EU Council Directive 2018/822, also known as DAC 6 (sixth update of the Directive on Administrative Cooperation), has been in force since 25 June 2018 and relates to cross-border tax arrangements. DAC 6 amends Directive 2011/16. It deals with mandatory automatic exchange of tax information and is aimed at achieving transparency and fairness in taxation. It applies to cross-border tax arrangements that meet one or more specific criteria and which concern either more than one EU country or an EU country and a non-EU country. Failure to comply can result in penalties of £600 for each day. 

In July 2019, HMRC provided insight on how the UK’s implementation of the EU’s Mandatory Disclosure rules will work in practice. The draft regulations and consultation document (running from 22 July 2019 to 11 October 2019) provide some clarification on the directive. The implementation of the regulations must take place by 31 December 2019.

Catherine Robins, partner at Pinsent Masons, brings the details of the directive to the surface.

What is DAC 6?

An EU regime that will require some cross-border tax arrangements to be disclosed to an EU tax authority, which will then automatically exchange the information with other affected EU tax authorities.

Who will be affected, and what is a 'cross-border arrangement'?

Anyone who is classified as an intermediary in relation to a reportable cross-border arrangement and is based in the EU could be obliged to notify arrangements under the new rules.

There are two types of intermediary who could be impacted. The first category (promoters) will be more actively involved in an arrangement. They will be those who design, market, organise or make available for implementation or manage the implementation of a reportable cross-border arrangement. This would catch a management company that has established a fund giving certain tax advantages and is responsible for marketing it to investors. It could also catch a financial adviser or wealth manager who has recommended an investment because of its particular tax advantages.

The second category (service providers) catches those with a more peripheral involvement. These will be people who know, or could be reasonably expected to know, that they have undertaken to provide aid, assistance or advice with respect to designing, marketing, organising or making available for implementation, or managing the implementation of a reportable cross-border arrangement. This could catch professional advisers involved in setting up an arrangement.

A cross-border arrangement concerns more than one member state or a member state and a third country. In the financial services context, this could perhaps be a fund platform established in one country with investors based in another country, where the fact that the investors are resident elsewhere is material to a tax advantage obtained by the investors. 

From the financial services point of view, one of the most concerning hallmarks is that there is a standardised documentation for the arrangement A cross-border arrangement will be reportable if it bears one of a number of hallmarks. These include arrangements that convert income into capital, generate losses or have the effect of undermining the Common Reporting Standard (a mechanism set up by the OECD for jurisdictions to obtain information from their financial institutions about non-residents holding financial accounts, and to automatically exchange that information with other jurisdictions on an annual basis). Some, but not all, of the hallmarks are subject to a main benefit test, so that the arrangement will only be reportable if the main benefit, or one of the main benefits, a person may reasonably be expected to derive from the arrangement is the obtaining of a tax advantage. From the financial services point of view, one of the most concerning hallmarks is that there is a standardised documentation for the arrangement (although this is subject to the main benefit test).

The UK draft regulations define tax advantage so that it will not catch arrangements where the obtaining of the tax advantage is consistent with government policy, such as pension arrangements or tax favoured investments such as ISAs.

What is the purpose of DAC 6?

Although it is an EU directive, the UK has been actively involved in its development as it is modelled in part on the UK's Disclosure of tax avoidance schemes (DOTAS) regime. It is a tax transparency measure, designed to give EU tax authorities details at an early stage of cross-border tax avoidance schemes. It is designed to deter the use of aggressive tax avoidance schemes, although its ambit is wider than this.

What will the benefits for businesses and consumers be?

Other than deterring the use of tax avoidance schemes and potentially raising more tax revenues, which could be popular with the public, it is difficult to see benefits from the regime for businesses and consumers. The regime is likely to increase administrative costs for financial services businesses, at least in the short term, and therefore could increase costs for consumers. 

What challenges do you foresee with implementing the directive?

There are considerable challenges. Each member state is required to implement it by the end of 2019, but businesses operating in more than one state may find that the requirements differ in each state. For example, Poland has already implemented the directive, but more widely than required. Some other countries have yet to publish their draft legislation.

What is the timeline for the directive?

EU member states must transpose the rules into their national laws by 31 December 2019 and apply the rules from 1 July 2020. However, the directive entered into force on 25 June 2018 and so it applies to arrangements from that date.  

A single report must be made by 31 August 2020 that includes any reportable cross-border arrangements, the first step of which takes place between 25 June 2018 and 1 July 2020. Reports will be made electronically but we do not yet have further details of the process.  

Arrangements entered into from 1 July 2020 must be reported within 30 days of the arrangements being made available or implemented. Service providers must report within 30 days of providing assistance or advice in relation to the arrangement.

What should firms do to respond to the requirements?

Firms need to put procedures in place to identify the arrangements they will need to disclose. This will include arrangements from 25 June 2018.

How will a firm's processes be affected?

HMRC's consultation document on the new rules, published in July 2019, says that it does not expect service providers to do significant extra due diligence to establish whether there is a reportable arrangement. HMRC says a firm should do the normal due diligence it would for the type of transaction and the client in question. However, a firm will need to have some sort of process for identifying arrangements that may need to be reported and some staff training may be required.

About the expert

Catherine Robins is a tax partner at international law firm Pinsent Masons LLP. She specialises in providing technical assistance on new developments in UK tax law affecting large businesses.

Each potentially notifiable arrangement may have a number of different firms who are caught by the wide definition of intermediary. Only one intermediary is required to make the disclosure, but firms will need evidence that someone else has disclosed and that the information that they would have to report has already been reported.

What are the issues with DAC 6?

It is difficult to know exactly what will need to be disclosed as the ambit of the directive is very wide. Not all member states have published their draft legislation. The UK published its draft regulations in July and a consultation on the regulations closed on 11 October. However, detailed guidance on how the rules will be interpreted by HMRC has not yet been published.

DAC 6 was supposed to require the disclosure of potentially aggressive cross-border tax planning schemes, but it is drafted much more widely than this. It is hoped that HMRC's guidance will include examples that will make it clear that common arrangements within the financial services sector will not be caught and will clarify which firms involved in the supply chain for financial products are likely to have enough knowledge of any potential tax benefits of the arrangements to have a reporting obligation. Businesses operating in other EU countries will also need to keep track of how those countries are interpreting the rules.

What happens if a firm is not compliant?

Each member state is free to set its own penalties for non compliance. For a failure to notify HMRC of a reportable arrangement, the UK's draft regulations provide a penalty of £600 for each day the firm fails to comply. Penalties will not be chargeable if there is a reasonable excuse for the non-compliance.

Is there any indication of how these rules will change post-Brexit?

The UK's draft regulations will need to change if the UK leaves the EU without a deal. A no-deal Brexit would also affect the mechanism for exchanges of information between the UK and the remaining EU member states.