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The UK Disclosure of Tax Avoidance Schemes

Jane Mackay, Partner, Head of Tax
02/07/2019
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The UK Disclosure of Tax Avoidance Schemes (DOTAS) regime has been in place for some time. The EU directive known as DAC6 has a similar aim to DOTAS but will catch cross-border transactions including many which have real commercial substance and no tax avoidance motive.  DAC6 is effective from 25 June 2018 and requires intermediaries to prepare their first reports in August 2020, covering the period from 25 June 2018 to June 2020. It is expected to be enacted into UK law by the end of 2019 whatever the Brexit outcome, although much of the detail about what transactions fall within the regime, what specifically will need to be reported and the detail of penalties for failing to prepare correct reports is as yet unclear. Intermediaries who advise on cross-border transactions need to prepare so they can make any required report on time.  

What is DAC6?

DAC6 requires mandatory automatic exchange of information. It imposes a requirement to report certain cross-border arrangements.  It is the latest in a series of measures adopted by the EU to tackle tax avoidance and promote tax transparency by introducing an obligation on intermediaries to disclose cross border tax arrangements. This will allow different tax authorities to exchange information on potentially aggressive tax structures.

Although DAC6 is intended to provide a mechanism for tax authorities to counter act tax abuse, the current provisions are very widely drafted and may catch many commercial transactions with no tax planning motive.  DAC6 covers all taxes other than VAT, customs duties, excise duties and mandatory social security contributions.

How does Brexit affect the application of DAC6 in the UK?

It is expected that the UK will ratify DAC6 in spite of Brexit, even though the UK legislation adopting DAC6 into UK law has yet to be provided. Therefore UK intermediaries should continue to monitor developments on DAC6 to ensure they are in a position to make DAC6 reports by August 2020.

Who does it apply to?

DAC6 applies to any person (including an individual, partnership, company or other legal entity) operating in the EU or with interests in the EU.  So it could apply to multinational companies. It also applies to intermediaries such as law firms, accountants, banks and financial advisers.

What action is required as a result of DAC6?

DAC6 requires the reporting of certain cross border arrangements if they meet the “hallmarks”. The hallmarks fall within the following categories:

  • Category A – Generic hallmarks linked to the main benefit test: arrangements that give rise to performance fees or involve mass-marketed schemes. 
  • Category B – Specific hallmarks linked to the main benefit test: this includes certain tax planning features, such as buying a loss-making company to exploit its losses in order to reduce tax liability. Another example would involve arrangements aimed at converting income into capital in order to obtain a tax benefit. 
  • Category C – Specific hallmarks related to cross-border transactions; some of these hallmarks are also subject to the main benefit test: for example, deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax. Another hallmark is about deductions for the same depreciation on an asset claimed in more than one jurisdiction. 
  • Category D – Specific hallmarks concerning the automatic exchange of information and beneficial ownership: an arrangement is reportable if it has the effect of undermining the rules, or the absence thereof, on beneficial ownership or any other equivalent agreement on automatic exchange of financial account information. 
  • Category E – Specific hallmarks concerning transfer pricing: these include the use of unilateral safe harbours; the transfer of hard-to-value intangible assets when no reliable comparables exist and the projection of future cash flows or income are highly uncertain. 

When does DAC6 apply from?

EU member countries are required to legislate for DAC6 by 31 December 2019.  The first reports under DAC 6 will be due 31 August 2020, with the first exchange of information under DAC6 occurring 31 October 2020. However the first reports will need to cover reportable events for the transitional period from 25 June 2018, when the directive came into force, to 30 June 2020.

Reports under DAC6 will need to be made within a very short timeframe, being the earliest of 30 days from when the arrangement is "made available" for implementation; is "ready" for implementation, or when "first step" in the implementation has been made. 

What action should you take?

There is still a lot of uncertainty about how DAC6 will apply.  The UK the legislation has not yet been drafted, so there are a still a lot of unanswered questions including whether there will be safe harbour provisions to restrict the impact of DAC6.

However, until more detail is available, intermediaries who are potentially affected should set up a system to collate data for the transitional period so that they have the information easily available to report if needed.  In order to assess whether a report may need to be made, any arrangements should be assessed against the following questions:

1. Is there a cross-border arrangement?
2. Is the cross-border arrangement reportable based on the hallmarks?  

  • It is recommended that the hallmarks are widely interpreted even though the generic hallmarks and some of the specific hallmarks are subject to the “main benefit” test (i.e. that one of the main benefits of the transaction is to obtain a tax advantage).  

 3. Who has the obligation to report?  

  • It is expected that this will normally be the intermediary.  The definition of an intermediary is broad (designing, marketing, organising, making available, managing or implementing a cross-border arrangement). Exemptions include intermediaries who did not know and could not reasonably be expected to know the existence of the reportable cross-border arrangement, intermediaries outside the scope of the directive (non-EU) or absent (because it is fully done in-house). 
  • If an intermediary can prove that another intermediary has already reported, it is also exempt.  If another intermediary has reported then you may want to review notifications made to confirm they have been made correctly. 
  • If more than one intermediary is involved, then agreement should be reached about who is reporting and the format.  Given the potential penalties, this may be in the form of a written agreement setting out who is responsible for the reporting, by when the reporting will be completed and what will be reported.  Taxpayers will want to avoid unnecessary tax authority scrutiny if multiple reports are made by different intermediaries or if transactions that are not reportable are reported. 
  • When no intermediary is required to notify, the taxpayer is required to notify. This is most likely to apply to in-house tax functions of large multinational corporations when arrangements are structured without using external advisors at all.  A taxpayer notification might be rare in practice, given the broad definition of an intermediary.
  • The report will need to be made to the tax authorities in the country in which the person who has the obligation to report is tax resident.  

4. What should be reported?  

  • It currently appears the report will need to include a lot of detail, including down to names of individuals involved, so a good system to retain reportable information, bearing in mind GDPR and confidentiality, will be required.  DAC6 reports will be made electronically, which poses practical issues around appropriate tax systems to maintain potentially reportable information and then to be able to report it within the tight reporting deadline.  

Conclusion

EU directives will continue to affect UK taxpayers operating internationally well beyond Brexit.  Taxpayers will want to ensure compliance with DAC6 within the deadlines and the responsibility for this will in many cases be with their advisers.  With so little detail about how EU members will implement the directive there is no clarity about what will need to be reported.  However, if a client is involved in a cross-border arrangement that is potentially reportable, make sure to collate as much of the potentially relevant information as possible now, as this is likely to be simpler than trying to recreate records for the transitional reporting period to June 2020.  

 

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Jane Mackay
Jane Mackay
Partner, Head of Tax
Thames Valley