DAC 6 obliges intermediaries and taxpayers to report
"potentially aggressive tax planning arrangements" to their
respective national authorities. The scope of the reporting
obligations under the rules is surprisingly wide, requiring
both intermediaries and companies within the European Union to
address those reporting obligations more intensively. In
addition, multinational enterprises (MNEs) that advise their
group companies could also be caught by the rules as
Although the rules do not enter into force until July 1 2020
across the EU member states, taxpayers and intermediaries will
need to review their cross-border arrangements now to ensure
they are not unexpectedly caught by the rules in two years.
The EU Economic and Financial Affairs Council (ECOFIN)
reached political agreement on March 13 2018 on the final draft
of the Council Directive (EU) 2018/822, which
amends Directive 2011/16/EU on mandatory automatic exchange of
tax information regarding reportable cross-border
According to Article 3, No. 19, of the Directive on
Administrative Cooperation (DAC), any cross-border arrangement
that has at least one of the following hallmarks set out in
Annex IV, must be reported to the national EU tax authority as
of July 1 2020:
A. General hallmarks;
B. Specific hallmarks which may be linked to the main
C. Specific hallmarks related to cross-border
D. Specific hallmarks concerning automatic exchange
of information agreements in the EU; or
E. Specific hallmarks concerning transfer
Some of the hallmarks listed above lead to a reporting
obligation only if they meet the so-called "main benefit" test,
which applies to hallmarks A, B and to C.1 (b) (i), (c) and
(d). This test will be met if obtaining a tax advantage
constitutes the main benefit, or one of the main benefits, a
person is expected to derive from an arrangement.
As a reverse conclusion, transactions must be disclosed
under some hallmarks even if the arrangements are not
tax-driven at all.
As such, even those taxpayers, who do not see tax planning
as being part of their tax strategy, will need to observe DAC 6
Article 2(1) of the Directive requires member states to
transpose the Directive into national law by December 31 2019.
From July 1 2020, cross-border tax arrangements become
- The reportable cross-border arrangement is made available
for implementation; or
- The reportable cross-border arrangement is ready for
- The first step in the implementation of the reportable
cross-border arrangement has been made.
Reportable arrangements need to be disclosed from this point
in time to the local EU tax authority within 30 days.
It should be noted, however, that according to Article 8ab,
paragraph 12 of the DAC, intermediaries and taxpayers are
subject to an obligation to report arrangements by August 31
2020 if the first step was implemented between June 25 2018 and
July 1 2020.
Challenges arising from DAC 6
The challenges arising under the new reporting obligations
of DAC 6 are seemingly countless.
The retroactive effect described above forces intermediaries
and taxpayers to start analysing their transactions now, in
order to determine the scope of what needs to be reported after
July 1 2020.
This confronts these parties with the problem that the
Directive has not yet been implemented in any EU member state,
meaning that there continues to be uncertainty from a
Accordingly, only the Directive itself can be used as the
benchmark to check potential reporting obligations until local
laws across the member states are implemented. Such a
retroactive application from June 25 2018 is very much
comparable to a direct application from day 1 – but a
direct applicability is a legal effect reserved for regulations
and not available to directives.
There is no room to dig deeper into the compatibility of the
retroactive effect with EU law here. However, it is clear that
no intermediary or taxpayer can fulfil their obligations and
appropriately document relevant activities efficiently without
a supporting database or system. Imagine the challenges of
revisiting otherwise potentially reportable transactions for
the two-year period between June 25 2018 and July 1 2020 once
the various EU member states release their local implementation
peculiarities, all the while under the threat of material
penalties for non-compliance.
However, there is more to consider when applying the DAC 6
in this interim period.
For MNEs with in-house tax functions, the first question is
whether the tax function or its members might qualify as
intermediaries in their own right– especially in
advising group companies.
Depending on the respective local law, EU member states may
take divergent approaches, shifting a considerable liability
risk for non-compliance to the tax departments and their
members. Clarification on that issue would be of utmost
The various hallmarks in the EU Directive are often
criticised as being too undetermined – but they are
not. They are simply set in an extremely wide fashion covering
a vast variety of transactions, sometimes seemingly without any
direct connection to aggressive tax planning. For example,
transfer pricing arrangements need to be reported when
safe-harbour rules are used. However, how do those disclosure
obligations relate to the principles developed by the OECD
under Action 10 for low-value-add activities safe harbour
rules? Will taxpayers be required to report cost-plus-5 service
level agreements even though they are applying OECD principles,
which were developed to combat aggressive tax planning?
However, it is not only hallmark E that opens the door for
legions of reportable 'arrangements’.
Consider the establishment of a permanent establishment (PE)
in a country for which the credit method applies under a tax
treaty – any depreciation of assets for this PE will
have to be considered twice – in the source country
and in the country of residence of the taxpayer. Not the
fanciesttax planning from our perspective.
Nevertheless, because EU member states are yet to transpose
the directive into local legislation, there is still hope that
domestic legislators will try to limit the scope of application
for the different hallmarks where possible in order to prevent
the requirements of intermediaries and taxpayers to become
unduly burdensome and lose balance with the intended objectives
of the legislation.
Furthermore, the latest feedback of the European Commission
on DAC 6, following a meeting on September 24 2018, gives a
first positive sign that in certain situations the broad
wording of the directive has to be interpreted more
However, limitation on the part of local laws will result in
taxpayers with a European presence being required to apply
those deviating rules in a consistent manner, and it is without
any irony that the 'inclusiveness’ of DAC 6 can
only be managed with the appropriate controls and systems of
Digital solutions to the challenges
As described above, DAC 6 and its transposition into
national legislation triggers complex challenges for advisors
and companies alike. The Directive establishes new obligations
to comply with disclosure rules in multiple countries.
MNEs will need to manage these challenges with an adequate
internal tax compliance management system (TCMS) in order to
comply with those rules and to avoid penalties as far as
possible (i.e. to what extend the latter will be achieved
depends on the implementation of DAC 6 into national
legislation). In the process of establishing a TCMS the
following questions have to be answered:
- Which business units/functions/departments may be
involved in a reportable arrangement?
- Who shall be responsible for the DAC 6 assessment and the
- How can I manage consistent reporting by the different
- How should the relevant information be collected?
- How will the collected information be analysed and
reporting decisions be made as well as documented?
- How can tight reporting deadlines be met in the
- How can I organise the external reporting in various
In order to answer these questions, MNEs will need to
conduct a review of their activities, processes and supporting
IT landscape in light of DAC 6. Such a review requires a
thorough understanding of the hallmarks.
As DAC 6 reporting will have to be submitted electronically,
it does not require much fantasy to realise that an integrated
digital solution will be a central tool in
order to satisfy the
compliance needs efficiently. This is particularly true if a
large number of transactions needs to be analysed, different
business departments need to be included, DAC 6 rules of
several relevant EU member states need to be observed and
various intermediaries are involved as advisors.
The use of a digital solution facilitates the data
collection and assessment process as an integrated platform
allowing a structured analysis of fact patterns and efficient
collaboration followed by electronic submission of reports.
With such digital solutions, the review and approval processes
can be established and documented along the ongoing business
processes in order to determine which arrangements will have to
be reported without interrupting the business.
MNEs and intermediaries will have to cooperate more closely
on such IT platforms in the future in order to ensure a
reconciled reporting of different arrangements.
DAC 6 may become a case study in what can happen when a
supranational institution like the EU tries to do the perceived
"right thing" but goes too far with the chosen measures.
If a tsunami of reported arrangements hit the competent
authorities in each jurisdiction, this has the potential to
hide the comparably small number of truly aggressive
arrangements. Thereby, the effectiveness of the well thought
out intention in highlighting undesired arrangements to tax
authorities in order to more properly respond with changes in
their legislation might be largely diminished.
When considering the administrative burden for
intermediaries and taxpayers, the associated cost, and the
additional threat of penalties, it can be only concluded that
DAC 6 will build an additional layer of complexity when working
in the area of international taxation in the future.
This article was written for International Tax Review by
Christian Kaeser, global head of taxes at Siemens, Mark Orlic,
tax technology and transformation partner at PwC in Frankfurt,
and Arne Schnitger, head of the PWC Germany tax national