DAC 6: Reporting of potentially aggressive cross-border tax planning arrangements
Earlier this year, the UK brought in legislation to implement an EU directive on ‘administrative cooperation in the field of taxation’, better known as DAC 6.
The aim of the DAC 6 rules is to provide HMRC, and other EU tax authorities, with additional information to identify and challenge offshore non-compliance, but also to seek to deter people from engaging in aggressive tax arrangements. Despite the DAC 6 rules being led from the EU, they will almost certainly remain in place following the end of the Brexit transition on 31 December 2020.
The primary reporting obligation of DAC 6 falls on ‘intermediaries’, which includes lawyers, accountants and tax advisers aiding, advising, or otherwise assisting UK taxpayers on the design or implementation of a reportable cross-border arrangement. If there is no intermediary, the reporting obligation falls on the taxpayer.
At first glance, this might suggest that finance directors can sit back and let their advisers take the strain of DAC 6. However, this relaxed attitude may be misplaced! There are a number of reasons why UK companies, who are using tax advisers, should still be prepared to be more vigilant and proactive in the reporting process.
It is clear that DAC 6 is intended to provide tax authorities in the UK and in the EU with information to enquire into and challenge the reported transactions, with the aim of raising additional taxes.
It will be important for taxpayers to track what arrangements have been reported by advisers, and where, and to assess the tax risk presented by this additional disclosure. However, a reportable arrangement will not necessarily seek to obtain a tax advantage or benefit.
To be reported the tax arrangement must feature a ‘hallmark’ of possible tax avoidance (to be addressed in my next article), but that may not, and probably will not, be the motive of the arrangement. Furthermore, even if an arrangement is never actually implemented, it may still have to be reported.
Finance directors may be faced with the prospect of dealing with enquiries from HMRC and other tax authorities in the EU in relation to quite benign transactions. These enquiries will take up management time and incur additional professional fees to counter any challenge to an arrangement.
Tax due diligence
A buyer will expect a target company to provide details of all cross-border arrangements reported to HMRC, or a tax authority in the EU, by an adviser or by itself.
More than one adviser
It is common for a company undertaking a cross-border transaction to use advisers in more than one country and to use more than one adviser in the same jurisdiction. However, it is sufficient for only one adviser to report and only in one country. The taxpayer, therefore, has a role in helping to ensure that multiple disclosures are avoided by facilitating a coordinated approach with advisers and making sure that the reporting obligation rests with just one.
Adviser is not in the UK or EU
The reporting obligation only falls on an intermediary if that adviser is in the UK or EU.
For example, where a UK subsidiary of a US company uses an adviser in the US on a cross-border transaction, and there is no adviser in the UK or in the EU, the reporting obligation falls on the UK company.
Adviser has legal professional privilege
A lawyer is not required to disclose privileged information under the rules. If there is no other adviser, the taxpayer must take on the reporting obligation (having been notified by the lawyer). The lawyer may still hold non-privileged information and would still have the responsibility to report that information to HMRC.
Even where an adviser has reported an arrangement, the taxpayer is still required to report details of the arrangement in its tax return (see below).
If the DAC 6 reporting falls on the UK taxpayer (individual, company or partnership), that person must report to HMRC within 30 days of the arrangement being ready for implementation or, if earlier, when the first step in the implementation has been made.
The reporting requirement was due to begin on 1 July 2020. However, in response to COVID-19, the European Commission has proposed a three-month deferral of all the DAC 6 reporting deadlines. If this proposal is adopted, the 30-day reporting requirement will commence on 1 October 2020; and the reporting of arrangements between 1 July 2020 and 30 September 2020 will be deferred to the end of October 2020.
There will also be an initial, catch-up, exercise to capture and report arrangements made between 25 June 2018 (when the EU brought in DAC 6) through to 30 June 2020. The deadline for reporting these historic arrangements was 31 August 2020 but the proposal is to delay this to 30 November 2020.
When filing its tax return a taxpayer is required to include details of all reportable cross-border arrangements it has participated in during the accounting period (ie annual reporting). For each reportable arrangement, it must give the arrangement reference number (ARN) and details of any tax advantage arising from the transaction. If the tax advantage continues in subsequent periods, the ARN must also be included in subsequent tax returns.
Failure to report information (by intermediaries or advisers) can be penalised by HMRC. The initial penalty is £5,000, but there are provisions to penalise serious offenders with a daily penalty of £600 or potentially a penalty of up to £1 million. In addition, failure by taxpayers to comply with the disclosure requirement on their annual return can be penalised by penalties up to £10,000 for each reportable arrangement.
In his next article, Neil Insull will focus on what cross-border arrangements must be reported under DAC 6, the relevant ‘hallmarks’, and what information must be reported to HMRC.