DAC 6: 'uncertainty surrounds' cross border tax disclosure rules

Catherine Robins of Pinsent Masons, the law firm behind Out-law, said: "The rules are very widely drawn – especially the definition of intermediaries - and this, coupled with tight timescales for reporting, seems likely to result in a significant number of duplicate reports of arrangements which are not the type of potentially aggressive tax avoidance schemes the rules were aimed at," she said. 

In July the UK published draft regulations and a consultation document on the implementation in the UK of an EU directive known as DAC 6 which is designed to enable tax authorities to share information about cross-border tax schemes with other EU member states. The consultation period ended on Friday.

"The draft regulations do very little to flesh out how the broadly-drafted EU directive will be applied in the UK in practice. Instead, HMRC intends to produce guidance. We are concerned that intermediaries will have to rely on guidance, rather than legislation to work out what their obligations are, particularly when the penalties for non compliance are onerous," Robins said. 

The rules apply to a 'cross-border arrangement', which means an arrangement which 'concerns' more than one member state or a member state and a third country if certain conditions are satisfied. These conditions include that not all the participants in the arrangement are tax resident in the same jurisdiction. In the consultation document HMRC has confirmed that in order for the arrangement to ‘concern’ multiple jurisdictions, those jurisdictions must be "of some material relevance to the arrangement".

A cross-border arrangement will be reportable if it bears one of the specified hallmarks. There are five categories of hallmark. Some of the hallmarks are only triggered where the arrangements satisfy a 'main benefit' test. This will be satisfied if it can be established that the main benefit or one of the main benefits which a person may reasonably expect to derive from the arrangements is the obtaining of a tax advantage.

The UK draft regulations define tax advantage so that it will only catch arrangements "where the obtaining of the tax advantage cannot reasonably be regarded as consistent with the principles on which the relevant provisions that are relevant to the reportable cross-border arrangement are based and the policy objectives of those provisions".

Robins said: "A particular concern is that HMRC is taking the view that 'tax advantage' is not limited to EU tax advantages are covers tax advantages arising outside the EU. We do not think this is the clear intent of the directive and it does not seem to fit with the overall scheme of the directive".

Disclosures under the rules will need to be made by anyone who is an 'intermediary'. This is widely drafted and includes not just those who design and market schemes (promoters), but also anyone who provides aid or assistance with regard to a marketable arrangement (service providers). Service providers will not have a duty to notify if they did not know and could not reasonably be expected to know that they were part of a reportable arrangement.

"For service providers, the rules impose a significant administrative burden, yet are unlikely to provide tax authorities with new information about aggressive tax avoidance schemes. In most cases there will be a number of other intermediaries and the arrangement will already have been or be being disclosed by a promoter or another service provider, yet even those with a relatively peripheral role in the arrangements could have to take a number of steps to identify arrangements within the scope of the rules and to check someone else has disclosed," Catherine Robins said.

"Tight timescales for reporting and onerous penalties for non-compliance could lead to significant numbers of duplicate reports," she said.