Corporate tax advisers are facing a patchwork of rules and the threat of fines as a new EU-mandated disclosure directive rolls out this year.
The directive, known as DAC 6 (EU Directive 2018/822), requires member states to implement rules requiring intermediaries—law firms or in-house tax advisers—to report to authorities certain cross-border tax arrangements, including those that could result in a tax benefit.
Reported information will become part of a shared database accessible by all EU tax authorities. The EU wants member countries to use that information to spot problematic tax arrangements more quickly.
But EU directives like DAC 6 leave it to member states to interpret and implement their version of the rules. That has left practitioners and companies with questions about how countries decide who is required to report, where transactions are reported, and how transactions used to avoid paying taxes should be disclosed. It’s also up to countries to decide how they’ll levy fines and how they’ll use the information they collect.
“You’re sharing data, but you don’t know what the tax authorities will do with it,” said Mounia Benabdallah, a partner at Baker & McKenzie’s international tax group in New York.
Reaction from corporate clients range from “I don’t care, I have nothing to hide,” to “I’m afraid,” said Oliver Hoor, partner and head of transfer pricing and the German Desk at ATOZ Tax Advisers in Luxembourg. “The concern is that it’ll put you on the radar of tax authorities unnecessarily.”
The directive requires intermediaries that advise, assist, and direct cross-border arrangements—which could also include banks and individual advisers—to report those transactions to their home member state.
If there is no intermediary, or the intermediary is outside the EU, taxpayers themselves must report.
Countries’ implementations of the rules are similar, but “you do see significant differences, which make it really difficult,” said Robert van der Jagt, a partner and chairman of KPMG LLP’s EU Tax Center in Amsterdam.
For example, in Germany only advisers directly involved in planning and executing a transaction are considered intermediaries, not service providers like banks that provide funding for the transactions, said Tino Duttine, a partner at Norton Rose Fulbright in Frankfurt. That departure could actually create additional complexity for banks, which may face reporting obligations in other member states instead, he said.
U.S. multinationals will have to report cross-border transactions in the EU that meet the hallmarks, and U.S. practitioners could have reporting obligations if they work for a firm with an EU branch. U.S. advisers should be having conversations with clients about what transactions are reportable, and who will report them, Benabdallah said.
Main Benefits Test
Transactions must be reported if they meet any of certain tests, such as having deductible cross-border payments in which the recipient doesn’t pay tax.
Certain arrangements only have to be reported if they meet the main benefit test—if one of the main purposes of the arrangement was to gain a tax advantage. The test has raised questions for practitioners, because the directive defines “main benefit” broadly enough to allow interpretation by tax authorities.
“Most transactions have a commercial purpose, but also a tax benefit,” and determining whether a transaction meets the main benefit test requires balancing the two against each other, said Dominic Stuttaford, head of tax for Europe, Middle East and Asia at Norton Rose Fulbright in London. “Inevitably, different tax authorities will take different views.”
Tax lawyers are even studying case law to better understand how a particular tax administration might interpret the main benefit test, he said.
The stakes of answering these questions correctly are high. Advisers must strike a fine balance between reporting all DAC 6-reportable transactions—because failing to do so carries penalties under the directive—without reporting unnecessarily, which could violate professional secrecy obligations in the legal or financial services industries, Hoor said.
And while the EU directive applies to income taxes, Poland adopted an expanded version that requires reporting on other kinds of taxes as well, including value-added tax, and some property and excise taxes. The rules also apply to domestic as well as cross-border transactions.
‘When in Doubt’
Intermediaries or taxpayers generally report to their own member state. But it’s not that simple. A transaction might not be reportable in an intermediary’s home country, due to its interpretation of the main benefit test, for example, but have to be reported in another jurisdiction involved in the arrangement.
For example, a transaction might meet the benefit test in one jurisdiction, but not in a second—even if the tax benefits were realized in the second jurisdiction, Stuttaford said.
That means advisers and companies must pay close attention to differing guidance in every EU member state to be sure they are reporting transactions where and when they are required to.
For now, “it’s a ‘watch this space,’” he said.
While the U.K. appears poised to exit the EU early this year, it released guidance Jan. 13 explaining how it will implement the directive post-Brexit.
When Poland adopted DAC 6 it took an even broader view than the directive requires, saying that intermediaries anywhere in the EU must report in Poland if they have reportable transactions there.
The advice to clients is to report when in doubt, considering the severity of fines for non-compliance, according to Tomasz Rolewicz, an associate partner at Ernst & Young LLP in Warsaw.
“But if there are much stronger arguments not to report,” the advice is “to make sure that we build our internal files, documentation, in order to make sure that we have identified and collected—as of a given day—all information, all arguments, all evidence that would prove that our decision at the time was correct and correctly considered,” Rolewicz said.
—With assistance from Jan Stojaspal in Prague.