As anticipated, the UK government has announced a six month deferral of the first reporting deadline for DAC 6 to provide taxpayers and intermediaries dealing with the impacts of the COVID-19 pandemic with additional time to ensure that they can comply with their reporting obligations.
The UK has incorporated into law the regulations implementing the EU Directive on Administrative Cooperation (DAC 6) (The International Tax Enforcement (Disclosable Arrangements) Regulations 2020).
The Directive provides for the mandatory automatic exchange of information between member states about certain cross-border arrangements. It is part of the European Commission’s ongoing work on promoting tax transparency and preventing international tax avoidance. The UK Government has committed to participating fully, notwithstanding withdrawal from the European Union.
The regulations come into force, and the first reports will be made, on 1 January 2021. However, the Directive requires that relevant arrangements entered into from 25 June 2018 must be reported. Organisations and individuals affected by these rules will, therefore, need to interrogate their records for the last two years to identify arrangements that are now subject to a requirement to report. Going forward, reporting will be required within 30 days of certain trigger events (broadly, initiating a relevant reportable arrangement).
What is reportable?
In many cases, arrangements that are reportable will have a ‘tax advantage’ attached to them. However, these rules go further and cover arrangements with no obvious tax motive. In particular, they include transfers that are ‘base erosive’ simply in virtue of transferring certain assets or businesses from one jurisdiction to another. They also cover arrangements that may be designed to frustrate EU or OECD rules on transparency (eg circumventing the Common Reporting Standard or obscuring beneficial ownership of certain assets). While the OECD’s 2018 model disclosure rules on tax transparency do not have the force of law, they will be used as a source of interpretation of the EU rules.
In a similar way to the UK’s existing rules for disclosure of tax avoidance schemes (DOTAS), DAC 6 sets out a number of ‘hallmarks’ for identifying the types of arrangement that must be reported. These are defined very widely, but some examples of arrangements potentially considered reportable include:
- Certain intra-group payments or transfers of assets where tax is not charged in full on the receipt
- Transactions or structures where the effect (not necessarily the motive) is to undermine the automatic exchange of information or where it is not possible to identify beneficial owners
- Certain transfer pricing arrangements utilising ‘safe harbours’
- Certain transfers of assets (including intangibles such as IP) or business functions between jurisdictions
- Arrangements characteristic of tax avoidance schemes such as converting income into capital
- Standardised tax products (eg those involving confidentiality clauses, contingent fees and so forth).
Who is obliged to report what?
The primary obligation to report will be with the taxpayer’s advisers (so-called ‘intermediaries’). There are two types of intermediaries, which include those ‘promoting’ arrangements (typically tax advisers and lawyers) and a wider class of ‘service providers’. This latter group could include banks, financial advisers, trustees, administrators, accountants etc.
However, the information that must be reported will include providing HMRC with details of the taxpayer. HMRC will then pass this information on to the relevant tax jurisdictions within the EU on a quarterly basis from January 2021 via a new EU central directory on administrative co-operation. The taxpayers will have an ongoing obligation to disclose the arrangements on their tax returns.
A majority of the hallmarks are clearly aimed at companies, but the rules on tax transparency are likely to also apply to individuals. Therefore, all taxpayers need to be aware of the potential reporting issues when they are undertaking arrangements that might trigger a disclosure.
As usual, the EU Directive sets a statutory minimum for the local reporting legislation. Therefore, it is possible that each jurisdiction may interpret the hallmarks or other aspects of the Directive slightly differently. HMRC is currently consulting on guidance setting out its views. There will inevitably be a period in which these rules ‘bed down’, during which time it may be difficult to confidently assess exactly what will need to be reported. There is also a significant risk that the requirements of DAC 6 will result in disclosures of common or garden commercial transactions that are of no interest to taxing authorities, or, worse, multiple disclosures of an arrangement by different intermediaries. HMRC’s current thinking on how to avoid multiple disclosures seems to be to allow one ‘lead promoter’ to discharge the reporting obligations of other intermediaries, although there remains a degree of scepticism among intermediaries about how this will operate in practice.
Many organisations are also struggling with embedding these uncertain requirements into their internal processes and tracking arrangements that they may need to report in July 2020. A penalty regime that can result in penalties of up to £1m has exacerbated these concerns.
What are the wider implications of reporting an arrangement?
As with UK DOTAS, making a report in itself does not imply the violation of any tax rule. The OECD expressly states this in the introduction to its disclosure rules on tax transparency.
Over time, we would hope that a system may eventually evolve through feedback from member states to the EU central directory on administrative cooperation whereby greater clarity emerges on the sorts of arrangements that are properly reportable. Clearly, the possibility that different jurisdictions may interpret the rules differently (most obviously under common law and civil law) means that this evolution may take some time.
In the meantime, a DAC 6 report may lead to increased risk of tax enquiries and possible challenge and even to the relevant tax authority reviewing and altering its tax legislation. It is also possible that a series of reports could affect the taxpayer’s ‘risk’ profile as far as HMRC is concerned, leading to enhanced scrutiny in other areas. The reputational issues associated with a DAC 6 report will need to be considered carefully by both taxpayers and intermediaries.
With Brexit and US tax reform driving the need to review and adjust cross-border structures, businesses should consider carefully the potential implications of reporting when undertaking any transactions that might fall within the DAC 6 rules. If you would like to discuss the status of DAC 6 implementation please get in touch with your usual BDO adviser or contact the team listed.