Why technology is critical for DAC6 compliance
These days, the number one concern of corporate tax departments is clear: keeping up with changing regulations. Adding to this complexity is a new set of European reporting requirements known as DAC6. While keeping pace with this type of just-in-time reporting is certainly a challenge, it can be addressed with comprehensive technology that facilitates collaboration and communication between stakeholders on reportable cross-border arrangements.
Understanding the basics of DAC6
DAC6 is the result of the OECD’s Base Erosion and Profit Shifting (BEPS) framework enacted in 2015. This framework aims to put an end to tax avoidance strategies and mismatches in tax rules to ensure multinational enterprises pay their fair share of tax. Although the OECD does not make laws, the widespread adoption of its international tax guidelines has taken hold in countries around the world.
While BEPS is the wider framework, Action Item 12 provides recommendations for the design of rules that require taxpayers and advisors to disclose aggressive tax planning arrangements. These recommendations seek to balance the need for early information on tax planning schemes with a requirement that disclosure is appropriately targeted, enforceable, and avoids placing undue compliance burden on taxpayers.
As an interpretation of BEPS Action Item 12, DAC6 is a European regulation that imposes the mandatory disclosure and reporting of cross-border arraignments. It requires contemporaneous or just-in-time reporting with respect to the arrangement of interests, not just transactions. This includes proposals or transactions that were started and then stopped. On top of that, all participants – both advisors and taxpayers – are liable for reporting.
The first DAC6 reports were originally due in July, however, the EU has extended the key filing deadline to January 1, 2021 due to the COVID-19 pandemic.
Managing the risk of DAC6 and similar regimes
While DAC6 is only one interpretation of BEPS Action Item 12, it is safe to say that tax authorities globally are trending in a similar direction. Within the EU alone, each country has its own interpretation of DAC6 requiring different stakeholders to report. In Mexico, the features of Mandatory Disclosure Rules (MDR) are generally similar to the DAC6 hallmarks but with some material differences. Similar features or “red flag” behaviors between the two regimes include undermining reporting obligations, hard-to-value intangibles, unilateral safe harbors, opaque ownership, intragroup asset transfer, double depreciation, loss utilization, and circular transactions. Additionally, both MDR and DAC6 state that reporting needs to occur within 30 days. It’s a lot to manage, to say the least.
Tax authorities are also increasingly using technology to their advantage for unprecedented access to information coming into audit. Governments are breaking down silos, talking to one another, and using joint audits to get their proper allocation of tax revenue. Tax authorities are exchanging information about what they know about the cross-border arrangements of multinational enterprises—and they know what they are looking for.
To appropriately manage this risk and comply with reporting guidelines like DAC6, multinational organizations must ensure a level of transparency never before seen, both within their organizations and toward the tax authorities themselves.
Just-in-time reporting gives tax authorities a real-time heads up on tax planning arrangements. This level of insight can catch up with organizations in relation to proposals or abandoned transactions. The challenge intensifies when tax departments are dealing with multiple jurisdictions where activities are reportable in some and not in others.
So, what proactive steps should a multinational organization take? First, it’s important to realize that this is not the time to leave your European operations to handle compliance on their own. Take charge from the top and assume all arrangements are interrelated and have a tax implication. Understanding who the participants are and who needs to report takes a huge amount of coordination. Needless to say, multinational tax departments need much more than a calendar and spreadsheet. A well-coordinated approach must ensure cohesive messaging and communication on what you did and why you did it—ahead of inquiries from tax authorities.
Because DAC6 and related regulations look outside of the immediate jurisdiction’s tax implications to decide the primary motivation for the transaction or arrangement, it can divide taxpayers and intermediaries. If your advisor is in the hot seat, how do you present a unified message? How do you control and mitigate risk across jurisdictions? The answer is found in a harmonized approach backed by advanced technology.
Why technology is necessary for DAC6 compliance
The transparency necessary in determining what is reportable or not reportable under DAC6 and similar regulations requires an unprecedented level of collaboration and communication within multinational organizations. Hefty fines for non-compliance exacerbate this need. In Poland, penalties can be as high as € 5 million. Similar legislation in Mexico includes a penalty clawback of 50-75% of the tax benefits of the transaction that went unreported.
With such substantial fines for non-compliance as well as the potential for reputational risk, multinational enterprises need a comprehensive, secure, enterprise-wide solution for identifying and accurately reporting reportable cross-border arrangements. Advanced technology offers insight into each country’s DAC6 requirements, including who needs to report and when, as well as the ability to automatically capture and flag cross-border arrangements and transactions for reporting.
Imagine this: When you upload arrangement and transaction data, the technology applies comprehensive logic based on each country’s rules to automatically flag activities that may need to be reported under DAC6. Technology can also track reporting deadlines for each country, assign related tasks, and auto-populate reporting forms.
In terms of driving transparency within the organization, technology enables collaboration between stakeholders for data gathering and finalizing reportable arrangements. Users can collect information through an integrated data survey tool from in-house stakeholders and outside advisors to verify the reportable arrangements and confirm that all connected transactions have been captured. Logic is then applied to separate those that will be reported by an intermediary or by the taxpayer and the country to whom the report should be submitted.
With technology as the backbone of DAC6 compliance, multinational enterprises can cultivate an internal architecture that ensures all corners of the organization are talking to one another—and that the messaging to tax authorities is consistent. When you have a system that tracks all guidance and houses data and reports in one place, you can easily deal with supplemental modifications, audits, and even employee turnover.
Technology helps tax departments demonstrate consistency and control, coordinate messaging, and tell a consistent story to tax authorities. With governments using technology to their advantage, it’s time multinational enterprises capitalize on the opportunity as well for a comprehensive view of cross-border transactions and simplified compliance across jurisdictions.
For more information on this topic, check out our latest Tax & Tech Talks podcast or visit DAC6 MDR Reporter to learn more about our technology solutions.