Tackling tax avoidance and evasion are high on the political agenda of European Union (EU) institutions. The aim is to create a more unified and fair single market. In this context, in recent years the Commission has presented several initiatives promoting tax system “fairness”.
Directive 2011/16/EU on administrative cooperation in the field of taxation, which was approved in 2011, replaced and “modernised” a Directive of 1977. In 2011 it was never unexpected that this new directive would play a key role in achieving these objectives. The Directive is generally referred to as ‘DAC’, an acronym for ‘Directive on Administrative Cooperation’.
The first version of the Directive (DAC1) established the mandatory exchange of information in only 5 categories of income and capital in cross-border situations, i.e. ownership and income from immovable property, income from employment, directors’ fees, pensions and life insurance products not covered by other Directives.
In 2014, DAC2 broadened the scope of the automatic exchange of information to income, profit and the state of financial accounts held by residents of a member state in another member state on 31/12. In fact, DAC2 was the implementation of the OECD’s Common Reporting Standards (CRS) within the European Union.
At the end of 2015, DAC3 was implemented to expand the automatic exchange of information to cross-border rulings and transfer pricing-agreements.
In 2016, DAC4 introduced the exchange of country reports. In the country reports, multinational companies must provide specific financial information on an annual basis for each of the tax jurisdictions in which they are active.
The objective of DAC5, which was adopted in 2017, has been to ensure tax authorities are better equipped to effectively accomplish their tasks and to combat tax evasion and fraud more effectively by allowing them to access information in the UBO-registers currently established in all member states.
On 25 May 2018, a European Directive was endorsed that compels tax consultants to report cross-border arrangements. This Directive results in DAC6 or “Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements”.
Any person advising or implementing cross-border arrangements must report such arrangements to the local tax authorities. This applies to arrangements involving more than one EU member state and an EU member state and a third country. Hence, it is sufficient that one or more participant(s) in this arrangement is/are tax resident(s) in different jurisdictions.
To broaden the DAC6’s scope of application, the concept of ‘arrangement’ is not defined, which makes the effectively covered arrangements unclear. DAC6 only includes a list of essential features (so-called ‘categories of hallmarks’) that indicate “aggressive tax planning”. In this respect, the hallmarks may only be taken into account where they fulfil the “main benefit test” (i.e. where the main, but not sole, objective of an arrangement is to obtain any tax advantage).
Such tax arrangements occur in a business environment, such as the arrangements for obtaining a double tax deduction for the same expense in two tax jurisdictions or the arrangements involving tax-deductible cross-border payments between affiliated companies. But they can also be planned in other areas, such as the circumvention of the automatic exchange of financial information (CRS) or to make legal or factual ownership non-transparent. Furthermore, a wide range of hybrid arrangements can be set up to convert profits to (tax-exempt) capital, gifts or to make the profits tax-exempt or taxed at a lower rate. Such hybrid arrangements do not necessarily need to be tailor-made. Reporting requirements may even be triggered when standardised documents are used requiring no further (essential) amendments for implementing the arrangements involved.
The mandatory reporting requirements have the widest possible scope, covering all intermediaries. Any companies or professionals will be covered that usually design, promote, organise or manage the implementation of a tax arrangement that has a cross-border element and that contains any of the hallmarks set out in the DAC6. This scope may include lawyers, accountants, trustees, investment managers, notaries, insurance intermediaries, tax and financial advisers, banks, consultants, etc. Professionals or intermediaries falling within DAC6’s scope will have to report the arrangement to their tax authorities within thirty days of the day that the arrangement is ready for implementation. Even if the role of the intermediary is limited to aiding, assisting or advising, the reporting obligation applies if the intermediary knows or should have known about it. By making the rules apply to all intermediaries, the Commission intends to ensure that the reporting requirements are complied with.
When several intermediaries are involved, the obligation to report the arrangement is incumbent upon the intermediary responsible for designing and implementing the arrangement(s).
The intermediary may be exempt from the reporting requirements where he or she is bound by legal professional privilege or secrecy rules (e.g. for lawyers). In this case, the reporting obligation shifts to another intermediary or, in the absence of any qualifying intermediary, to the taxpayer.
Information will be exchanged through the Common Communication Network (CCN) and centralised in a secure tax administration database. The member states are to implement a series of practical arrangements, including measures to standardise the transmission of all the required information by means of a standardised form.
DAC6’s provisions are yet to be implemented into national law. On 22 May 2018, Minister Van Overtveldt confirmed to a Parliamentary committee that action will be taken as soon as possible. Although national implementation is only due by 31 December 2019 and the reporting obligation will only apply from 1 July 2020, DAC6 further introduces the obligation to report all targeted arrangements established from the time of its entry into force. The Directive was published in the Official Journal of the European Union of 5 June 2018, and took effect twenty days later on 25 June 2018. All cross-border arrangements established from the entry into force date (the first step in the implementation is relevant) risk being reported to the tax authorities from 1 July 2020.
It goes without saying that the additional reporting obligation is at odds with the duty of professional confidentiality and the duty of discretion of lawyers and other professionals, and it further depends on how the Belgian legislator will implement DAC6. On the other hand, we should point out that the targeted “aggressive tax planning schemes” are a relic of the past that scarcely appear in contemporary legal advice. The question remains which “schemes” will be deemed to fall within the scope of the broad definition. Ideally, a constructive form of horizontal supervision would accompany such a reporting obligation in order to create a positive dialogue between the tax authorities, the taxpayer and the tax adviser. Provided that it is conceptualized well, DAC6 should only further improve the business climate.
We will continue to follow this new obligation and the further delineation of the targeted arrangements closely and will inform you about this in due time.
If you would like more information about the impact of this guideline, then please contact the authors of this article or your Tiberghien advisor.
Dirk Coveliers - Senior associate (firstname.lastname@example.org)
Gerd D. Goyvaerts - Partner (email@example.com)