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The EU is introducing new measures to increase tax transparency in order to detect potentially aggressive tax arrangements. We help you understand the impact of these new measures.
The amendment to EU Directive 2011/16/EU on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (commonly referred to as DAC6) has been in force since 25 June 2018. DAC6 aims at increasing transparency and fairness in taxation and will have far-reaching consequences for intermediaries and taxpayers (corporates or individuals).
DAC6 imposes mandatory disclosure requirements for certain arrangements with an EU cross-border element. Where such an arrangement meet one or more specified characteristics ("hallmarks") mentioned in the directive and in certain instances where the main benefit or one of the main benefits expected to derive from the arrangement is to obtain a tax advantage, the arrangement should be reported.
Although the directive is not effective until 1 July 2020, taxpayers and intermediaries need to monitor their cross-border arrangements already as of 25 June 2018. Therefore, corporates, individuals and intermediaries need to understand the importance and implications of the directive and the need to act now to ensure compliance by the deadline in 2020.
Failure to comply with DAC6 could mean facing significant sanctions under local law in EU Member States, including Cyprus, as well as reputational risks.
As our client
Our clients should be able to answer the following questions in relation to all cross-border arrangements:
How to assess what arrangements to report?
- Is a certain tax arrangement a reportable tax arrangement? PwC has developed a tool to support you with recognising those arrangements.
- What controls and processes do you have in place to capture and analyse whether a transaction needs to be reported?
- How will this be monitored where Tax and Finance are not (directly) involved?
- What if an intermediary reports your tax arrangement?
It is important to note that DAC6 does not only capture cross-border tax arrangements that can be perceived as being aggressive, but any cross-border arrangement that meet one or more specified characteristics.
If taxpayers are conducting DAC6 reportable cross-boarder arrangements, they should determine how this fits with their tax policy/strategy.
Who should make the disclosure?
- Are you as a taxpayer required to make the disclosure yourself or are there advisers or other parties involved in the transaction which may already have the obligation to report? In that case, how do you determine if anything is reported on you by the intermediary?
- Please note that if EU based advisers or other service providers are involved, they are likely to have the obligation to report. In that case, you will generally not be required to report yourself. However, if more than one adviser or another third party is involved, they could coordinate between them on who should file a single report for all of them and for that purpose agree on the contents of the report.
- Should you be required to report yourself, PwC can assist you with a reporting solution should you prefer outsourcing over building in-house solutions for DAC6.
What should be disclosed?
- Can you capture the right information from your systems and is this consistent with other filings (e.g. Country-by-Country Reporting)?
- What are third parties disclosing about you and does it coincide with your understanding / disclosure? Please note that PwC (Cyprus) will generally be considered an ‘intermediary’ under DAC6. DAC6 does not require us to inform our clients when PwC is reporting under DAC6. However, we encourage engage in a dialogue with our client on the DAC6 impact for each advice or transaction. In those cases where we are required to report, we can inform the client thereof and can provide the details of the report.
- There will be penalties in place for non-compliance. This is both a risk and a reputational issue for taxpayers (as well as for their tax advisers and other service providers).
Remember, information will be shared automatically with all EU Member States.
As intermediary
Intermediaries such as accountants, lawyers, tax advisers and other service providers should be able to answer the following questions:
How to assess what arrangements to report?
- Are you in any way involved in the advice, otherwise making available or wholly or partly in the implementation of a cross-border tax arrangement of your client?
- Does the cross-border arrangement have a tax angle?
- Is the arrangement a reportable tax arrangement?
Who should make the disclosure?
- If the arrangement is reportable, do you as service provider have the obligation to make a report?
- If so, and if other involved service providers also have a reporting obligation, it may be possible to make a single report for all service providers involved. How will it be decided whether a single report will be made? And how will be decided which service provider will do so (coordination)?
- In the case of a single report, can you as service provider agree on the contents of the report made by another other service providers and do you feel comfortable to rely upon that report?
- How will you keep a record of proof that the report is made?
What should be disclosed?
- Can you capture the right information about your client’s arrangements from your files and is the information consistent with other filings made by or on behalf or your client (e.g. Country-by-Country Reporting)?
- Is your client aware of the information, which you are about to disclose and does this coincide with your client’s understanding / disclosure?
- Are you aware of any possible impact of the report on your client’s tax position (e.g. possible follow-up questions from the tax authorities) or, possibly even, on your client's general reputation? Have these possible concerns been discussed with your client?
Remember, information will be shared automatically with all EU Member States.
As Financial Service provider
As the intermediary-definition is very broadly defined, many organisations in the Financial Services industry might be impacted by ‘DAC6’. To assess the potential impact for your organisation and take action to mitigate risks of non-compliance, you can start with the following considerations:
How to assess what arrangements to report?
- What controls and processes do you have in place to capture and analyse whether your products or transactions needs to be reported?
- How will this be monitored?
Who should make the disclosure?
- Which areas within your organisation potentially act as intermediary as they offer products/transactions which are in scope of the hallmarks?
- Define the governance structure and assign the various responsibilities under DAC6 (e.g. implementation of processes and controls, monitoring of new clients, products and execution of reporting).
What should be disclosed?
- Can you capture the right information from your systems and is this consistent with other filings?
- Synergies exist between DAC6 and existing reporting requirements of transparency initiatives.
- There will be penalties in place for non-compliance. This is both a risk and a reputational issue.
We can help you leverage existing product approval, client onboarding and/or monitoring processes and controls within your organisation (e.g. AML/KYC, FATCA/CRS, etc.).
Reportable tax arrangements
- Cross-border arrangements
- Hallmarks
- Main benefit
- Reporting
Cross-border arrangements
Cross-border arrangements are arrangements concerning at least two EU Member States, or at least one EU Member State and one or more non-EU jurisdictions. If a tax arrangement only involves one tax jurisdiction or only non-EU tax jurisdictions, the arrangement is not considered to be of a relevant cross-border nature and will then not be reportable.
Hallmarks
The hallmarks describe certain characteristics of arrangements; they are broadly worded and are expected to apply to a wide range of transactions. In some specifically mentioned cases the tax arrangement only becomes reportable if the main benefit or one of the main benefits expected to derive from the arrangement is to a obtain a tax advantage. Important to note is that DAC6 does not only capture cross-border tax arrangements that can be perceived as being aggressive.
Hallmarks which are subject to the tax main benefit test:
1. Certain confidentiality and fee arrangements with intermediaries and the use of standardized
documentation and/or structures.
2. The following types of cross-border transaction:
- certain acquisitions of loss making companies;
- converting income into capital, gift etc which is taxed at a lower level or exempt from tax; and
- circular or offsetting transactions.
3. Tax-deductible cross-border payments between two or more associated enterprises:
- where the recipient is resident in a state whose corporate tax rate is zero or ''almost zero''; or
- the receipt is exempt from tax on the payment; or
- the receipt benefits from a preferential tax regime on the payment.
Hallmarks not subject to the tax main benefit test:
1. Cross-border arrangements resulting in the following types of tax outcomes:
- tax-deductible cross-border payments between two or more associated enterprises,
where the recipient is not resident in any tax jurisdiction, or is resident in a State which is
included in an EU or OECD list of uncooperative tax jurisdictions;
- deductions for depreciation on the same asset are claimed in more than one jurisdiction;
- double tax relief is claimed in more than one jurisdiction on the same income / capital; or
- there is a transfer of assets and there is a material difference between the amount treated as
consideration in the two jurisdictions.
2. Specific hallmarks concerning the automatic exchange of information and beneficial
ownership, including structures involving holding companies and trusts, whereby the
identity of the beneficial owners is made “unidentifiable”.
3. The following hallmarks concerning transfer pricing:
- Arrangements involving unilateral “safe harbour” rules;
- Arrangements involving the transfer of hard-to-value intangibles; and
- Cross-border transfer of functions/risks/assets which result in the EBIT of the transferor to fall to less than 50% of what it would have been if the transfer had not been made.
A number of terms used in the hallmark descriptions are currently undefined and unclear.
Main benefit
The hallmarks subject to a tax main benefit test are relevant only if the main benefit, or one of the main benefits, of the arrangement is obtaining a tax advantage.
Reporting
Once the rules become fully applicable (i.e. on 1 July 2020), intermediaries and taxpayers will be required to file information with their national EU tax authority (e.g. the Cyprus Tax Authority) within thirty days of the first of the following dates:
- 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; or
- (only when an intermediary is involved) when the intermediary provided aid, assistance or advice.
As a transitional measure, where the first step in a reportable cross-border arrangement is implemented between 25 June 2018 and 30 June 2020, the arrangement should be reported between 1 July 2020 and 31 August 2020.
Once the information is filed with the relevant tax authority, then this is going to be shared with the tax authorities of all other EU Member States via the Common Communication Network (CCN) developed by the EU. Please note, that the information should not become available for public use. EU Member States may also share the information with tax authorities in third countries, with which they have information- sharing agreements, where the information is relevant to those third countries.
The filing obligation lies primarily with the intermediary who has made the tax arrangement available or is involved in the implementation process (tax adviser, lawyer, or other service provider). If a taxpayer (individual or corporate) has not made use of an intermediary, but has exclusively used its own inhouse tax expertise in respect of the tax arrangement at hand, the reporting obligation shifts to the taxpayer. The same applies if the intermediary is based outside the EU an in certain instances where the intermediary has legal professional privilege.
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Contact us
Marios S Andreou
Partner, Tax Advisory, Head of UK & India Market, PwC Cyprus
Tel: +357-22555266
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