Written by: Kyle Barford, Product Manager (Tax)
Edit: Since 31st December 2020 HMRC have confirmed that most of the UK’s planned implementation of DAC6 is to be repealed. CaseWare understand that replacement legislation will be enacted under which only tax planning schemes meeting the “Category D” hallmarks under DAC6 need to be reported, and those only for a limited time.
A consultation on the OECD’s Mandatory Disclosure Rules (MDR) is planned for 2021, following which the UK is expected to legislate to implement the MDR and repeal the remaining implementation of DAC6. This would move the UK from the European standard to an international one.
As a result of the above changes, much of the information in the below article is now out of date. UK businesses should carefully monitor and review the changes in DAC6 and MDR implementation as they occur, in order to understand how their data gathering and reporting requirements might be affected.
Original post: A new EU Directive is to be implemented by the UK which raises yet another disclosure and registration requirement for many taxpayers and their advisers, increasing the compliance challenges of providing services in the era of mandatory transparency and information-gathering initiatives.
Council Directive 2011/16/EU on administrative cooperation in the field of taxation, or DAC6, introduces requirements for the mandatory disclosure of cross-border arrangements by individual and corporate taxpayers, and intermediaries. DAC6 is a push by EU tax authorities to challenge cross-border tax avoidance and evasion.
The UK is planning to implement DAC6 and to do so in the same timeframe as the rest of the EU, Brexit notwithstanding, which means legislation will be in place in the UK by 31 December 2019.
The crucial dates to bear in mind for DAC6 are:
- 25 June 2018. Cross border arrangements within the scope of DAC6, and where the first step is undertaken on or after 25 June 2018, are reportable. Such arrangements undertaken between 25 June 2018 and 1 July 2020 will need to be disclosed within the first reporting period.
- 1 July 2020. DAC6 comes fully into force. Information on reportable arrangements undertaken on or after this date are reportable to HMRC within 30 days of the earlier of; the day the arrangement is made available for or is ready for implementation, or the date the first step in the implementation is taken.
- 31 August 2020. This is the due date for disclosure of arrangements undertaken between 25 June 2018 and 1 July 2020.
All firms acting as tax advisers and intermediaries should review the rules in detail over the coming months, in order both to prepare and also to capture records and information that might need to be disclosed under DAC6.
These rules are, in spirit, the introduction of a regime according to the recommendations of BEPS Action 12 against aggressive tax planning arrangements. In the UK we can draw a comparison to the DOTAS regime. However, all taxpayers and intermediaries should be aware that the scope of DAC6 is far wider.
In particular the definitions in DAC6 are going to capture a number of taxpayers, intermediaries and transactions that would not be reportable under DOTAS:
- It is not just aggressive tax planning that is reportable under the broadly drafted DAC6: there is no requirement for arrangements to have a tax motive in order to be reportable. This means that cross-border transactions undertaken for commercial purposes are potentially reportable, to the extent they fall within the broad “hallmarks” set out by the rules.
- “Intermediaries” under the legislation include any person advising on cross-border arrangements, or involved in the implementation of any transactions in the arrangements. All such intermediaries involved in a transaction have their own individual obligation to disclose.
- “Hallmarks” under the rules include arrangements with characteristics seen in avoidance schemes and planning, many cross-border payments and transfers and non-arm’s length or highly uncertain transfer pricing. A number of these only apply where a tax advantage is expected from the arrangements, however some of these are reportable even where no tax advantage is obtained and tax is not a significant factor in deciding to undertake an arrangement.
Taxpayers that are not resident in the EU are not exempt from these rules. To the extent such taxpayers carry on activities in the EU, they may be required to make a disclosure.
Under these rules, even relatively “standard” tax planning will carry a disclosure requirement. The following common arrangements are potentially reportable:
- A cross-border payment between associated persons which benefits from a preferential tax regime in the recipient jurisdiction. This might include cross-border payments for success and management fees.
- Double tax relief claimed in more than one jurisdiction in respect of the same income. This might affect US citizen taxpayers resident in one EU jurisdiction who receive pension or rental income from a second EU jurisdiction.
- Setting up a new branch or office as a Permanent Establishment in a second EU jurisdiction and purchasing fixed assets for use in that office. Depreciation of those assets will need to be considered in two EU jurisdictions.
These represent the worst-case scenario, but it is clear that affected taxpayers and their advisers need to prepare for a regime where many arrangements not deliberately undertaken for tax planning reasons require disclosure.
The key thing to take away from this uncertainty is the need to keep up to date on the implementation process for DAC6 in the UK and across the EU, and to maintain good records on potentially affected transactions from 25 June 2018 using an appropriate digital data collection and storage solution such as CaseWare Cloud. All of these transactions will need to be reviewed again in light of the legislation brought in to enforce DAC6.
*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.