How to comply with the new DAC6 reporting regime without tearing your hair out
Tax advisers affected by the European Union’s new DAC6 Directive on mandatory reporting for cross-border tax arrangements need to be aware that there could be serious consequences for those who fail to comply with the law’s strict reporting requirements and tight deadlines. Extreme diligence and thorough preparation are going to be necessary for all involved, because DAC6 is not a minor tweak of existing law—it is a complete game-changer.
WHAT IS DAC6?
The DAC6 mandatory disclosure regime (MDR) is part of a broader effort to introduce more transparency and accountability into the international tax system, and targets cross-border transactions or “arrangements” involving at least one EU Member country. The parameters of the law are extremely broad, however, and include transactions that may or may not be designed to provide a deliberate tax advantage for the entities involved. This means that tax advisers and other “intermediaries” with reporting responsibilities—i.e., judges, bankers, corporate service providers, holding companies, and even some individual taxpayers—will need to monitor all cross-border transactions they or their clients are involved in to determine which ones meet DAC6’s reporting criteria.
Tax professionals who do not already feel a sense of urgency about DAC6 should also know that while the law doesn’t go into full effect until July 1, 2020, transactions occurring now are definitely included. In fact, under DAC6’s retro-active reporting rules, ALL relevant transactions between June 25, 2018 and July 1, 2020 must be reported. Failure to meet DAC6 compliance requirements can result in financial penalties ranging from 30,000 EU to 5 million EU per transaction, depending on the countries involved.
Make no mistake, DAC6 is a no-nonsense law that must be respected. For tax advisers, however, DAC6 implementation will necessitate levels of diligence, responsiveness, and transparency that were not required before. These responsibilities will also be continuous and ongoing, which means tax professionals will need to incorporate them into their regular workflow. This could take time away from other critical tasks, and, if not managed correctly, could result in penalties and potentially put a client’s reputation at risk.
For example, the first significant DAC6 EU due date is the July 1, 2020 deadline to retro-actively report all relevant transactions going back to June 25, 2018. That’s two full years of transactions that must be researched, recorded, evaluated and—if necessary—reported. The consensus among industry analysts is that if you are an intermediary with DAC6 reporting responsibilities who hasn’t yet begun collecting the necessary data to meet this deadline, you are already well behind the curve.
Unfortunately for tax professionals, DAC6 was not written with convenience in mind. For starters, determining which transactions or “arrangements” need to be reported is not a very straightforward or intuitive calculation. Qualifying transactions involve at least one EU Member State—but can be between two or more EU states or a non-EU country. Transactions or arrangements must also meet a “main benefit test” and/or one of twenty-eight “hallmarks.” DAC6 hallmarks cover a broad range of transactional criteria, and are targeted at—but not limited to—so-called “tax aggressive” arrangements that use such tactics as transfer pricing, safe harbors, loss-buying, income conversion, circular transactions, or other dubious strategies to obtain a tax advantage.
DAC6’s reporting criteria also encompasses an enormous range of possible transactions, from cross-border leasing arrangements, M&A financing, reinsurance and holding-company vehicles to the vast and myriad intricacies of many multi-national business arrangements. Furthermore, all intermediaries involved must report on the transactions in which they or their clients are involved within thirty days of each transaction. And, since DAC6 e-reports are automatically shared between EU Member States, all the data submitted by separate parties must be consistent.
In other words, the numbers must all add up, or the authorities will come knocking.
Practically speaking, there is no way to meet DAC6 tax requirements without the help of a dedicated software tool or programmable system of some sort. Thomson Reuters has created just such a tool with DAC6 Reporter powered by Orbitax, a program that integrates seamlessly with other ONESOURCE Solutions and is designed specifically to help users manage the unique demands of DAC6 reporting.
DAC6 Reporter includes all the templates and forms necessary to meet DAC6 requirements in all EU Member States, the UK, and 195 different countries. It also includes color-coded dashboards and analytics tools to help track and manage transactions, as well as machine-learning capabilities that automatically assess whether a transaction triggers DAC6, and if so, identifies all the specific jurisdictional guidelines that apply. Once the appropriate data is in place, reporting transactions to the proper authorities is just a click away.
SAVE TIME, MONEY, AGGRAVATION
DAC6 Reporter is designed to save tax professionals as much time as possible, through simple, intuitive functions that streamline the reporting process and allow users to gather and coordinate data without having to leave the program’s ecosystem. Integrated meeting and chat functions give intermediaries the power to collect necessary information from clients quickly and easily. And if questions come up, the tool includes a complete library of DAC6 rules for 195 countries, as well as links to local legislation that might apply, all of which can be translated into the user’s language of choice.
Once the July 1, 2020 has been met, tax intermediaries will be responsible for monitoring and reporting all future DAC6-qualifying transactions, usually within thirty days. For a company with dozens or hundreds of qualifying transactions, DAC6 reporting responsibilities alone could put a significant strain on even the most well-organized tax department. So, to help manage regular, repeatable transactions, for instance, DAC6 Reporter allows users to flag such transactions as monthly, quarterly, or annual, and can be programmed to automatically report them as needed.
Though DAC6 requires more data and transparency from EU intermediaries than ever before, the burden of meeting those requirements need not be overwhelming. Some extra planning and foresight will be necessary, of course, but with the help of DAC6 Reporter, the task ahead doesn’t have to be as daunting as it seems.