DAC 6 is the latest update in a series of EU initiatives that relate to the automatic exchange of information regarding tax with the introduction of the Mandatory Disclosure Rules (MDR).
The objectives of the MDR are to obtain early warnings regarding potentially aggressive or abusive tax avoidance schemes; to identify these schemes and their users; and to act as a deterrent to reduce the promotion and use of tax avoidance schemes.
DAC 6 places the obligation on the intermediaries or taxpayers to disclose potentially aggressive tax planning arrangements and provides a way for tax administrations to exchange information on these structures. This includes the reporting of cross-border arrangements that fall within a set of “Hallmarks”. These Hallmarks must be assessed in light of a main benefit test and thereafter reported within 30 days of the earlier of either the arrangement being made available to the taxpayer or to the implementation of the arrangement.
The scope of this directive is all taxes, including local financial transaction taxes, stamp duties and insurance taxes and excludes VAT, customs & excise duties and compulsory social contributions.
HALLMARKS – MAIN BENEFIT TEST:
A – Generic Hallmarks
- The tax payer undertakes to comply with a confidentiality condition.
- Contingent fee (success fee based on saving).
- Standardised documentation is used.
B – Specific Hallmarks
- Acquisition of loss-making company, discontinuation of main activity and using losses.
- Conversion of income into a category taxed a lower level/exempt.
- Circular transactions resulting in the round-tripping of funds.
C – Specific Hallmark – cross border transactions
- Deductible payments to a related party where the jurisdiction in which the recipient is tax resident.
- Assets subject to depreciation in more than one country.
- Claiming DT relief more than once.
- Transfer of assets.
*D – Automatic Exchange of Info
- Circumventing of reporting obligations on automatic exchange of Financial Account Info.
- Legal structure lacking substantive economic activity where BO are unidentifiable.
*E – Transfer Pricing
- Use of unilateral safe harbour rules.
- Transfer of hard to value intangibles.
- Intragroup cross-border transfer of functions / risks / assets resulting in an EBIT decrease >50% during the following 3 years.
Relevant EU taxpayers or their intermediaries have an obligation to report on any cross-border arrangements that fall within these Hallmarks. Penalties have been put in place and set out in the Regulations for intermediaries or relevant taxpayers who do not comply with these obligations.
ARQ can advise clients on the introduction of DAC 6 and its implementation.
The DAC 6 became effective in July 2020 and first reporting is 28th of February 2021, covering the period from 25th June 2018 to 1st July 2020.
For any further information or assistance in EU tax matters, kindly contact ARQ Group Partner, David Borg, on dborg@arqgroup.com
*Hallmarks where Main Benefit Test is not required