There is a clear line between legitimate tax planning and unacceptable tax avoidance, although outside professional circles many peoples' views about what might constitute the latter can differ widely.
Governments have clarified the legal distinction between acceptable and unacceptable (often termed aggressive) tax avoidance arrangements with general anti-abuse rules. However, while the onus has generally been on the taxpayer to take responsibility for their tax affairs, increasingly governments are concentrating their efforts on tax advisers in policing the tax laws, including with tax scheme reporting arrangements. Significantly, the European Union is due to join them.
Under an amendment to the EU Directive on Administrative Cooperation (DAC) agreed by the European Council in March and adopted on 25 May, intermediaries will be required to report certain tax planning arrangements before they are used. This amendment (Directive 2018/822) is the sixth addition to the DAC, hence it is known as DAC 6.
The directive is intended to provide EU governments with details of tax planning arrangements designed and marketed by intermediaries, with an emphasis on cross-border schemes. Member states will be obligated to periodically exchange this information on an automatic basis.
The obligation to report a cross-border scheme bearing one or more "hallmarks" of tax planning schemes falls on the intermediary who supplied the scheme for implementation by a company or an individual.
An intermediary is defined as any person who designs, markets, organises or makes available for implementation, or manages the implementation of a reportable cross-border arrangement.
The directive will require intermediaries to file information on reportable arrangements with the relevant national authority within 30 days of it being made available, or ready for implementation, or when the first implementation step has been made, whichever occurred first.
Intermediaries are exempt from filing if they can show that the information has already been reported in another member state. The reporting obligations can also be waived if they breach legal professional privilege.
The directive applies to intermediaries in the EU. However, where an intermediary is not in the EU, and the scheme involves an EU taxpayer, the reporting obligation falls on the party receiving the advice.
The main hallmarks of a reportable scheme include:
- transactions with low- or no-tax jurisdiction or jurisdictions failing to meet international anti-money laundering standards;
- schemes avoiding EU tax ruling information exchange rules and other EU transparency requirements;
- schemes with a direct correlation between the fee charged and tax savings;
- schemes providing multiple tax benefits on the same income;
- schemes whereby the same asset benefits from depreciation rules in multiple jurisdictions; and
- schemes avoiding EU or international transfer pricing rules.
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To discourage non-compliance with these requirements, the directive requires member states to implement "effective, proportionate and dissuasive" safeguards.
Member states must transpose these requirements into national law by the end of 2019, and the new reporting requirements are set to apply from 1 July 2020.
Member states must exchange information collected under the directive every three months, within one month from the end of the quarter in which the information was filed. This means that the first exchanges should be completed by 31 October 2020.
DAC 6 is likely to have a major impact on those providing tax planning services across the EU. It remains to be seen how individual member states will flesh out the directive as they transpose the requirements. However, the directive implies significant additional administrative burdens for EU intermediaries providing tax services and businesses now have 18 months to prepare for the changes.