2020 brings a new type of reporting in the lives of taxpayers and intermediaries all over the EU.
EU member states should have already adopted the Council Directive (EU) 2018/822 of May 25 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, known as ‘DAC6’ or Mandatory Disclosure Rules (MDR) Directive.
If up to this moment, such reporting was only a far thought in the mind of taxpayers to be dealt with at a later stage, as the first reporting deadline is quickly approaching, it is starting to take the shape of an inevitable reality, requiring the intermediaries or the taxpayers to take action and prepare to meet the requirements arising from this Directive. Thus, it is crucial for companies to understand the implications of DAC6, as the first reporting requires adequate documentation for cross-border arrangements in place since June 2018 (when the Directive entered into force) onwards.
DAC6 in a nutshell
Broadly reflecting the objectives of Action 12 of the base erosion and profit shifting (BEPS) action plan, the DAC6 Directive aims at taking early actions when potentially aggressive tax arrangements are designed and implemented. This represents another layer of transparency between taxpayers and tax authorities on the one hand, and between tax authorities of different states on the other hand.
In turn, the increased transparency in such matters will enable the tax authorities to gather more detailed information about taxpayers’ transactions in a quicker way and thus, trigger targeted tax audits on specific risks arising from such reported information.
As per DAC6, intermediaries should report to the tax authorities cross-border arrangements which are defined as being ‘tax aggressive’. To be reportable, an arrangement should contain a least one of the particularities provided by the DAC6, so-called ‘hallmarks’.
In case there is no intermediary involved or the intermediary is covered by the legal professional privilege or the intermediary is not EU-based, then the obligation is on the EU taxpayer.
What is an intermediary?
Intermediary means any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement. Thus, an intermediary, which can be either an individual or a company, includes – but the list is not exhaustive – lawyers, accountants, consultants, corporate services companies, banks.
All the arrangements implemented between June 25, 2018 and June 30, 2020 must be disclosed by August 31, 2020. As of July 1, 2020, a 30-day rolling window for reporting new arrangements will apply. As very recent news, the European Commission has just proposed an extension of the reporting deadlines by 3 months, in the context of COVID-19. The final decision in this respect is pending.
A brief look at implementation across EU member states
Up to this moment, most of the EU countries have either implemented the provisions of DAC6 into their national legislation or have issued a draft legislation in this respect, these being mostly aligned with the provisions outlined in the Directive. Moreover, Poland implemented some wider provisions (including local arrangements) and with even more significant sanctions/penalties in case of non-compliance.
At a local level, Romania has published the Ordinance transposing DAC6 on January 31 2020, also not deviating from the provisions of the Directive. Penalties will range from RON 5,000 – RON 100,000 (approx. €1,034 ($1120) to €20,685), being relatively lower than the fines imposed by other EU countries.
The taxpayers will likely be facing difficulties when it comes to reporting content. The expectation of making sure that the Directive provisions are clear and actionable will fall on the practical guide/additional explanatory notes promised by the tax authorities. However, as this additional guidance is not expected to be published very soon, it is important for taxpayers and intermediaries to start getting ready themselves for reporting.
A first step would be the reviewing of transactions which took place since June 25 2018 in order to identify which of those should be reported, so that reasonable procedures can be put in place to comply with the applicable rules. This will be essential for how businesses manage their reputational risk and will also help in mitigating potential penalties.
There is no ideal recipe available that can assure a smooth DAC6 reporting, but there are a few strategies that can make the process easier. Here are a few of them:
Develop an internal procedure for scanning through arrangements and identifying the ones that should be reported;
Set clear responsibilities for specific persons in the organisation and ensure they are trained on how to recognise a reportable arrangement;
Keep in touch with your consultants/intermediaries and establish who and what will report;
Ensure detailed and complete documentation is available for each transaction.
Without any doubt, the time to start acting is now.
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