DAC6: Disclosure of cross-border arrangements – are you affected?

DAC6 is a new EU directive which will require the reporting of certain cross-border arrangements and structures that could be used to avoid or evade tax. The new regime comes into force on 1 July 2020.

What must be reported?

DAC6 will require UK intermediaries or the relevant taxpayer to report cross-border tax planning arrangements which contain a prescribed ‘hallmark’. This information will then be exchanged with tax authorities in EU member states so they can identify any potential tax risks in their jurisdictions.

There will be a requirement to make a report within 30 days of the arrangement being ‘made available’ or ‘ready’ for implementation.

The hallmarks

An arrangement will be reportable if it meets at least one prescribed hallmark. The hallmarks are grouped under five broad categories:

Category A – the ‘generic hallmarks’ linked to the main benefit test: arrangements that give rise to performance fees or involve mass-marketed schemes.

Category B – buying a loss-making company to exploit its losses, arrangements aimed at converting income into capital and circular transactions.

Category C – deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax, deductions for the same depreciation on an asset claimed in more than one jurisdiction, relief from double taxation and transfer of assets.

Category D – undermining reporting obligations and obscuring beneficial ownership.

Category E – the use of unilateral safe harbours, the transfer of hard-to-value intangible assets when no reliable comparable exists and cross-border transfers.

For hallmark categories A, B and certain elements of category C, an arrangement will only be reportable if one of the main objectives of the arrangement is to obtain a tax advantage.

When does this come into force?

Reportable cross-border arrangements where the first step is undertaken between 25 June 2018 and 1 July 2020 will need to be reported when legislation becomes effective in July 2020.

Intermediaries

An intermediary is broadly a promoter or service provider. Promoters are those who design and implement the arrangements, whilst service providers are those that provide assistance or advice in relation to the arrangements.

The relevant taxpayer must report an arrangement if there is no intermediary or if the intermediary does not have to report certain information due to legal professional privilege.

Are there penalties for non-compliance?

Yes. The proposed penalties are in line with those already applicable in the context of exchange of information and amount to up to €250,000.

What do I need to do?

HMRC will publish more detailed guidance on the regulations before they come into force on 1 July. Businesses and taxpayers which may be required to report under DAC6 need to put in place systems and processes to enable them to comply with their obligations.

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Craig Walker Tax Director

Craig Walker

Tax Director, Sheffield

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