DAC6, the sixth version of the EU Directive on administrative cooperation, entered into force on 25 June 2018. This directive requires the mandatory reporting and automatic exchange of information with respect to certain cross-border arrangements of individuals, companies and other entities, with the aim of providing EU member states information to undertake risk assessments and react promptly against harmful tax practices.
DAC6 imposes new reporting obligations in respect of reportable cross-border arrangement on “intermediaries” and absent an intermediary, on “relevant taxpayers”. As such, all financial services organisations, including banks, brokers, investment managers and financial advisors with operations in the EU have to make an assessment as to whether they have participated (as intermediary or relevant taxpayer) in any reportable cross-border arrangements since 25 June 2018.
Where an organisation has participated in a reportable cross-border arrangement as an intermediary or a taxpayer, a legal obligation to report such arrangement to local tax authorities may result.
EU member states are required to implement the directive’s provisions into their domestic laws by 31 December 2019, and the relevant law must apply as from 1 July 2020.
On 22 July 2019, HM Revenue & Customs (HMRC) published a draft of The International Tax Enforcement (Disclosable Arrangements) Regulations 2019 (draft regulations) that would implement Council Directive (EU) 2018/822, or DAC6, in the UK. A consultation document also has been published seeking input from stakeholders and setting out HMRC’s current views on how the key concepts of DAC6 should be interpreted for UK purposes. Comments are due by 11 October 2019.
A consultation document, the “ConDoc”, was also published setting out HMRC’s current views on various elements of DAC6 and seeking input from various stakeholders on how certain concepts of DAC6 should be interpreted for UK purposes. The consultation responses are due by 11 October 2019.
Key features of draft regulations and consultation document
As widely expected, the main provisions of the draft regulations are in line with DAC 6, including the key definitions and timeline. Key features of the draft regulations and consultative document include the following:
- HMRC has taken more of a principles-based approach rather than setting out predetermined rules applicable to specific commercial arrangements. The ConDoc focuses on the principles underlying the relevant hallmarks, for example, rather than setting out examples of when a hallmark would or would not apply in practice.
- In order to assess whether an arrangement is cross-border, HMRC’s view is that in order for the arrangement to ‘concern’ multiple jurisdictions those jurisdictions must be of some material relevance to the arrangement. For example, where a permanent establishment enters into an arrangement with a customer in the same jurisdiction this should not constitute a cross-border arrangement even through the company it itself tax resident in a different country.
- A “tax advantage” is defined in the draft regulations as a tax advantage which cannot reasonably be regarded as consistent with the principles on which the relevant provisions are based. It follows that where obtaining a tax advantage can reasonably be regarded as consistent with the policy objectives of a taxing provision it does not constitute a “tax advantage” for these purposes. The ConDoc goes on to state that an arrangement will not have a main benefit of obtaining a tax advantage if the tax consequences of the arrangement are entirely in line with the policy intent of the legislation upon which the arrangement relies. This approach to “tax advantage” and “main benefit” should have the impact of limiting the number of cross-border arrangements to which the draft regulations apply.
- “Tax advantage” includes not only taxes levied by EU Member States but also equivalent taxes levied in other jurisdictions. This means that the draft Regulations could impose a reporting obligation even where the tax advantage arises in a non-EU member state (and is perhaps an indication that over time the reporting requirements could extend beyond the EU Member States).
- With respect to those Hallmarks to which a “main benefit” test applies, being Hallmarks A, B and part of C, certain banks and financial institutions have signed up the “Code of practice on taxation for banks”. The question had therefore arisen whether a bank compliant with the Code could be considered to have acted as an intermediary for arrangements with a main benefit of obtaining a tax advantage. HMRC notes in the ConDoc that DAC6 and the draft Regulations are wider than the Code and compliance with the Code will not, in and of itself, mean that the bank has no reporting obligation under the draft Regulations, e.g. where a Hallmark does not require a tax main benefit. Equally, making a disclosure under the draft Regulations does not necessarily contravene the Code.
- With respect to Hallmark C, in HMRC’s view:
- A tax rate is “almost zero” if it is less than 1%,
- The list of non-cooperative jurisdictions is the list in force on the date on which the reporting obligation arises.
- Obtaining capital allowances in the UK should be seen as equivalent to a deduction for deprecation.
- Double deductions are not reportable where there is dual inclusion of the relevant income.
- HMRC intends to follow OECD principles with respect to Hallmark D given the substantial common ground between Hallmark D and the OECD Mandatory Disclosure Rules (“MDR”). Accordingly, HMRC will interpret Hallmark D in line with the MDR. Likewise, Hallmark E should be interpreted in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as revised by Aligning Transfer Pricing Outcomes with Value Creation, Action 8-10 – 2015 Final Reports.
- With respect to Hallmark E:
Advanced pricing arrangements (APAs) made between tax authorities and companies or groups do not constitute unilateral safe harbours; and in calculating post-transfer EBIT, where a transferor entity would be projected to make a loss if the transfer did not go ahead and, as a result of the transfer, the loss is projected to be nil, Hallmark E(3) will not be in point. This may be of relevance to Brexit restructuring transactions to which Hallmark E(3) might otherwise apply.
- The draft Regulations clarify that an employee of an organisation is not an intermediary or a relevant taxpayer in respect of reportable cross-border arrangement in which the organisation participates.
- Penalties: these are based on the UK’s disclosure of tax avoidance schemes (DOTAS) penalty regime. Failure to report by an intermediary or relevant taxpayer may result in penalty of up to £600 per day that such failure continues, with no maximum. Further, failure by a relevant taxpayer to file an annual report with HMRC stating the details of any reportable arrangements it has been involved in (even where reported by an intermediary) is subject to a penalty up to £10,000.
The DAC6 Team at Deloitte has recently held a webcast to talk through some of the key points raised in the draft regulations and financial services businesses should approach compliance with the draft. You can access the webcast recording here.