15 May 2020

Invest Europe: New EU mandatory disclosure rules: what you need to know and do

Last week, the European Commission proposed deferring certain deadlines for mandatory reporting and the exchange of information under the EU Directive on Administrative Cooperation (DAC).

This includes a three-month postponement regarding reportable cross-border arrangements with the possibility of a further extension. Member states have yet to give their green light, but it is likely that some form of deferral will be agreed upon.

We have called for such a postponement of the application deadline due to the significant operational / business challenges resulting from the Covid-19 crisis – as have many other critical industries. While a deferral will indeed be welcome, it will remain important and prudent for members to consider the obligations deriving from DAC 6 and prepare accordingly.  

The soberly sounding EU Directive on Administrative Cooperation is not widely known outside the world of tax, nor is its latest iteration that carries the acronym ‘DAC 6’. However, DAC 6 may have significant implications for many industries, including private equity and venture capital, and most certainly will mark a major change for the wider advisory eco-system that supports industries across all sectors.

 

What’s DAC 6 and why should I care?

In May 2018, the EU adopted a range of new mandatory disclosure rules through an amendment to the Directive on Administrative Cooperation. The changes are the EU’s response to Action 12 of the OECD’s Base Erosion and Profit Shifting project, which provides recommendations for the design of rules to require taxpayers and advisors to disclose aggressive tax planning arrangements.

In a nutshell, DAC 6 will make it mandatory for intermediaries (e.g. accountants, tax advisors, lawyers, banks and others) and in some cases taxpayers to report cross-border transactions and arrangements to national tax administrations, and will require the subsequent automatic exchange of information between EU Member States involved in those transactions.

DAC 6 introduces a main benefit test (is the main benefit to obtain a tax advantage?) as well as a number of generic as well as specific hallmarks (e.g. involvement of a low or blacklisted tax jurisdiction) to determine whether an arrangement needs to be reported to the responsible tax administration. 

Failure to report can result in heavy financial penalties – which vary significant across member states. Importantly, the Directive requires the reporting of relevant arrangements as from 25 June 2018 (the date of entry into force of the Directive).

 

Key consideration from a private equity perspective:

• The impact of DAC 6 on fund structures will in the first instance depend on whether an arrangement has a cross-border dimension, although some countries have chosen to broaden the scope to domestic tax schemes.  
• Where there is no intermediary, or the intermediary is subject to professional privilege, the disclosure obligation falls upon the taxpayer. Where there is an intermediary, the fund (manager) will still need to ensure that the relevant information is available to the reporting intermediary.
• In certain cases, a fund manager / in-house team may qualify as intermediary, e.g. when an in-house team advising on a cross-border arrangement is viewed as doing so on behalf of the fund’s investors. In such cases, the reporting obligation may fall upon the fund manager/ in-house team.
• Non-EU intermediaries do not have any reporting obligations under the Directive, however, in such circumstances the reporting obligation may shift to the taxpayer benefitting from the arrangement.

 

How to prepare?

Needless to say that the Covid-19 crisis has significantly complicated the implementation of systems and processes and a deferral of the application deadline is therefore welcome. The retrospective dimension of the Directive also requires a careful review of reportable arrangements dating all the way back to June 25, 2018, adding another layer of difficulty. It will be important to identify potential arrangements that may qualify as reportable, based on the main benefit test and the hallmarks of the Directive. From our own industry’s perspective, funds need to clearly identify who will be the reporting party (in-house / an intermediary or multiple intermediaries) and where operations in multiple countries are involved, it will be key to be aware of the different requirements resulting from national implementation of the Directive.                                                                 

Anything unclear? Our Invest Europe DAC 6 may provide an answer – members can access it here. Of course, a look at the EU legal text can be very useful and additional information is also available here.

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