The European Union has introduced a new tax reporting regime—known as the DAC6 EU Directive—which requires companies and individuals to report certain “tax-aggressive” cross-border transactions involving at least one Member State. Furthermore, the required reporting needs to happen more frequently, and in much greater detail, than ever before.
What is DAC6?
The new DAC6 mandatory disclosure regime (MDR) is intended to create more transparency, but for multinationals and other businesses or individuals who conduct business in and between EU countries, the law’s strict reporting requirements, tight timelines, and harsh penalties will necessarily force tax departments and other tax “intermediaries” to re-think their current tax strategies and workflows.
Under the DAC6 directive, reporting is required by both intermediaries and relevant taxpayers, which include not only corporate tax departments and accountants, but almost anyone involved in creating tax strategies either for their employer, their clients, or themselves. Lawyers, banks, corporate service companies, holding companies, group treasury companies, individual taxpayers—all must report qualifying transactions to tax authorities in a timely manner, and with complete transparency about the parties involved.
The demands and responsibilities that DAC6 compliance imposes on tax professionals are significant, and the penalties for non-compliance can be harsh. The law requires more tax data to be collected, more often, and for analysis and reporting of relevant data to happen much faster—within thirty days of each transaction in most cases. Under the new regime, arrangements requiring DAC6 tax scrutiny must also be monitored more-or-less constantly, and tax professionals will need broader access to sensitive client information. Furthermore, failure to understand and comply with DAC6 could result in severe penalties, with fines ranging from EUR 30,000 to EUR 5 million per transaction.
DAC6 Meaning and Requirements
Not all transactions must be reported under DAC6. The law specifically targets cross-border transactions or tax “arrangements” that may or may not provide a tax advantage to one or more of the parties involved, but still meet the law’s specific criteria. Qualifying arrangements can involve transactions between two EU countries, or one EU country and a non-EU country, and must meet at least one of the twenty-eight DAC6 “hallmarks.”
These DAC6 hallmarks include:
- Any fee-based arrangement where the fee is based on tax savings.
- Any arrangement that involves a confidentiality agreement not to disclose transaction details to tax authorities.
- Any arrangement using standardized documentation and/or a structure without substantial customization for implementation.
- Any arrangement that involves loss-buying, income conversion, or circular transactions to obtain a tax advantage.
- A wide range of cross-border tax deductions between different jurisdictions.
- Any arrangement intended to undermine beneficial ownership and information exchange rules.
- Transactions impacting transfer pricing, including the use of safe harbors and transfer of hard-to-value intangible assets.
Compulsory DAC6 reporting does not begin until July 1, 2020. However, intermediaries and relevant taxpayers must report any and all arrangements stretching all the way back to June 25, 2018. This means companies, taxpayers and their advisers have a great deal of work ahead of them in the coming months, as they must collect and organize the data needed to meet DAC6 requirements in both the past and in the future.
The Solution: DAC6 Reporter
These new rules put tax professionals involved in DAC6-qualifying arrangements under a great deal of pressure.
Fortunately, Thomson Reuters has developed a new tool, the DAC6 Reporter, which includes 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 UK. DAC6 integrates directly with other ONESOURCE Solutions, so data already entered can be migrated to populate fields in DAC6, saving data-entry time and making it much easier to monitor and report qualifying arrangements in the future.
For speed and ease of use, DAC6 Reporter guides users through all steps of the DAC6 reporting process (from initial data collection to 30-day filing, notifying all participants, and continuing quarterly and annual reporting), and contains a comprehensive database of DAC6 compliance rules by country, as well as translated explanations for how the rules apply in each individual country. It also contains a complete analytics dashboard to help monitor and manage DAC6 arrangements, so users can keep track of whether and when compliance benchmarks have been met.
DAC6 Reporter was designed specifically to help tax advisers navigate the tricky legal territory surrounding DAC6. If users are in doubt about whether a given arrangement is subject to DAC6 reporting, the tool can analyze data from the tax arrangement (countries involved, nature of transaction, participant names, ownership structure, etc.), automatically flag transactions that qualify, identify which hallmarks they trigger, and explain—through the comprehensive library—how they apply in the relevant countries.
Information gathering is also going to be an important part of the process for intermediaries and relevant taxpayers, especially in the retro-active reporting phase. To facilitate information gathering and clarification, DAC6 Reporter includes two separate features: one is a chat tool that allows users to create collaborative online workgroups; the other is a survey tool that allows users to create and distribute questionnaires that relevant parties can respond to at their convenience.
Given the amount of information, tax advisers must collect and process, as well as the time constraints involved and the consequences for non-compliance, tax advisers who underestimate the extra workload associated with DAC6 do so at their own peril.
There is only one product on the market specifically designed to make the job more manageable—and that’s DAC6 Reporter.