DAC6 Reporting Is Coming…

13th August 2020 Wills, Trusts & Estate Planning

The Directive for Administrative Cooperation (DAC6) is part of a suite of anti-avoidance tax legislation which has been implemented by the European Union. The Directive sets out a framework for the mandatory disclosure by intermediaries of certain types of cross border transaction which will attract direct taxation in Europe and which need to be reported to HMRC.

In response to the Covid19 pandemic, the deadlines for the first compulsory DAC6 reports have been extended to early 2021. However, those with cross border arrangements in place should be aware that the requirement to report is imminent and should consider taking legal advice.   

Intermediaries have the responsibility for reporting in the first instance and are defined as:

“an individual, company or trustee who designs, markets or organises a reportable cross boarder transaction or who makes available or manages the implementation of a reportable cross border transaction”.

For an arrangement to qualify it will include either:

  • more than one member state; OR
  • a member state, a third country and one or more of the following will apply:
  1. Not all participants are registered in the same jurisdiction; or
  2. One or more participants are simultaneously resident for tax purposes in more than one jurisdiction; or
  3. A permanent establishment (in the UK) linked to any of the participants in the arrangement is in a different jurisdiction and the arrangement forms part of the business of the permanent establishment; or
  4. At least one of the participants carries on business activities in another jurisdiction in which they are not resident for tax purposes and they have not created a permanent establishment; or
  5. Such an arrangement has an automatic exchange for information or the identification of beneficial ownership

Not all arrangements which fall into the definition above will be reportable. In order to be reportable they must have occurred after 25 June 2018 (or continued to occur after this date) and also have at least one of the ‘hallmarks’ set out below. In some instances there is also a further main “main benefit test” which needs to be satisfied. Namely, whether the main benefit of the transaction is a tax benefit, taking into consideration all of the circumstances of the transaction.

Category

Examples 

Main benefit test?

A

Generic and linked to the Main Benefit Test

Confidentiality - where a confidentiality agreement has been entered into to prevent disclosure of how an arrangement could create a tax advantage to intermediaries or tax authorities.

Yes

Premium Fee arrangements – this would include instances where the intermediary fee is based on the tax saved.

 Yes

Arrangements where standardised documentation has been used and there has been no real customisation of the documents to make them fit the circumstances.

Yes

B

Specific Hallmarks linked to the main benefit test

Arrangements involving buying something at a loss in order to reduce the tax liability of the company buying.

Yes

Arrangements which convert income to capital and have the effect of allowing the company to pay tax at a lower rate

Yes

A circular transaction between companies within the same group – when no real commercial function can be ascertained.

Yes

C

Specific Hallmarks related to cross-border transactions

Arrangements involving deductible cross boarder arrangements between associated enterprises where:

a.    The recipient has no tax residence

No

b.    The country of residence has a zero, or close to zero corporation tax rate.

OR

The country is included in the OECD list as being a non-cooperative jurisdiction

Yes

 

 

No

c.     The payment is except in the jurisdiction of receipt

Yes

d.    The payment benefits from a preferential tax regime in the jurisdiction of receipt

Yes

Arrangements involving deductions in more than one jurisdiction

No

Arrangements which involve claiming relief from double taxation on the same item in more than one jurisdiction

No

Arrangements involving the transfer of assets where there is a material difference in the amount treated as payable consideration for the assets in the jurisdictions involved

No

D

Specific hallmarks concerning the automatic exchange of information and beneficial ownership

Arrangements which undermine the rules on beneficial ownership (or any other equivalent agreement) on automatic exchange of financial account information

No

Arrangements which contain a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures which

a.    Do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and

b.    They are incorporated, managed, resident or controlled in the jurisdiction of residence of one or more of the beneficial owners of the assets held by the said person, legal arrangement of structure.

No

E

Specific hallmarks concerning transfer pricing

Arrangements concerning transfer pricing including the use of unilateral safe harbours or the transfer of hard to value intangible assets where no reliable comparables exist and the projection of future cash flows or income are highly uncertain

 

No

 

Failure to comply with any reporting obligations could result in a one off penalty of up to £5,000. However, where this seems too low, for example where the failure to report was deliberate or repeated, it is possible for the penalty to be up to £600 a day until a report is submitted. In the worst cases, where this even appears to be too low there is scope for penalties up to £1,000,000.

Advisors and intermediaries continue to wait for further clarification as to what type of arrangement is likely to be ‘reportable’ it is hoped that HMRC will issue detailed guidance in due course.

In the meantime, if you are concerned that you may be an intermediary or part of transaction which should be reported under the DAC6 regulations, we encourage you to contact us for some initial advice. To get in touch please call 0345 872 6666.

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Grace O'Driscoll is a Trainee Solicitor located in Manchesterin our Trainee Solicitors department

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