Starting from the end of January 2021 the UK will see the introduction of a new mandatory cross-border tax reporting regime called DAC6.
Although DAC6 has been promoted as a transparency reporting regime to help crack down on aggressive cross-border tax planning, it has been widely drafted so that even no tax driven arrangements potentially need to be disclosed; and failing to disclose attracts very substantial financial penalties (not to mention potential reputational consequences).
As it stands, the way the legislation has been drafted means that it potentially also applies to standard transactions with no particular tax motive. This means that ordinary transactions such as cross-border leasing, securitisation structures, certain types of reinsurance and many standard group corporate funding structures may be reportable. There is also no safety net to exclude the obligation to report where there is an underlying commercial purpose (although, see further below the explanation of the hallmarks).
The requirement to report was initially expected to start in Summer 2020 but, as a consequence of the COVID-19 pandemic, the EU introduced an optional six-month delay to reporting deadlines. All member states other than Germany, Austria and Finland implemented this deferral. Reporting in most jurisdictions (the UK included) will not begin until January 2021.
Who do the reporting obligations fall on? The role of the Intermediary
The answer is anyone connected to the EU or UK who designs, markets, organises or makes available or implements a reportable arrangement or anyone who helps with reportable activities and knows or could reasonably be expected to know that they are doing so. This also includes any “in-house” counsel or advisers.
The definition of intermediary is widely drafted and can include:
Consultants, accountants, financial advisers, lawyers (including in-house counsel).
Banks, trust companies, insurance intermediaries.
Holding companies, group treasury functions.
If you are in any doubt about whether you are an intermediary for a particular purpose you should see advice. Whilst you may not consider yourself to be in the nature of an intermediary, the net is cast very wide and so you should always check when working on any sort of cross-border arrangement.
The hallmarks that trigger the obligation to report
It is the presence of a hallmark that triggers the obligation to report, so although the arrangement may be a cross-border one, there is only a need to report if a hallmark is also present.
There are two categories of hallmarks: hallmarks falling into either A or B (or part of C) that also require there to be a main benefit of obtaining a tax advantage to accompany the hallmark; or hallmarks falling into either D or E (or the other part of C) that need only for the hallmark to be present (I.e. there need not be a main benefit of obtaining a tax advantage).
Hallmark A : the taxpayer is subject to a confidentiality provision relating to how the structure secures a tax advantage, or fees are contingent on whether the structuring attains a tax advantage, or standardised documents are used.
Hallmark B: the purpose of the arrangements is to convert income to capital or otherwise to try and secure a lower tax level by converting something, or acquiring losses to try and reduce a tax liability, or by using circular transactions.
Hallmark C (requiring the presence of a main benefit to be securing a tax advantage): deductible payments being paid cross-border between associated enterprises or using cross-border arrangements to try to secure a lower tax rate or to otherwise benefit from a preferential tax regime.
Hallmark C (no main benefit required): deductions for depreciation are claimed in more than one jurisdiction or double tax relief is claimed in more than one jurisdiction in respect of the same income, or there has been an asset transfer where the amount treated as payable is materially different between jurisdictions.
Hallmark D: there are arrangements which have the effect of undermining reporting requirements under agreements for the automatic exchange of information, or there are arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no real substance (offshore trusts being a common example of this).
Hallmark E: there are arrangements involving the use of unilateral transfer pricing safe harbour rules, or transfers of hard to value intangibles for which no reliable comparable exists where financial projections, or where there are assumptions used in valuation which are highly uncertain or there is a cross-border transfer of functions/risks/assets causing a 50%+ decrease in earnings before interest and tax during the subsequent three years.
In each case, where there is a hallmark present, the obligation falls on the intermediary to make the disclosure to the relevant tax authority.
When does a UK business need to notify HMRC?
The intermediary must notify HMRC within 30 days of the earliest of one of the following:
For each of the above examples, If the relevant date is between 1 July 2020 and 31 December 2020, HMRC must be notified on or before 30 January 2021.
If the arrangement started between 25 June 2018 and 30 June 2020, then HMRC must be notified on or before 28 February 2021.
Failure to comply with DAC6 could mean facing significant sanctions under local law in EU countries and reputational risks for businesses, individuals and intermediaries.
There are various businesses now offering to provide outsourcing services to deal with disclosures for DAC6 purposes, but before disclosing (or before outsourcing the disclosure process to a third party to manage) you need to consider whether the arrangements with which you are involved are such that they prudently require disclosing. This is something we can assist with.
The contents of this article do not constitute legal advice and are provided for general information purposes only.
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Expertise: Tax Law
Philippa is a UK corporate tax Solicitor with 15 years experience. Philippa advises on all areas of UK business taxation, including tax efficient employee remuneration and share option schemes, tax incentives for investment, group restructuring (both UK and cross-border), business asset disposal relief (entrepreneurs relief) planning, partnership taxation and property taxation.