EU Tax Transparency Legislation (Commonly Referred to as DAC6)
What is DAC6?
DAC6 is the European Union’s (EU) directive on mandatory reporting for cross-border transactions that fulfill certain hallmarks. It is the latest EU response on tax transparency with respect to the OECD BEPS Project Action 12.
When does it apply?
The directive came into force on June 25, 2018, and required each EU member state to enact domestic legislation by December 31, 2019, with an effective date of July 1, 2020.
In summary, all affected cross-border transactions where the first step was implemented after June 25, 2018, must be reported from July 1, 2020, onward. The first reports are due by August 31, 2020, and the first exchange of information between EU states will commence on October 31, 2020.
How does this affect me?
If you are a U.S. tax advisor or an internal tax team within a U.S. company involved in advising on or implementing cross-border transactions between any EU territory and another jurisdiction, you may have a reporting obligation under these rules and may face significant penalties if you fail to make a report.
The Rules in Brief
The rules are aimed at intermediaries who are designing, marketing and implementing cross-border arrangements and service providers who assist with their implementation. This may include a company internal tax team in certain circumstances.
A cross-border arrangement is not defined in the directive and includes any transaction between an EU member state and any other territory that meets one of the hallmarks. There is no de minimis.
There are five hallmark categories (A through E below), some of which have a main benefit test (where one of the main advantages of the arrangement is the obtaining of a tax advantage) and some are reportable regardless of any tax advantage being obtained.
In some territories, the main benefit test has been extended to included situations where a tax advantage is obtained anywhere in the world, not just in the EU. This may bring into the remit of these rules any cross-border transactions where a U.S. tax advantage is obtained, e.g., where global intangible low-taxed income (GILTI) deductions are taken or foreign-derived intangible income (FDII) benefits are obtained.
- General hallmarks with a main benefit test, e.g., standardized structures, a confidentiality clause or success remuneration
- Specific hallmarks with a main benefit test, e.g., loss buying, converting income to revenue taxed at a lower rate, deductible cross-border payments with asymmetrical tax treatment
- Specific hallmarks with no main benefit test, e.g., deductible cross-border payments where one party is not a tax resident anywhere, deductions for the same depreciation in more than one jurisdiction, double tax relief for same income or capital in more than one jurisdiction
- Specific hallmarks related to transparency, e.g., obscure beneficial ownership; this has no main benefit test
- Specific hallmarks related to transfer pricing; again, this has no main benefit test. This includes transactions where unilateral safe harbor rules have been relied on, transfers of hard-to-value intangibles and cross-border transfers if the projected earnings before interest and tax (EBIT) of the transferor in the three years post-transfer are less than 50 percent of projected EBIT in the absence of the transfer. This last category (E3) in particular could potentially catch many benign commercial transactions
In this example, a valuable French trading activity is transferred from a U.K. subsidiary of a U.S. parent to another overseas subsidiary. The U.K. subsidiary only has a small trading activity of its own, and after the transfer, the U.K. company’s EBIT will be significantly reduced for the foreseeable future.
In this case, it would seem the cross-border transaction could fall within category E3 and be reportable in France, the U.K. or both territories by intermediaries advising on the transfer or the company’s internal tax team. The EU directive’s domestic implementation in both France and the U.K. would have to be considered, as the reporting requirements may not be the same.
- There is much complexity that intermediaries will need to carefully consider and coordinate with their clients around who should report what, where and when.
- Intermediaries are widely defined to include lawyers, banks, tax advisors, accountants, etc., and may include company internal tax teams where there are no intermediaries with a reporting obligation.
- Penalties for failure to report may be extensive and may apply in more than one territory.
- Companies have had to track affected transactions since June 2018, but without the benefit of detailed legislation and guidance in all EU member states until shortly before first reporting deadlines.
- Different EU member states are implementing the EU directive in different ways. The EU directive contains the basic rules that must be adhered to, but each member state can extend its scope. For example, Poland has included additional hallmarks, extended the taxes to cover VAT and required some domestic transactions to be reported.
- Not all EU member states have implemented final domestic legislation by December 31, 2020; therefore, if you have transactions with a jurisdiction without final rules, it may be difficult at present to assess whether there is a reporting obligation or not.
- The U.K. left the EU on January 31, 2020. However, under the terms of the withdrawal agreement, it is still bound by all EU directives during the transition period to December 31, 2020, and is required to implement the legislation. In any case, U.K. tax authorities have said leaving the EU will not diminish the U.K.’s resolve to tackle tax avoidance and evasion. Future changes to the U.K. legislation and any mechanism for the exchange of information between the U.K. and EU member states will depend on the terms of any trade agreement that is reached.
What do I need to do?
- Identify potential cross-border transactions since June 2018 that could be caught.
- Consider the detailed rules of each affected EU territory and identify which entities/intermediaries may have a reporting requirement.
- Get in touch with your BKD Trusted Advisor™ if you have questions or are unsure of next steps.
International Tax Director
Tel: +44 7920 783188