Implementation of the new European Union (EU) mandatory disclosure regime (MDR) for cross-border business transactions, known as DAC6, is almost upon us. DAC6 takes effect on July 1, 2020. Although the first reports for the complex, robust, and demanding DAC6 regulatory monolith were originally due by the end of July, because of the COVID-19 pandemic the EU has proposed extending key filing deadlines and adding a new one to the mix.
The proposed extension would allow the August 31, 2020 deadline for reporting historical arrangements dating back to June 25, 2018, to be moved to February 28, 2021. The 30-day period for reporting post-June 2020 cross-border arrangements would be deferred to January 1, 2021 (rather than the end of July), with ongoing quarterly information exchanges between tax authorities deferred to January 31, 2021.
These proposals are optional and there is a caveat to their implementation. The individual EU member countries are to decide whether to transpose these rules into their local laws. If they decide to go ahead with these rules; the adoption must be completed before the effective date for the current DAC6 rules on July 1, 2020. Belgium has already implemented the deferral and Luxembourg has proposed draft legislation to adopt the deferral. The EU Council will need to agree to the EU Commission’s proposals in their upcoming June 19, 2020 meeting.
It’s important to note that it will be up to the 21 countries that have finalized their DAC6 legislation to make their respective announcements if they intend to adopt the proposed DAC6 deferral into their local laws. Otherwise, the original effective dates will continue to be July 1, 2020, for the 30-day reporting and August 31, 2020, for the retroactive reporting.
The purpose of DAC6 is to use the EU mandatory disclosure rules to deter aggressive cross-border transactions intended to secure tax advantages. The Organisation for Economic Co-operation and Development (OECD) was tasked to design 15 action items intended to prevent base erosion and profit shifting (BEPS) by multinational enterprises (MNEs.) DAC6 is the EU implementation of the BEPS Action 12 initiative regarding the strategies for mandatory disclosure of such transactions. The overarching goal of these initiatives is a fair, transparent, efficient, and thorough digital tax system. To date, other countries are looking to implement BEPS Action 12, including Mexico, whose rules are effective in 2021.
Although the proposed delay in reporting deadlines gives multinational enterprises (MNEs) a little more time to prepare compliance plans, the message is clear: Get ready now!
DAC6 compliance challenges
DAC6 compliance is a difficult task, whether you’re dealing with first-time historical reporting or ongoing reporting. Organizations face multiple challenges:
- Separate reporting is required for every country with which an enterprise has a transaction relationship.
- Each country has its own local compliance requirements that must also be met.
- Specific reporting is required for each cross-border transaction (with some companies required to report on domestic transactions as well).
- Reporting requires the disclosure of personal and business information that can be difficult to obtain and that is sometimes intentionally hidden.
- The burden for data collection falls to corporate tax specialists, who are likely not privy to this information.
- The first round of reporting takes place within a very compressed timeframe and requires retroactive reporting.
- The data input needed for previous and ongoing transactions is not leverageable from existing workflows (such as enterprise resource planning systems).
- All reporting, both first-time and ongoing, requires continuous collaboration with multiple stakeholders.
This means that MNEs are not only going to have to hurdle some significant obstacles to meet the first set of compliance requirements, they’ll also need to address how to remain compliant on an ongoing basis. The failure to comply can result in fines into the millions of euros and include criminal penalties.
Best practices for DAC6 compliance
DAC6 compliance is an end-to-end, multifaceted process that spans planning, reporting, reconciliation, audit and resolution, and ongoing monitoring. There are several factors to consider in designing your compliance plan.
For example, the reporting process is very complex and takes place within a demanding time frame, particularly for historical reporting. MNEs must be able to quickly gather accurate and often hard-to-find information at a greatly accelerated rate across functions and across countries. Reports must be submitted electronically and in alignment with a very specific schema that passes DAC6 validation rules. These efforts require significant coordination that could lead to creating new tax department workflows.
The following actions are recommended to ensure that you’re putting an effective long-term plan solidly in place:
- Ensure that all stakeholders are well-informed about the directive and its requirements and that tax teams have the technical knowledge they need to meet reporting compliance.
- Develop a comprehensive understanding of the 15 DAC6 hallmarks (those specific signs that reporting on a particular transaction may be indicated) so that reportable and potentially reportable transactions can be properly identified and assessed.
- Nurture strong, collaborative relationships between taxpayers and intermediaries to ensure that there are well-understood and controlled processes in place for managing reporting information.
- Establish a repeatable process for managing reporting obligations that addresses multicountry reporting formats, reporting timetables, the ability to meet 30-day reporting requirements, secure information storage, and annual reporting.
- Implement a process for ongoing monitoring and review to support the efficacy of your DAC6 compliance program.
A DAC6 compliance plan
Including the following elements in your compliance plan can help ensure that you meet all DAC6 reporting requirements, now and into the future:
- An automated and well-defined workflow that spans from data collection to filing
- A robust database of country tax rules capable of automatically identifying reportable cross-border arrangements (RCBA)
- Sophisticated analytics that can quickly identify RCBA status, including filtering by due dates and reporting countries
- Comparison tables that can pinpoint any variations from the EU directive
- Automated logic that can identify entities and countries within your enterprise’s footprint that has the potential to trigger DAC6 hallmarks
It’s important that MNEs be in control of this compliance process. The MDR is a permanent, ongoing workflow and more countries will implement BEPS Action 12 in the future, even countries outside the EU. MNEs should be looking to invest in an MDR solution capable of scaling to cover multiple countries as that expansion occurs.
Manage compliance with the DAC6 Reporter
Automated capabilities and repeatable workflows are a recurring theme in robust DAC6 compliance. Thomson Reuters DAC6 Reporter is an automated workflow solution that encompasses all the data collection templates, reporting forms, analytics dashboards, and supporting information necessary to meet DAC6 reporting requirements in all EU Member States and the U.K. Most importantly, the tool addresses many of the compliance challenges that can interfere with timely and accurate reporting and it can scale as needed.
DAC6 Reporter guides you through the process and is supported by a comprehensive database of DAC6 compliance rules ― by country. An easy-to-use analytics dashboard makes monitoring and managing DAC6 arrangements simple. The tool helps ensure ongoing compliance by analyzing data from any given tax arrangement and flagging any transactions that are subject to DAC6 mandatory disclosure. Data that exists in other Thomson Reuters ONESOURCE™ solutions can be easily migrated to populate DAC6 Reporter fields, saving significant data-entry time for both first-time and ongoing reporting. A dedicated chat feature facilitates collaboration and feedback across workgroups.
Don’t risk non-compliance
Failure to comply with DAC6 is not an option. The cost is simply too high, both in terms of financial penalties and reputational damage. Taking the right steps now to curate the information you need to meet current obligations and plan for ongoing compliance as regulations and processes evolve will benefit you in both the short and the long term.
Learn more about managing the DAC6 directive through these resources: