What is DAC6?
Transparency has been high on government agendas since the global financial crisis and this has resulted in the introduction of a number of tax transparency and anti-avoidance measures across the world.
The adoption of the OECD’s Common Reporting Standard (CRS) introduced automatic exchange of tax and financial information on a global level. This was a game-changer, providing for the international exchange of account holder information and introducing a new level of transparency.
The OECD then turned its attention to combatting Base Erosion and Profit Shifting (BEPS) – multinational enterprises exploiting gaps and mismatches between different countries’ tax systems to ‘shift’ profits from higher-tax jurisdictions to lower-tax jurisdictions and thereby ‘eroding’ the tax bases of higher-tax jurisdictions.
DAC6 – officially Directive 2018/822 amending Directive 2011/16/EU on Administrative Cooperation in the field of taxation – is the European Union’s response to Action 12 of the OECD’s BEPS project. It provides for the mandatory disclosure by intermediaries, or individual or corporate taxpayers, to the tax authorities of certain cross-border arrangements and structures that could be used to avoid or evade tax and the mandatory automatic exchange of this information amongst EU member states.
DAC6 imposes mandatory reporting of cross-border arrangements affecting at least one EU Member State that fall within one of a number of ‘hallmarks’: broad categories setting out particular characteristics identified as potentially indicative of aggressive tax planning. The information reported will be contributed to a central directory accessible by the competent authorities of the Member States.
Although intended to target aggressive tax planning, the Directive has been drafted such that it can also apply to standard transactions with no particular tax motive. This means that ordinary transactions such as cross-border leasing, securitisation structures, certain types of reinsurance and many standard group corporate funding structures may be reportable.
How does this affect companies in the Middle East?
Middle East based individuals and companies should not assume they will be unaffected by the new DAC6 regime. It will apply to cross-border arrangements, either involving more than one EU Member State, or concerning a Member State and a third country – e.g. in the Middle East.
An obligation to report under DAC6 may therefore fall on Middle East companies that meet any of the following criteria:
- Companies that have permanent establishments (PEs) in the EU
- Companies that have a taxable presence in the EU
- Companies that receive an income or profit in the EU, even without a PE
- Companies that carry out any business activities in the EU, even without a PE
The reporting obligation falls initially on the applicable EU-based ‘intermediary’ involved in the arrangement – bank, accounting firm, law firm or other service provider. But where there is no EU intermediary, or where legal and professional privilege applies, the reporting obligation falls on the ‘taxpayer’.
The taxpayer could include a ME-based individual or company that is party to a transaction into the EU, or the EU subsidiary of a ME parent company that is party to a transaction into another EU Member state or outside the EU.
What are the hallmarks?
Some hallmarks only apply if the ‘tax main benefit test’ – a test to determine if one of the main objectives of the arrangement is to obtain a tax advantage – is met. However others have no such requirement and are potentially much broader in application.
Hallmarks which are subject to the tax main benefit test:
- Generic hallmarks – includes confidentiality, premium fee and standardised tax arrangement hallmarks.
- Specific hallmarks with a tax main benefit – include acquiring a loss making company, converting taxable income into capital gains or exempt income, and circular or offsetting transactions.
- Specific hallmarks related to cross-border transactions – includes deductible cross-border payments, where the recipient is resident in a state whose corporate tax rate is zero or ‘almost zero’, or the receipt is exempt or the payment benefits from a preferential tax regime.
Hallmarks not subject to the tax main benefit test:
- Specific hallmarks related to cross border transactions – includes deductible cross-border payments, where the recipient is resident nowhere; deductions for depreciation on the same asset are claimed in more than one jurisdiction; double tax relief is claimed in more than one jurisdiction; or where there is a transfer of assets and there is a material difference between the consideration in the two jurisdictions.
- Specific hallmarks concerning automatic exchange of information and beneficial ownership – these apply even if a tax advantage is not the main benefit, and include structures involving holding companies and trusts, whereby the identity of the beneficial owners are made ‘unidentifiable.
- Specific hallmarks concerning transfer pricing – arrangements involving unilateral safe harbour rules; arrangements involving the transfer of hard-to-value intangibles; and cross-border transfer of functions/risks/assets that result in the EBIT of the transfer or to fall by more than a specified amount.
- Specific hallmarks concerning the automatic exchange of information and beneficial ownership – transactions that undermine the CRS reporting obligation.
When is DAC6 being implemented?
The Directive came into force on 25 June 2018. Transitional rules require that reportable cross-border arrangements implemented between 25 June 2018 and 30 June 2020 will be disclosable, with a reporting deadline of 31 August 2020.
From 1 July 2020 – when the transitional period ends – disclosures will need to be made within 30 days of advice being given or the first step of transactions being implemented.
With the DAC6 regime coming into full effect in July, it will be mandatory for Middle East companies with potential EU reporting obligations to ensure they meet the necessary requirements. There are still areas needing further clarification, which we expect the tax authorities will address and finalise in the lead up to June 2020.
Sovereign can provide reliable, professional advice on these matters. We have significant experience in gathering and reporting company data and are helping our clients understand and respond to the new legislation.