Before embarking on this discussion, it is always worth outlining the general context. In a nutshell, Council Directive 2018/822 of 25 May 2018 has amended Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (“DAC6”). DAC6 requires tax intermediaries to report – on a mandatory basis – specific cross-border arrangements which contain defined characteristics or features, and which were implemented after 25 June 2018. For an arrangement to fall within the scope of DAC6, it therefore has to meet a double test. First, the arrangement must be cross-border. This means that the arrangement must involve at least two different states, one of which being an EU Member State. Some countries have implemented more stringent rules by including domestic arrangements. Secondly, the arrangement must also satisfy at least one of the hallmarks of the Directive, some of which are subject to a main benefit test. For hallmarks subject to this main benefit test, reporting will only be required if it is reasonable to assume that the main (or one of the main) benefits of the arrangement is to obtain a tax advantage. For the other hallmarks – those that are not contingent on the main benefit test being satisfied – reporting will automatically be made if one of these hallmarks is present.
The Luxembourg government passed the law implementing DAC6 on 25 March 2020, with the wording broadly similar to that of DAC6. The commentaries on the Luxembourg law provide only a few explanations on how it will be interpreted and applied in practice. In addition, the Luxembourg tax authorities issued explanatory guidelines on 12 February 2021.
Impact of COVID-19
Conscious of the heavily disruptive impact of the pandemic and the resulting lockdown which spread across Europe in Q2 2020, the European Commission published Council Directive (EU) 2020/876 on 24 June 2020. This amends DAC6 to address the urgent need to defer certain time limits for the filing and exchange of information in the field of taxation. This Directive introduced an optional six-month extension to the reporting deadline under DAC6. Member States could consequently take necessary measures to allow intermediaries and relevant taxpayers to extend the filing deadline for information on reportable cross-border arrangements (the first step of which was implemented between 25 June 2018 and 30 June 2020) to 28 February 2021 (instead of the initial deadline, which was set at 31 August 2020). For reportable cross-border arrangements made available for implementation, ready for implementation, or where the first step in their implementation was made between 1 July 2020 and 31 December 2020, the applicable 30-day reporting period began on 1 January 2021.
While this was generally a positive outcome for intermediaries, some Member States like Austria, Germany and Finland ultimately did not adopt the filing extension, thereby creating even more inconsistencies and difficulties for intermediaries setting up a suitable process.
Impact of Brexit
At the eleventh hour, on 31 December 2020, Her Majesty's Revenue and Customs decided that the United Kingdom would no longer apply DAC6 in its entirety. Rather, it will limit its scope to only Hallmarks D, and to arrangements set up since 25 June 2018.
This sudden change had a significant impact on some multinational groups which had designed a process where DAC6 would be managed out of the United Kingdom, due to their significant presence there. It led them to a full revamp of their processes almost overnight, given the abruptness of the announced change and the short timeframe which intermediaries were given.
Where does that leave us?
While a few things remain to be clarified, the Luxembourg tax authorities have issued some interpretational notes with regard to DAC6 in Luxembourg. The reporting has now begun and we can see that clients are still working their way through their organisational processes regarding DAC6.
It is true that there is no one-size-fits-all approach, but we can say that we tend to see three main categories.
The first is not to intervene in any way with DAC6, which in our view may lead to potential overlapping reporting, on the basis that there is no coordination between the relevant intermediaries.
The second category is the one where the number of transactions and the number of intermediaries involved is not very significant, and where the lead intermediary coordinates the others. This has the benefit of being rather flexible, but depending on what the transaction is and who is involved, this may potentially lead to diverging conclusions being reached, albeit on the same issue.
The last category may be divided into two sub-sets, but the general operating model remains broadly the same. It is a model where a designated party will endorse a project coordinator role to connect intermediaries and centralise the information. The variants depend on whether or not the functions are managed internally by the client (because it has the necessary skills and capacity) or have been outsourced to a service provider. In our view, when there is a critical mass of transactions and intermediaries, this is likely to be the most robust organisational system one may adopt. This is because it maximises consistency in the analysis being produced, consistency in the content of reporting (if any) and efficiency in the management of the overall process.
Our key takeaways
We have spent a significant amount of time with our clients helping them design a DAC6 process and policy which address their compliance needs and operations, while not adding an undue burden.
We are also adding substantial value by deploying our dedicated IT solutions, such as DAC6Connect©, which helped to manage DAC6 interpretations across the EU and coordinate with intermediaries.
What has not changed since our last article is, therefore, the fact that one needs well-oiled internal processes and project management. This must involve clear and transparent coordination and communication among taxpayers and intermediaries to ensure compliance with DAC6 obligations.