New UK mandatory tax disclosure rules: implications for companies

On 25 June 2018 an EU Directive (known as 'DAC 6') entered into force. It requires automatic exchange of information about cross-border tax arrangements and could require cross-border arrangements where the first step has taken place on or after 25 June 2018 to be disclosed in the future, even though DAC 6 has not yet been transposed into UK law. The UK government says it will implement the rules, notwithstanding Brexit.

Companies need to be aware of what may be covered by DAC 6 because:

• it is much wider than the UK's current Disclosure of Tax Avoidance Schemes (DOTAS) regime;
• in many cases companies themselves (rather than their advisers) may be required to make the disclosure; and
• it catches arrangements being entered into now.

Outline of the rules

The DAC 6 rules apply to a 'cross-border arrangement', which means an arrangement, interpreted widely, concerning more than one member state or a member state and a third country.

A cross-border arrangement will be reportable if it bears one of the 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, 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.

Hallmarks subject to main benefit test

Hallmarks which need to be combined with the main benefit include hallmarks which are familiar from DOTAS, such as where:

• the participant agrees to confidentiality obligations;
• the intermediary’s fees are dependent on success or by reference the tax saved; or
• there is standardised documentation or a standardised structure.

A main benefit test also needs to be satisfied for a further set of hallmarks covering:

• acquiring or generating losses;
• converting income into capital or into revenue taxed at a lower level or exempt from tax;
• circular transactions resulting in the ‘round-tripping' of funds; or
• cross-border payments between associated enterprises where the recipient is resident in a zero or near zero corporate tax jurisdiction; or the payment benefits from an exemption from tax or a preferential tax regime in that jurisdiction.

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 or is resident in a ‘blacklisted country’;
• deductions claimed for depreciation in more than one jurisdiction;
• relief from double tax claimed in more than one jurisdiction;
• transfers of assets where there is a material difference in the amount treated as consideration in each jurisdiction;
• arrangements which may have the effect of undermining CRS reporting; or
• certain arrangements involving non-transparent ownership chains, using arrangements which lack substance.

Of particular concern for companies are the following hallmarks which are not subject to a main benefit test and could require the reporting of arrangements which are entirely commercial:

• arrangements using unilateral safe harbour transfer pricing rules;
• arrangements involving the transfer of ‘hard-to-value’ intangibles; or
• intra group cross-border transfers of functions and/or risks and /or assets removing 50% or more of the transferor’s income.

This last group will cover many situations where you would not expect a reporting obligation to arise. Note that, unlike the UK's DOTAS rules, there is no requirement for there to be a tax advantage as a result of the arrangements, so a wide class of arrangements could potentially be disclosable. The rules will be a particular concern in relation to intra group transactions.

The rules also contain no de minimis so even small transactions will theoretically need to be disclosed. It is to be hoped that the UK will include some form of de minimis when it transposes the rules into UK law.

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"; 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 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 can provide proof of that report to discharge their own obligation.

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.

There is no carve out from the intermediary definition for group companies. It could catch a holding or treasury company in a transaction involving a multinational group or an in house tax or legal team.

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.

Timing

EU member states must 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. Once up and running, the reporting must be done within 30 days of the arrangements being made available or implemented.

However, a single report must be made by 31 August 2020 which includes any reportable cross-border arrangements the first step of which takes place between 25 June 2018 and 1 July 2020, the date from when the 30 day deadline will apply.

UK implementation

The UK government is proposing to include the legislation in the 2019 Finance Act which will give it the power to make regulations to bring the new rules into force.

It is to be hoped that when the regulations are made they will either make it clearer how the rules will apply in the UK or comprehensive guidance will clarify what should and should not be disclosed.

The UK government has stated that it has not yet decided how the rules should interact with the domestic DOTAS rules.

Arrangements disclosed will be exchanged with affected Member States. It is not yet clear what the mechanics for exchange will be post-Brexit. It is also not clear whether the UK will limit the scope of the rules to cross-border transactions with EU member states or whether it will include third countries.

Action needed now

Companies located in the UK or anywhere in the EU with cross-border arrangements of any description will need to be aware of DAC 6.

Given that the rules may require disclosure of arrangements where the first steps are taken on or after 25 June 2018, groups need to consider the rules whenever they are entering into cross border transactions or putting in place cross border structures. They will be relevant for M&A transactions as well as group reorganisations and refinancing.

Groups should put in place procedures now to identify transactions which they may need to report in August 2020.