have a negative impact on the intermediary or taxpayer reputation.
RSM at your disposal
We would be delighted to assist you with regards to this upcoming reporting obligations and offer our assistance as follows:
- Identification of any ;
- Identification of intermediaries or taxpayers that fall under mandatory reporting obligation;
- Coordination with RSM offices located in EU Member States.
