DAC6: Disclosure of cross-border tax arrangements

Although the obligation to report will usually fall on advisers, it will sometime fall on taxpayers themselves. The rules are widely drafted and may require arrangements to be disclosed which are not tax motivated.

On 25 June 2018 an EU Directive (known as DAC6) entered into force. The rules have been in force in EU member states since 1 July 2020, but the first reporting obligations were deferred by the UK and most EU countries until 2021 because of the coronavirus pandemic.

DAC6 is designed to give tax authorities early warning of new cross-border tax schemes. It requires tax authorities to be notified of certain cross-border tax arrangements. The tax authorities will then automatically exchange the information with other relevant EU tax authorities.

For the purposes of DAC6, until 31 December 2020 the UK is treated as an EU member state. It is not yet clear how information exchanges under the rules will take place after the end of the Brexit transition period on 31 December 2020. However, the UK government has stated it is committed to applying the rules after that date, even though the UK may no longer be obliged to do so.

Although DAC6 has been implemented by all member states, there are differences between implementation in different countries and in the guidance given by tax authorities, so this guide only relates to the UK rules and the guidance issued by HMRC.

Under the DAC6 rules an 'intermediary', or in some cases a taxpayer, will be obliged to notify their tax authority of an arrangement which:

• is cross border;
• satisfies a hallmark; and
• in some, but not all, cases, has a main benefit of obtaining a tax advantage.

Cross-border arrangements

The DAC6 rules apply to a 'cross-border arrangement', which means an arrangement concerning more than one member state or a member state and a third country where at least one of the following conditions is satisfied:

• ·not all participants in the arrangement are tax resident in the same jurisdiction;
• at least one participant in the arrangement is tax resident in more than one jurisdiction;
• at least one participant in the arrangement carries on a business in another jurisdiction through a permanent establishment there and the arrangement forms part or all of the business of that permanent establishment;
• at least one participant in the arrangement who is a tax resident in one jurisdiction carries on an activity in a different jurisdiction without being tax resident or creating a permanent establishment there; or
• the arrangement has a possible impact on the automatic exchange of information or the identification of a beneficial owner.

HMRC has helpfully confirmed that an arrangement only 'concerns' multiple jurisdictions if those jurisdictions are of some material relevance to the arrangement. It gives some helpful examples of where arrangements will not be considered cross-border merely because some of the parties happen to be resident in different jurisdictions, where this has no bearing on the tax consequences.

Main benefit test

A cross-border arrangement will be reportable if it bears one of the hallmarks. Some of the hallmarks are only triggered where the arrangements satisfy a 'main benefit' test.

The main benefit test will be satisfied if it can be established, having regard to all relevant facts and circumstances, 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 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 cross-border arrangement are based and the policy objectives of those provisions.

The test is designed to exclude tax advantages which are entirely in line with the intention of the legislation. In deciding whether the policy objectives are met it is necessary to look at the arrangement as a whole so that even if a tax deduction is within the policy objectives of one jurisdiction, and not taxing a receipt is within the policy of another jurisdiction, if that creates a mismatch, that may not be consistent with the principles of the relevant legislation.   

'Tax' is limited to taxes arising in the UK or in an EU Member State. It does not include VAT, customs and excise duties or social security contributions such as National Insurance contributions.

Hallmarks subject to main benefit test

Hallmarks which are subject to there being a main benefit of obtaining a tax advantage are:

• the participant agrees to confidentiality obligations (A1);
• the intermediary's fees are dependent on success or by reference the tax saved (A2);
• there is standardised documentation or a standardised structure (A3);
• loss buying (B1);
• converting income into capital or into revenue taxed at a lower level or exempt from tax (B2);
• circular transactions resulting in the 'round-tripping' of funds (B3); or
• cross-border deductible payments between associated enterprises where the recipient is resident in a zero or near zero corporate tax jurisdiction (C1(b)(i)); or the payment benefits from an exemption from tax (C1(c)) or a preferential tax regime in that jurisdiction (C1(d)).

Hallmarks not subject to main benefit test

More worryingly, there are a number of hallmarks which are not subject to a main benefit test. These catch:

• cross-border deductible payments between associated enterprises where the recipient has no tax residence (C1(a)) or is resident in a 'blacklisted country' (C1(b)(ii));
• deductions claimed for depreciation in more than one jurisdiction (C2);
• relief from double tax claimed in more than one jurisdiction (C3);
• transfers of assets where there is a material difference in the amount treated as consideration in each jurisdiction (C4);
• arrangements which may have the effect of undermining Common Reporting Standard (CRS) reporting (D1); or
• certain arrangements involving non-transparent ownership chains, using arrangements which lack substance (D2).
• arrangements using unilateral safe harbour transfer pricing rules (E1);
• arrangements involving the transfer of 'hard-to-value' intangibles (E2); or
• intra group cross-border transfers of functions and/or risks and /or assets where the projected annual earnings before interest and taxes (EBIT) during the three year period after the transfer of the transferor(s) is less than 50% of the projected annual EBIT of the transferor(s) if the transfer had not been made (E3).

For the purposes of hallmark C1(b)(ii), countries on the EU 'blacklist' can be found here. No jurisdiction is currently listed as an uncooperative tax haven by the OECD.

Reporting

The rules require a person who is an 'intermediary' in respect of reportable cross-border arrangements to make the report.

'Intermediary' is widely defined as: 

• "any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement". This type of intermediary is sometimes referred to as a 'promoter'; or
• any person that "knows or could be reasonably expected to know that they have undertaken to provide aid, assistance or advice with respect to" the above, having regard to the circumstances, information available and expertise of the person in question. This type of intermediary is sometimes referred to as a 'service provider'.

This wide definition could catch financial institutions and trust company and service providers as well as accountants, lawyers, and other tax advisers. If more than one EU intermediary has an obligation to report, one can report and the others are not obliged to report if they have evidence that another intermediary has reported and they are not aware that they have information which was not reported.

A person only qualifies as an intermediary if the person is resident, has a permanent establishment, is incorporated, or is registered with a professional association related to legal, tax or consultancy services, in a member state.

Businesses themselves, rather than professional advisers could have an obligation to report in several situations. These are where the professional adviser is prevented from making the disclosure because of legal privilege or where the business is itself caught by the definition of intermediary. The business may also have an obligation to report if it is based in the EU but its professional advisers are not.

The information that needs to be reported includes details of the intermediaries and relevant taxpayers, the hallmarks being met, a summary of the arrangement and the member states or persons likely to be affected by the arrangement.

Once an arrangement has been reported, HMRC will issue an arrangement reference number which must be provided to other intermediaries.

Timing

EU member states (including the UK) were obliged to transpose the requirements of DAC 6 into their national legislation by 31 December 2019 at the latest, with a go live date of 1 July 2020. However, the reporting requirements were postponed as a result of the coronavirus pandemic. 

Once the reporting regime is live from 1 January 2021, arrangements will have to be reported within 30 days. The main trigger for the 30 days is the day after the arrangement is made available for implementation is ready for implementation, or the first step in implementing the arrangement is made. For an intermediary which is a service provider, the trigger point for the 30 days in which to report is the day after giving the aid, assistance or advice.

There are specific deadlines for arrangements occurring before 1 January 2021. Arrangements occurring between 25 June 2018 and 30 June 2020 must be reported by 28 February 2021. Those occurring between 1 July 2020 and 31 Dec 2020 must be reported by 31 January 2021.

There is a penalty of up to £5000 for a failure to report. If HMRC considers that in the circumstances this is inappropriately low it can ask the First-tier Tribunal to impose daily penalties, which could be up to £1m in total.

No penalties can be imposed if there is a reasonable excuse for the failure. In considering whether a person has a reasonable excuse HMRC must consider whether they had in place reasonable procedures to meet their obligations under DAC6.