For multinationals who do business between countries in the European Union (EU), the new EU mandatory disclosure regime (MDR) for cross-border transactions—known as DAC6—is a regulatory beast that cannot be ignored. Penalties for non-compliance can run into the millions of euros, and the reputational harm to non-compliant companies and their tax advisers could be considerable.
However, tax professionals or other intermediaries involved in DAC6 reporting will soon discover that this mandatory disclosure regime requires a significant increase in data collection, review, analysis, and communication. Workflows may need to be re-assessed as well, and more effective technological tools may also be necessary to ensure an efficient, timely, and reliable process going forward.
The DAC6 Challenge
For those just getting up to speed, DAC6 is part of the international community’s ongoing effort to create a digital tax system characterized by fairness, transparency, efficiency, and thoroughness. Technically speaking, DAC6 regulations are a response to the Organization for Economic Co-Operation and Development’s (OECD) BEPS Action 12, which recommended ways to design mandatory disclosure rules for aggressive international tax-planning strategies that seek to gain a tax advantage by moving assets to low- or no-tax jurisdictions. Action 12 also issued guidelines for developing and implementing more effective information exchange and co-operation between tax administrations and multinational entities (MNE).
DAC6 adds considerable muscle to BEPS Action 12 by applying the OECD’s recommendations to qualifying cross-border business transactions, or “arrangements,” involving at least one Member country in the EU. The result is a rigorous but by no means perfect set of rules delineating the types of cross-border transactions that need to be reported, who is responsible for the reporting, what information the reports should contain, and how and when they should be submitted.
DAC6 was legally ratified by most EU states at the end of 2019, and the first reports are due July 31, 2020. In addition, reports for transactions going back to June 25, 2018, are due August 31, 2020, with more or less continuous reporting after that. This means that in addition to identifying current qualifying transactions, multinationals and their tax representatives must comb through two years of records to identify reportable arrangements, after which reporting is generally due within thirty days of the implementation of any given transaction.
Buckle up, intermediaries
Reporting responsibilities under DAC6 fall to intermediaries, and all intermediaries involved in a transaction must report. The directive defines an intermediary as anyone who “designs, markets, organizes, or makes available for implementation or manages the implementation of a cross-border arrangement.” In most cases, this means tax advisors, accountants, lawyers, consultants, and bankers, but it can include other service providers (e.g., holding companies, trust officers) and even individual taxpayers. The other stipulation is that the intermediary must have some professional connection to the EU—i.e., be a resident, part of an EU-based corporation, or registered with a professional association in the EU.
In practice, this means that any given transaction could have multiple intermediaries, all of whom must report, and—crucially—all of the information they report must match. So not only must the relevant data of a transaction be collected, but some degree of communication between intermediaries is also necessary to ensure reporting accuracy and consistency.
Arrangements are reportable under DAC6 if they exhibit certain “hallmarks” associated with aggressive tax planning and/or meet a “main benefits” test indicating that the motive behind the arrangement is to secure a tax advantage. The DAC6 hallmarks target well-known characteristics of various tax-avoidance schemes—e.g., loss buying, circular transactions, confidentiality agreements, transfer pricing, etc.—and cast a fairly wide net. In fact, the directive’s guidelines are broad enough to include transactions that yield no tax benefit whatsoever. So, for example, a number of common corporate financing mechanisms, cross-border leasing arrangements, multi-country reinsurance deals, and other tax-neutral business arrangements can trigger reporting requirements.
Several other complicating factors to DAC6 reporting are also worth noting.
- First, though all 28 EU member states were required to pass legislation enforcing the DAC6 MDR within their borders, many member states have also issued additional local guidelines. Furthermore, some countries are asking for more taxpayer information than others, and still, others have yet to issue specific guidance. Intermediaries are responsible for keeping track of these differences and making sure that reporting is in compliance with both international and regional requirements.
- Another complicating factor has to do with the amount of taxpayer information that must be disclosed under DAC6. For example, all taxpayers and intermediaries involved in a transaction must disclose not only their involvement, but also their legal tax residence, name/date/place of birth, and tax identification number (TIN). Each report must also be accompanied by a summary of the arrangement, a list of applicable hallmarks and associated details, an estimate of the tax value of the arrangement, and a list of any other person or entity likely to be affected by the arrangement.
- In many cases, this level of informational detail may be difficult to obtain. For intermediaries, knowing precisely who is involved in an arrangement and who might be affected isn’t always obvious, especially if the people involved aren’t eager to have their identities known. And if an intermediary isn’t aware of a person’s involvement, they can’t very well provide their name, much less their date and place of birth.
Taming the beast
The specificity of information required for DAC6 compliance is, of course, the point. The law was created to deter aggressive cross-border tax arrangements, and the speed with which transactions need to be reported—30 days in most cases—is intended to alert tax authorities to loopholes and tactics that MNEs are attempting and need to be addressed. In future blogs, we will explore in-depth the compliance challenges faced by intermediaries under DAC6, including the vagaries of country-to-country compliance; how to obtain required information from multiple stakeholders; how to design an efficient and repeatable DAC6 workflow; and best practices for keeping up with country-specific rule changes.
DAC6 does not have to be a beast, but in this emerging age of heightened scrutiny and digitized tax governance, several new strategies may be required to tame it.
Businesses can act now to plan for compliance, curate additional information they will need outside of their ERP to determine if a transaction needs to be reported, and avoid regulatory and reputational risk. Find out more information on how a well-designed DAC6 software helps you comply with this EU requirement.