On June 24, 2020, the European Union (EU) Council agreed to the EU parliament's proposal to extend by 6 months the deadline for filing and exchanging information under the DAC6 mandatory reporting guidelines. This decision was taken in the wake of the ongoing Covid-19 crisis, which has caused disruption in activities for financial institutions, tax authorities and advisers all across the world.
Under the current amendment, the Council can extend the deferral period for another 3 months, although any new developments will be based on how the pandemic unfolds in the future, subject to strict conditions.
Overview of the DAC6 Tax Regulatory Regime
To increase the level of transparency in tax practices and prevent "aggressive cross-border tax planning," the EU Council launched the DAC6 (Directive 2018/822) mandatory disclosure regime on June 25, 2018. Under this regime, EU intermediaries are now required to report certain cross-border transactions to local tax authorities. These cross-border tax arrangements need to meet one or more specified categories or "hallmarks" and should involve at least one EU member state or an EU nation and non-EU nation. The reporting methods, however, can vary across the EU member states.
Who Does DAC6 Affect?
Organisations that meet the requirements to qualify as an EU intermediary, which includes financial institutions that design, market, process payments of cross border tax payments on behalf of customers and financial advisors who provide advice in tax and legal matters. So, any entity will fall under the purview of DAC6, if it:
- Promotes and provides services related to reportable cross-border arrangements (RCBA's) to relevant EU taxpayers.
- Promotes these services to other group entities and third parties.
"Relevant EU taxpayer" means an entity that benefits from RCBA's promoted or provided by advisers, financial service providers and other group entities.
These intermediaries will have an obligation to disclose reportable cross-border arrangements (RCBA's), where at least one EU member state is involved and meets certain "hallmarks."
Previous Timeline for DAC6 Implementation
All EU member states were required to adopt the amendment as national law by December 31, 2019. The application date was July 1, 2020. The Directive provided an initial one-off reporting deadline of August 31, 2020, for all transactions conducted between June 25, 2018, and July 1, 2020. From that date onward, a 30-day rolling window would be applicable to report new arrangements.
By December 31, 2020, the first annual reports of transactions, pertaining to the arrangements due from taxpayers, was to be submitted. The first exchange of reports between member states was scheduled for October 31, 2020.
Failure to meet these deadlines entails significant monetary penalties and damage to reputation.
What are the New Deadlines for DAC6?
EU intermediaries have up to 6 months now to disclose reportable cross border arrangements (RCBA's). As per the recent decision:
- The initial deadline for reporting historical arrangements, those implemented between June 25, 2018, and July 1, 2020, has been extended from August 31, 2020, to February 28, 2021.
- The start of the 30-day window period for reporting cross border transactions has been extended from July 1, 2020, to January 1, 2021.
- The first periodic report on marketable arrangements will need to be submitted by April 30, 2021.
- The first exchange of information on RCBA's between EU tax authorities, which was supposed to take place on October 31, 2020, has been shifted to April 30, 2021.
However, given the optional nature of this proposed amendment for deferral, it is up to the member states now, whether they want to formally apply for the extension. If an EU member state does not respond, the original timelines will be applicable. This makes it necessary for taxpayers, intermediaries and third parties to monitor the latest developments continuously.
On July 27, 2020, the Cyprus Tax Department (CTD) issued a circular, stating that it will adopt the optional deferral and extended time-frame to disclose information.
Regardless of the postponement of deadlines, the reporting guidelines will impact Cypriot companies and permanent establishments of offshore companies that deal with cross-border transactions. Even if no reportable transactions are determined, failure to adhere to the reporting guidelines will lead to significant penalties, which is why companies need to be alert and maintain documentation to establish audit trails.
Consequences of the DAC6 Reporting Regime
DAC6 includes 5 main "hallmarks" that RCBA's need to satisfy:
- Generic Hallmarks
- Specific Hallmarks
- Specific Hallmarks for cross border transactions
- Specific Hallmarks for automatic exchange of information and beneficial ownership
- Specific Hallmarks related to transfer pricing
This automatic exchange of information, between the tax authorities of EU member states, will not be limited to only those tax authorities that deal with RCBA's. The countries can exchange this information with other countries (third parties), with whom they have established agreements for information sharing, and in cases where the information is relevant to that country. This will increase the level of transparency around potential loopholes and help prevent harmful tax practices.
Further transparency will be brought about as taxpayers themselves will want to ensure that disclosures related to RCBA's, under these rules, are consistent with their other filings. This will spur effective and timely liaison between taxpayers and their advisors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.