The EU Council Directive 2018/822 concerning cross-border tax arrangements, known as DAC 6, impacted a range of businesses including professional advisers, service providers and multinational groups when it came into effect in July 2020.
DAC 6 applies to cross-border tax arrangements which meet one or more specified characteristics or hallmarks and which concern either more than one EU country, or an EU country and a non-EU country. It mandates a reporting obligation for these tax arrangements whether or not the arrangement is justified according to national law.
Failure to comply with DAC 6 could mean facing significant sanctions under local law in EU countries and reputational risks for businesses, individuals and intermediaries.
DAC 6 is widely drafted and captures a range of transactions, not just those involving potentially aggressive cross-border tax planning. As a result, many questions, issues and challenges will be encountered in navigating the rules
While DAC 6 is a tax reporting obligation, several of the hallmarks apply whether or not a tax advantage is a primary benefit of the arrangement. Many everyday commercial transactions could potentially be reportable even in circumstances where they have no tax motive and where they do not produce any tax benefit.
The obligation to report primarily rests with the 'intermediary'. An intermediary will often be a professional services firm but in many cases could extend beyond such firms to include:
Service companies within large groups which provide professional advice to other related companies
External corporate service providers
Banks
Private equity houses
Investment funds
Valuation experts
Legal professional privilege does not provide a full exemption from the rules for law firms. Legal advisers may also have reporting obligations where their advice covers a cross-border arrangement that meets one or more of the hallmarks.
Alternatively, the reporting obligation can rest with the relevant taxpayer in a cross-border arrangement. The relevant taxpayer will need to report where no EU-based intermediary exists or where legal professional privilege applies to any EU based intermediaries involved in the arrangement.
Reporting commenced in early 2021 for reportable cross border arrangements arising in the period from 25 June 2018 to 31 December 2020.
From 1 January 2021 onwards a narrow 30 day timeframe applies. DAC6 reports are due to be filed within 30 days of the earliest of the date on which the reportable cross border arrangement is:
made available for implementation,
ready for implementation, or
the first step in the implementation of the arrangement is taken.
Depending on the category of intermediary, the reporting obligation may instead be 30 days from the date on which aid, assistance or advice is provided in respect of the reportable cross border arrangement.
Determining whether an arrangement is reportable presents challenges for tax experts, let alone business advisors who do not have a tax background and who may not be well-versed on some of the concepts enshrined in DAC 6.
Questions that might arise:
Does the arrangement concern more than one EU Member State, or an EU Member State and a third country?
Where are participants in the arrangement tax resident and how is tax residence determined? How does this apply to partnerships or other transparent entities?
Does the arrangement meet at least one of 15 widely drafted hallmarks, of which only seven contain the "main benefit test"?
Where the main benefit test is concerned, how do you objectively assess whether obtaining a tax advantage is "one of the main benefits" which a person may reasonably expect to derive from the arrangement?
An arrangement could be reportable in more than one EU Member State. However, rules are not identical across the Member States. Some Member States, such as Poland, have gone beyond the minimum standard.
Even in circumstances where Member States have effectively transposed DAC 6 into national law, the tax authorities in those states may not necessarily align on the interpretation of particular provisions.
The requirement to complete DAC 6 reporting within a 30-day time frame presents challenges in terms of data collection and assessment of reportability.
It will be vital to ensure that information captured in relation to transactions, particularly where it is highly sensitive, is stored and transmitted to tax authorities securely. For example, in the case of a pre-sale restructuring or where data is protected by GDPR.
Given the potentially significant penalties for non-compliance, it will be essential to demonstrate to tax authorities that appropriate robust controls and systems are in place to identify and report all reportable cross-border arrangements to the tax authorities.
Many cross-border arrangements may, by their nature, involve multiple intermediaries. Rules may vary between jurisdictions. This may lead to differing views between intermediaries, or between intermediaries and the taxpayer, as to whether an arrangement is reportable. It may be challenging to come to a consensus view. Therefore, your governance must ensure that you can conclude your position as to whether you must report.
Our DAC 6 team brings together specialists in tax, people, processes, data and technology. We help our clients understand this complex piece of legislation and its broader tax policy context. We advise on how to implement effective controls and processes to ensure all reportable cross-border arrangements are identified, collated and managed.
Building upon our experience and in-depth market knowledge, we can perform an analysis of your business' activities and help identify areas where you may have reporting obligations.
We can help you to develop a comprehensive, documented governance framework. We can help you define roles and responsibilities concerning the reporting obligations and identify and manage risks.
We can support you in the effective and efficient collation, analysis and storage of the data you need for reporting.
We can assist you in fulfilling multiple reporting requirements using technology solutions. We can help you process data sets through the DAC 6 reporting mechanism and put it into the required XML schema. We can also help you to prepare the necessary paperwork.
We can provide on-site or online workshops for your staff to educate them on how to identify relevant transactions on an ongoing basis.
We have developed two technology solutions to help organisations comply with DAC 6. Our tools are especially useful for organisations involved in a significant number of transactions across various Member States that involve several business units.
At PwC, we have developed an entirely web-based solution to help clients assess their reporting obligations, capture the required information and manage their filing obligations. The DAC 6 Smart Reporting tool is systematic, structured, secure and auditable.
It has been created with assistance and input from PwC DAC 6 specialist teams from across Europe. The technology allows you to navigate rules across all jurisdictions and helps you understand the requirements in each country in which you operate. It identifies divergences in the rules and their interpretation in those jurisdictions.
Please reach out to us to arrange a demonstration.
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Our DAC 6 Compare tool gathers together valuable views and insights from our DAC 6 Central Expert Group. It collates our understanding of the interpretation of the directive from the perspective of all EU Member States.
The Compare tool contains up-to-date information on the local implementation of DAC 6 and guidance from each jurisdiction.
It also facilitates country comparisons to allow quick identification of differences across Member States. The tool includes details of additional requirements introduced by some countries which go beyond the scope of DAC 6.
