The Council Directive 2018/822/EU of 25 May 2018 (“DAC6” or the “Directive”) on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, imposes mandatory disclosure requirements for certain arrangements with an EU cross-border element where the arrangements fall within certain “hallmarks”.
In accordance with the DAC6, intermediaries have the obligation to report arrangements to the tax authorities in the country in which they are resident. The latter will then automatically share the information with the Tax Authorities of all other member states on a quarterly basis. The Directive gives Member States the option to exempt intermediaries from the obligation to report where the reporting obligation would breach Legal Professional Privilege (“LPP”). If there are no intermediaries who can report, the obligation will shift to the taxpayers.
An intermediary is any person who:
- designs, markets, organizes or makes available for implementation or manages the implementation of a Reportable Cross- Border Arrangement (RCBA);
- provides, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organizing, making available for implementation or managing the implementation of RCBA.
The concept of intermediary is not limited to tax experts but may include among other, accountants, auditors, banks, lawyers, administrative services providers, or any other professionals who undertake any of the above acts.
Note: As per the draft Cypriot Mandatory Disclosure Rules (“MDR”) Law persons exercising the profession of lawyer are covered by the Legal Professional Privilege (LPP) and are therefore, exempted from the obligation to report/file information to the tax authorities.
Reportable Cross- Border Arrangement (RCBA)
RCBA means any cross-border arrangement that contains at least one of the hallmarks set out below:
- Hallmark category “A”: arrangements whose tax benefits are subject to confidentiality arrangements, that give rise to performance fees or mass marketed schemes;
- Hallmark category “B”: arrangements such as the contrived acquisition of loss-making companies, the conversion of income into capital or other forms of income, or so-called circular transactions;
- Hallmark category “C”: arrangements that give rise to tax deductions without a corresponding amount of taxable income, to certain double reliefs or deductions, or other mismatches;
- Hallmark category “D”: arrangements that have the effect of undermining the CRS or the rules on identification of beneficial ownership;
- Hallmark category “E”: arrangements concerning transfer pricing.
The hallmarks listed above are characteristics or features of cross-border arrangements that present an indication of a potential risk of tax avoidance.
Reporting, and deadlines
Tax intermediaries will have to report arrangements that fall within the scope of the DAC6 within 30 days after the arrangement is made available for implementation/ready for implementation or the first step in the implementation has taken place (although in certain situations, the intermediary will be required to submit a report every three months).
Where an intermediary (or taxpayer) is required to submit information on covered arrangements with the competent authorities of more than one-member state, the information must be filed with one-member state according to a specified hierarchy.
In accordance with DAC6, an arrangement is reportable if:
- It meets the definition of a cross-border arrangement; and
- It meets at least one of the hallmarks (mentioned above);
The Directive covers arrangements involving all types of direct tax, including corporate, personal, capital gains and inheritance tax.
Reportable information on the arrangement would include:
- Identification of all taxpayers and intermediaries involved, including
- Name, date and place of birth (if an individual);
- Tax Identification Number (TIN);
- Tax residence;
- Associated persons of the relevant taxpayer (if applicable).
- Details of the relevant applicable hallmark(s).
- A summary of the arrangement, including (in abstract terms) a summary of relevant business activities.
- The date on which the first step in implementation was or will be made.
- Details of the relevant national law.
- The value of the cross-border reportable arrangement.
- Identification of relevant taxpayers or any other person in any Member State likely to be affected by the arrangement.
Reporting Deadlines:
The official application date of the DAC6 in all Member States was the 1st July 2020 despite its retrospective enforceability on reportable cross-border tax arrangements carried out since 25 June 2018. However, due to the Covid-19 outbreak and the disruption caused in the business sector at global level, the European Commission has decided to defer certain reporting and filing deadlines.
Specifically:
- The reporting of the “historical” cross-border arrangements (i.e., arrangements that became reportable from 25th June 2018 to 30th June 2020) has been moved to 28th February 2021 instead of 31st August 2020;
- With respect to arrangements targeted by DAC6 starting 1st July 2020, where a reportable cross-border arrangement is made available for implementation, or is ready for implementation, or where the first step in its implementation has been made, or aid, assistance or advice have been provided, between 1st July 2020 and 31st December 2020 (deferral period), the period of 30 days for filing information shall begin on 1st January 2021;
- The date for the first exchange of information on reportable cross-border arrangements has been moved from 31st October 2020 to 30th April 2021.
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