New directives regarding cross-border arrangements with EU - opinion

Moreover, the EU and the UK are now implementing broad new disclosure rules for cross-border arrangements where certain “hallmarks” exist – pursuant to DAC 6 (Council Directive 2018/822).

DAC6 aims to uncover potential tax avoidance, but has been criticized for overkill. Many innocent arrangements may need to be reported to an EU tax authority or HMRC in the UK.

Multinational groups and financial institutions, e-commerce businesses and trusts may be affected.

The commencement date for DAC 6 reporting is generally January 1, 2021, but some EU countries allowed a few extra months without fines – e.g. Cyprus. In any event, it applies retroactively to reportable arrangements from June 25, 2018, so catch-up reporting will initially be required.

In the UK, following Brexit, not all the hallmarks trigger reporting. Following is a brief summary.

A “Cross-border arrangement” is an arrangement concerning more than one EU member state (or the UK) and/or a third country where one of the following apply:

• Not all the participants are resident for tax purposes in the same jurisdiction (e.g. multinationals);

• One or more participants is a dual-resident;

• One or participants has a permanent establishment in another jurisdiction;

• One or more participants carries on an activity in another jurisdiction without a permanent establishment (e.g. e-commerce).

• Possible impact on automatic exchange of information or identification of beneficial ownership (e.g. trusts).

A “reportable cross border arrangement” is one containing any of the hallmarks discussed below.

Reporting is required by an “intermediary” which designs, markets, organizes or makes available a reportable cross border arrangement or could be reasonably expected to know they did so. The intention is lawyers or accountants. In addition, the Intermediary should have a link to the EU or UK: resident, permanent establishment, incorporated, legally governed, or registered with a professional association there. (This author is not designing, marketing, organizing or making available any arrangement and advises against any arrangement exhibiting a hallmark). 

If a lawyer claims legal privilege, the reporting responsibility passes to any other intermediary, or failing that, the relevant taxpayer.

DAC6 reporting is required within 30 days after availability, readiness of, or first step of the reportable cross border arrangement, and thereafter every three months.

Any hallmark may trigger a “reportable cross-border arrangement.” Many hallmarks are subject to the “main benefit test,” namely a person may reasonably expect to obtain a tax advantage.

Hallmarks in the EU subject to the main benefit (tax advantage) test include:

• Confidentiality;

• Intermediary gets success fee;

• Substantially standardized documentation;

• Acquiring a loss-making company, discontinuing its main activity and using its losses;

• Converting income into capital, gifts or revenue taxed at a lower level or exempt from tax;

• Round tripping of funds by interposing entities without other primary commercial function, or transactions that offset or cancel each other;

• Deductible cross-border payments to an associated enterprise that benefits from full exemption or a preferential tax regime in its country of residence. 

Hallmarks in the EU where the main benefit (tax advantage) test is not stipulated:

• Deductible cross-border payments to an associated enterprise resident nowhere or in a jurisdiction that imposes zero or almost zero corporate tax, or in a non-cooperative jurisdiction per EU member states or the OECD (Comment: may catch e-commerce from a cloud in a tax haven);

• Assets depreciated in more than one jurisdiction;

• Asset transfers where there is a material difference in the consideration recognized in the jurisdictions concerned;

• Use of transfer pricing “safe harbor” rules (not defined);

• Transfer of hard-to-value intangibles between associated enterprises where no reliable transfer pricing comparables exist or future cash flows, income or assumptions are highly uncertain;

• Intragroup transfer of functions and/or assets and/or risks reducing projected earnings before interest and taxes (EBIT) by over 50% in the following three years.

Hallmarks in the UK and EU where the main benefit (tax advantage) test is not stipulated:

• An arrangement undermining automatic exchange of financial account information;

• “Non-transparent” ownership chain using persons, arrangements or structures that: (1) do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises, and (2) are incorporated, managed, resident controlled or established in a jurisdiction other than the residence of one or more beneficial owners, and (3) the beneficial owners are made unidentifiable (but not most trusts per the UK HMRC);

DAC 6 will affect many international groups with EU/UK links, not only offshore structures. Check it out.

As always, consult experienced tax advisers in each country at an early stage in specific cases.