Deadlines for reporting cross-border transactions under DAC6 regulations intended to identify tax practices with particular hallmarks have been extended. Taxpayers and their advisers are being warned, however, not to be complacent
DAC6 is the shorthand term for a set of rules introduced by the European Union and the UK, requiring that “intermediaries” or, in certain cases, taxpayers, report to the tax authorities any cross-border arrangements that meet certain “hallmarks”. Some hallmarks include classic characteristics of tax avoidance schemes including “loss-buying”, circular transactions and arrangements that have the effect of obscuring the beneficial ownership of assets. However, it is generally accepted that the rules will capture benign arrangements with no tax avoidance including certain cross-border transactions.
The initial reporting deadline of 31 August for past transactions between 25 June 2018 and 30 June 2020 has now been extended to 28 February 2021, and the deadline for reporting arrangements during the second half of 2020 is the period of 30 days beginning on 1 January 2021.
The ICAEW Tax Faculty has identified a number of potential misconceptions regarding the new rules, of which six are discussed here as follows.
1. “I don’t advise on complex planning within the EU and certainly don’t facilitate avoidance so DAC6 doesn’t apply to me.”
As discussed above, while aggressive tax planning is the main target of the new regime, the rules will catch a number of transactions in which there is no tax avoidance motive.
2. “I don’t take the lead on any overseas transactions. I involve other advisers and therefore I can rely on them to make a report.”
The rules around being able to rely on another adviser’s report are complex and will require due diligence by the party seeking reliance. An arrangement reference number (ARN) will need to be provided and the other party will need appropriate evidence that the other adviser’s report is accurate and complete.
3. “I am an individual or private client practitioner. I am not involved with corporates, therefore I’m not concerned.”
While more clarity is awaited regarding how the rules will apply to private clients, transactions carried out by individuals and trusts are also covered.
4. “I’ve heard something about a deferral and it doesn’t come in for a few months so I don’t need to think about this now.”
The reporting deadlines have been deferred, but transactions going back to June 2018 are still covered. This means there will be a backlog of reports that those responsible will need to be preparing now.
5. “I’m an employee, so it’s my employer’s responsibility to ensure compliance with the new rules.”
The obligation to report may fall on an individual. For example, a member of a UK-based professional association, working in a non-EU jurisdiction for a locally-based employer, may be required to report a transaction that meets any of the hallmarks. Also, as partners in professional firms are not employees, they will likely be an intermediary in their own right and have obligations as individuals should they be involved in reportable arrangements.
6. “I work in-house and engage tax advisers, so it’s their responsibility to ensure arrangements they’re advising on are reported.”
In some circumstances the taxpayer rather than an intermediary may be required to report. For example, the adviser may not be able to, because of legal/professional privilege. The adviser may also not have the information required, especially if it concerns a routine transaction handled by the in-house team.
Angela Clegg, ICAEW’s Technical Manager, SME Business Tax, warns: “Hallmarks under Category E involving transfer pricing issues and cross-border transfers are proving challenging, so in-house professionals with international groups need to take particular care especially given that these could capture certain benign arrangements with no tax avoidance motive.”
In the UK the default penalty for a failure to report is £5,000. The First Tier Tribunal (FTT) can apply penalties of up to £600 per day for the duration of the failure and if this is deemed inappropriately low, the FTT may increase the penalty to an amount not exceeding £1m in total.