Pandemic Derails Prep for New EU Tax Disclosure Rules

Tax advisers are worried that amid the pandemic neither companies nor countries will be ready this summer when an EU directive on sharing tax information comes into effect.

They say help is needed, especially since some governments haven’t yet published much-needed guidance or finished implementing the European Union directive known as DAC 6 (EU Directive 2018/822).

The directive requires law firms or companies to report to tax authorities information on certain cross-border tax arrangements 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 states to use that information to spot problematic tax arrangements more quickly.

Several countries missed implementing the rules by the Jan. 1 deadline. Practitioners warn those countries might not be ready by the time the directive goes into effect July 1 or the when the first reports are due on Aug. 31. In the absence of clear guidance on what should be reported in a particular jurisdiction, companies and tax advisers may have to guess or over-report—at the risk of penalties, which are severe in some jurisdictions.

Final legislation is still pending in a handful of countries. For example, finance ministry officials in Sweden and Cyprus told Bloomberg Tax they are aiming to move legislation in May. Sweden will have guidance and online systems in place by the time the first reports are due, an official said. The Spanish Finance Ministry said the country is hoping to approve implementation as soon as possible.

“It would make sense for everybody to say, let’s postpone this,” to allow for governments to finalize guidance and set up technological systems to receive the data, and for companies to complete the necessary work, said Bart Le Blanc, a partner at Norton Rose Fulbright LLP in Amsterdam.

“The 31st of August will otherwise be a nightmare,” he said.

But it may be hard for the EU to change the directive’s deadlines.

“While the Commission understands the difficulties attached to the current circumstances, the fight against tax evasion and tax avoidance remains a priority for the Commission alongside the fight against the coronavirus,” a European Commission official said in an April 16 email. “Member States will need all available resources to combat the consequences of the latter.”

Changing the deadlines would require a new directive and unanimous support from member states, the official said. The EU “will follow a pragmatic stance when enforcing EU law” and will consider the problems members states are facing from the pandemic, the official added.

Not a ‘Survival Issue’

For companies trying to make it through the crisis, “anything that they consider not to be a survival issue is obviously not given priority,” said Robert van der Jagt, chairman of KPMG’s EU tax center in Amsterdam. “They don’t have the manpower for it.”

The directive requires intermediaries that advise, assist, and direct cross-border arrangements—which could also include banks and individual advisers—to report to their home member state transactions with certain qualifying features. For example, companies should report if associated entities make deductible cross-border payments in which the recipient doesn’t pay tax.

If there is no intermediary, or the intermediary is outside the EU, taxpayers themselves must report. The first filing calls for information about the past two years of tax arrangements.

“I think that currently there’s no client working on this project right now,” Le Blanc said. While they may have begun the work before the crisis, “currently nobody is focused on this, simply because all the items just take up too much time.”

Guidance Needed

Because the directive allows member states some leeway in how they implement parts of the directive, companies and tax advisers need guidance before the deadline to know what they should report.

In France, tax advisers and companies still have questions on a few key issues, said Daniel Gutmann, a partner at CMS in Paris.

That includes how the DAC 6 requirements interact with the attorney-client privilege standards built into French law—which would determine what outside tax advisers and law firms should be reporting. Even though France has released guidance on this issue, there are still questions about how it would be applied in practice, he said.

France’s economy ministry didn’t respond to a request for comment.

In Spain, companies and advisers are waiting for final legislation to also address the professional secrecy issue, as well as how penalties will be imposed, Roberta Poza Cid, a partner at PwC in Madrid, said in an email.

With governments behind schedule in implementation, some haven’t yet set up the IT portals in which the DAC 6 reports are supposed to be filed, van der Jagt said.

“If that’s not ready, the legislation can be in place but I can’t do the reporting,” he said.

Advice for Clients

For big holding groups that may have many intercompany transactions that fall within the scope of reportable arrangements, identifying those transactions is a huge task—and one not made easier when everyone is working remotely.

“Obviously, dealing with a backlog of years, the bigger the organization the more difficult it is to already identify the transaction,” said Oliver Hoor, partner at ATOZ Tax Advisers in Luxembourg.

Without guidance, companies and intermediaries “will be prudent and do a lot of filings which they otherwise wouldn’t have made, and the amount of filings will be larger,” Le Blanc said.

But despite uncertainty over how the directive will be applied, advisers aren’t telling companies to report everything.

Gutmann said his advice to clients is to report only when there’s a good chance that an arrangement falls within the directive’s parameters.

“In my view, the proper approach is that reasonable doubts should drive you to report this, especially as long as we don’t have clear guidance from tax authorities,” he said.

Moving Deadlines?

Poza Cid said she is telling her clients to be prepared to meet the reporting deadline, because there hasn’t been any indication that it will be delayed.

But companies are hoping for some relief. Even before the coronavirus crisis, the French Association of Financial Markets was concerned that governments were lagging on implementation measures, said Eric Vacher, tax counsel for the organization.

The association is now campaigning for flexibility in the implementation of DAC 6—postponing the deadline for the first, retroactive filing until 2021. But it’s too early in the crisis to expect a formal position from the EU or French government, he said.

The directive allows member states to choose how to apply penalties. If the reporting deadline can’t be moved, countries could still offer relief by waiving penalties for late filings, van der Jagt said.

If the crisis hasn’t eased in a few months, “then at the last minute we may see some relief measures,” he said.