As part of its continuous efforts to secure transparency in the field of taxation, the EU Council adopted on 25 May 2018 the Directive 2018/822/EU on Administrative Cooperation in Tax Matters (amending Directive 2011/16/EU), regarding the mandatory automatic exchange of information between tax authorities in relation to reportable cross-border arrangements (DAC6).
What is DAC6?
DAC6 requires that intermediaries of EU Member States, and in certain situations taxpayers, report specific cross-border arrangements to their relevant tax authority. Reportable cross-border arrangements must fall within specific “Hallmarks” or where the main or expected benefit of the cross-border arrangement is a tax advantage.
Who is affected?
DAC6 affects intermediaries and, in certain circumstances, taxpayers.
An intermediary is any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement. The definition given to the term intermediary under the directive is broad, extending to anyone who provides aid, assistance or advice for a reportable cross-border arrangement, with the underlying intention of covering anyone associated with the abovementioned practices. Consequently, it includes accountants, lawyers, tax counsels, banking institutions, advisers etc.
In cases where there are no intermediaries able to report, this obligation is shifted to the taxpayer, for example where he has constructed an in-house arrangement or took advice from third country advisors. A relevant taxpayer is any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such arrangement.
In order for an arrangement to be reportable it must be in line with the definition of a cross-border arrangement and the arrangement must fall at least within one of the Hallmarks outlined in Annex IV of DAC 6 or where the main or expected benefit of the cross-border arrangement is a tax advantage. A cross-border arrangement is defined as an arrangement concerning more than one Member State or a Member State and a third country.
Cross border arrangements must be reported if they fall within at least one of the following Hallmarks:
A. commercial characteristics seen in marketed tax avoidance schemes;
B. structured arrangements seen in avoidance planning;
C. cross border transactions;
D. arrangements which challenge tax reporting and transparency; or
E. transfer pricing arrangements which are not at arm’s length.
It is important to note that Hallmarks A, B, C listed above apply if the “main benefit test” is met. D and E need to be reported irrespective of the satisfaction of the “main benefit test”.
Main Benefit Test
The test “will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.”
Cross-Border Arrangement + Hallmark = Reportable Cross-border Arrangement
Intermediaries are required to report cross-border arrangements to the relevant tax authorities within 30 days beginning:
- on the day after the reportable cross-border arrangement is made available for implementation; or
- on the day after the reportable cross-border arrangement is ready for implementation; or
- when the first step in the implementation of the reportable cross-border arrangement has been made, whichever date occurs first.
DAC6 in Cyprus
On 19 March 2019, the Ministry of Finance released a draft bill (Bill) regarding the implementation of DAC6 which aims to amend the current national law on administrative cooperation in the field of taxation. On 22 October 2019, the Cyprus Tax Authority (CTA) invited all interested parties to comment and provide suggestions on the proposed Bill by 12 November 2019.
Even though the Bill was anticipated to be adopted by 31 December 2019, it still goes through the formal legislative process and it is expected to become effective as of 1 July 2020. At a subsequent stage, the CTA is also expected to release official guidance notes on the new legislation.
DAC6 vs the Bill
The Bill closely follows the provisions set out in DAC6 without any striking departures except the following:
A. Main Benefit Test
- The overall notion of the “main benefit test” remains the same as outlined in DAC6 although a wording was added with the main aim of connecting the “tax advantage” definition to the range of taxes covered under DAC6. Hence, the Bill indicates that the tax advantage is restricted to tax advantages acquired in Cyprus or any other Member State.
- The “tax advantage” definition is extended to include the following:
- Relief or increased relief from tax;
- Repayment or increased repayment of tax;
- Avoidance or reduction of a charge to tax or an assessment to tax;
- Deferral of a payment of tax or advancement of a repayment of tax;
- Avoidance of an obligation to withhold tax.
The release of the CTA’s official guidance notes is expected to shed light on how the “main benefit test” will be accurately used in practice.
The Bill similarly defines an “intermediary” as defined in DAC6 but exempts practicing lawyers from the obligation to report cross-border transactions in circumstances where reporting would result in the infringement of the “Legal Professional Privilege” (LPP). In such cases, the reporting obligation shifts to the taxpayer.
C. Reporting Deadlines
The Bill includes the same reporting deadlines with those set out in the DAC6. Additionally, the Bill takes advantage of the option which was provided under DAC6 for periodic reporting of reportable arrangements by intermediaries within one month from the end of each quarter.
Key dates and reporting periods under DAC6 are as follows:
- DAC6 has a retrospective application to include cross-border arrangements dated as of 25 June 2018.
- First reporting of cross-border arrangements carried out between 25 June 2018 until 30 June 2020 by intermediaries and relevant taxpayers is due by 31 August 2020
- The first exchange of information between tax authorities of each Member State shall be communicated by 31 October 2020.
The Bill includes penalties up to €20,000 for intermediaries and relevant taxpayers who have either been negligent or failed to comply with the reporting obligations or have submitted incomplete or false information with respect to a reportable cross-border arrangement.
E. Reporting in Good Faith
Where intermediaries reasonably believe that they are required to report a cross-border arrangement to the CTA, they must do so only to the extent of the information in their possession or control. Reporting in good faith also includes circumstances where an intermediary reaches an uncertain decision on whether to report, even if information that surfaced at a later stage prove that the intermediary’s judgement was incorrect. Such reporting is not considered to be a breach of any contract, law or regulation and therefore shields intermediaries from any liability.
F. What Information is Reportable
The Bill specifies that cross-border arrangements reported from 1 of July 2020 onwards must include the following information as appropriate:
- Identification details of intermediaries and relevant taxpayers, including the name, date and place of birth (if a natural person), tax residence, tax identification number and any associated persons.
- Detailed information of the applicable hallmark(s) that deem the cross-border transaction reportable.
- A summary of the reportable cross-border arrangement’s content, including the name of which the arrangement is widely known (if applicable), and a summary of the relevant business activities (in abstract terms) without disclosing any confidential information.
- The date on which the first step of implementation of the reportable cross-border transaction was or will be made.
- Details of the national provisions that form the basis of the reportable cross-border arrangement.
- The value of the reportable cross-border transaction.
- Reference of the relevant taxpayer’s Member State and other possible Member States that are likely to be concerned by the reportable cross-border arrangement.
- Identification details of any other person in the Member State that is likely to be affected by the reportable cross-border transaction, with reference of the Member States which this person is connected to.
The author of the article is Michalis Parides.
Michalis is a junior legal consultant at Royal Pine & Associates. He is a holder of an LL.B from the University of Essex and an LL.M from the University of Leeds.
* This publication has been prepared as a general guide and for information purposes only. It does not purport to be comprehensive or to render legal advice.