The UK has recently introduced final regulations to implement DAC 6 which will be used by HM Revenue & Customs (HMRC) to identify potentially aggressive cross-border tax planning arrangements.
The EU Council Directive 2018/822 known as DAC 6 has been in effect since 25 June 2018. It introduces an obligation on “intermediaries” to disclose certain cross-border arrangements which exhibit certain “hallmarks”, and concern either more than one EU member state or an EU member state and a non- EU country. In the UK, regulations implementing the Directive come into force on 1 July 2020, with the first deadline for reporting to HMRC of 31 August 2020.
Why are the rules being brought in?
DAC 6 is the latest tool the EU are using to clampdown on perceived tax avoidance and evasion. The aim of the rules is to provide the EU tax authorities, including HMRC, with information on tax planning at an earlier stage in order to improve transparency and fairness in taxation.
What is a cross-border arrangement?
An arrangement is considered to be a cross-border arrangement if it contains either:
- More than one EU member state; or
- An EU member state and a third country.
Any one of the following conditions is met:
- Not all the participants in the arrangement are resident for tax purposes in the same jurisdiction;
- One or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
- One or more of the participants in the arrangements carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
- One or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
- Such arrangement has a possible impact on the automatic exchange of information or the identification or beneficial ownership.
A cross-border arrangement is a reportable cross-border arrangement if it contains at least one “hallmark”.
What are the hallmarks?
There are five categories of “hallmark”. A number of the hallmarks require the arrangement to meet the ‘main benefit test’ which will broadly apply where the main benefit of the arrangement is to obtain a tax advantage and that advantage is not consistent with the policy objectives of the applicable law. Further detail on the five hallmarks can be found below.
|Category A||Confidentiality condition in a transaction not to disclose how a tax advantage is secured; or||X|
|Fee arrangements paid on the amount of tax saved; or||X|
|Standardised documentation and/or structure.||X|
|Category B||Acquiring a loss buying company; or||X|
|Converting income into capital; or||X|
|Circular transactions with no primary commercial function.||X|
|Category C||Cross border deductible payment between associated enterprises where:|
|Recipient resident in a 0% or near 0% jurisdiction.||X|
|Recipient has full tax exemption.||X|
|Recipient benefits from preferential tax regime.||X|
|Recipient is not resident for tax purposes in any jurisdiction.|
|Recipient is resident in a EU blacklisted country.|
|Depreciation on same asset deducted in more than one jurisdiction.|
|Double tax relief claimed in more than one jurisdiction in respect of the same income.|
|Transfer of assets where material difference in amount treated as payable.|
|Category D||Automatic exchange of information and beneficial ownership|
|Category E||Arrangements involving the use of unilateral transfer pricing safe harbour rules.|
|Transfers of hard to value intangibles for which no reliable comparable exist where financial projections or assumptions used in valuation are highly uncertain.|
|Cross-border transfer of functions/risks/assets projected to result in a more than 50 per cent decrease in EBIT during the next three years.|
Who needs to report?
In the UK, the primary reporting obligation falls on “UK intermediaries” (broadly speaking, UK tax resident or UK incorporated intermediaries). If there is no UK intermediary the UK relevant taxpayer will need to report the arrangement.
An intermediary is anyone who designs, markets, organises, makes available for implementation or manages the implementation of a reportable cross-border arrangement. It also includes anyone who provides aid, advice or assistance in respect of such arrangements.
What are the time limits?
Where the first step of a reportable cross-border arrangement was implemented between 25 June 2018 and 30 June 2020, the report must be submitted to HMRC by 31 August 2020. However, from 1 July 2020, any cross-border arrangement that meets one or more of the hallmarks must be reported within 30 days after the earliest of the arrangement being made available, being ready for implementation, or when the first step in the implementation is taken.
As tax advisers, if we were to advise or otherwise assist in designing or implementing a reportable cross-border arrangement, we would be required to report the transaction to HMRC within 30 days of providing “aid, assistance or advice “.
UK relevant taxpayers caught by the rules also have an annual reporting requirement, on or before the company or personal tax return filing date.
Are there any penalties for failing to disclose?
There are strict penalties for non-compliance. The level will depend on whether it is the intermediary or the taxpayer who has failed to report. As it stands for intermediaries, failure for non-reporting will be penalised with a one-off penalty of up to £5,000. In more serious cases, penalties could be as high as £600 per day for each day of non-compliance, or potentially a penalty up to £1 million. The penalty for a tax payer failing to submit a report could be as high as £10,000 for each reportable arrangement.
How we can help
We are assisting taxpayers with analysing past arrangements and preparing them for future reporting. This includes identifying whether a cross border arrangement could be caught by DAC 6 and conducting an impact assessment.
If you have questions about how the new rules may impact on you or your business, please get in touch with your usual Blick Rothenberg contact.