The EU has published an amendment to the Directive on Administrative Co-operation (otherwise known as DAC 6), which requires intermediaries (including lawyers) to report certain cross border arrangements to tax authorities of EU member states, who will then exchange relevant information with each other on a quarterly basis. While the rules were introduced to tackle aggressive tax planning, they apply more broadly. Members who do not advise on tax issues should therefore be aware that the rules may apply to them.
The rules must be implemented by all member states by 2020, but with reporting obligations being backdated to 25 June 2018. Member states may choose to implement an exception for the intermediary where the relevant information would be subject to legal professional privilege (LPP). The obligation then moves to the client, and the intermediary will be required to notify the client that this has arisen.
Pending clarity on how HMRC will implement the new rules - and to avoid a potentially onerous compliance burden in 2020 - members are recommended to familiarise themselves with the scope of the Directive and keep a record of potentially reportable transactions. Members may also wish to consider their internal processes to ensure that they can be compliant with the Directive going forwards.
Purpose of the new rules
The primary purpose of the Directive is to deter intermediaries and users of potentially aggressive tax planning schemes from promoting and using such schemes. It applies to 'cross-border reportable arrangements'. These are broadly defined, which means that the Directive may have consequences for non-tax driven transactions.
What transactions do the rules apply to?
The Directive applies to 'cross-border reportable arrangements'. A cross-border arrangement is one that involves a participant in an EU member state and is not purely domestic.
The Directive sets out a series of 'hallmarks' representing distinctive elements of potentially aggressive tax planning, which, if applicable, renders the arrangement reportable. Some of the hallmarks require the transactions to have a main benefit of obtaining a tax advantage. However, many of them do not, and could apply to commercial transactions with no tax motivation. The hallmarks are contained in Annex IV to the Directive.
When do they apply?
Although member states will have until 31 December 2019 to implement the new rules, which are effective from 1 July 2020, the rules have consequences now. This is because intermediaries will have to report by August 2020 on any arrangements where the first step has been taken following the Directive entering into force on 25 June 2018.
Who does it apply to?
The Directive applies to any intermediary that designs, markets, organises or makes available for implementation, or manages the implementation of, a reportable cross-border arrangement. It also covers those who provide aid, assistance or advice where they can be reasonably expected to know that this is what they have done. If the intermediary is located outside the EU or is subject to professional privilege or other secrecy rules, the obligation to report the arrangement passes to the taxpayer who benefits from the scheme. In instances where there is no intermediary, (ie where the scheme is designed in-house), the taxpayer will still be obliged to report the arrangements to HMRC.
How do the rules work in practice?
The rules will cover any cross-border arrangement if it bears the 'hallmarks' defined in the Directive. The intermediary is required to report to the relevant tax authority within 30 days of when the arrangement is made available, is ready for implementation or has been implemented - whichever occurs first, or of when the aid, assistance or advice is provided. The Directive states that intermediaries will have to report information which is in their knowledge, possession or control.
What information should be reported?
Each member state will agree the scope and format of the information to be reported to their respective tax authority. However, basic information for reporting purposes will include:
- The identification of intermediaries and relevant taxpayers, including their name, date and place of birth (in the case of an individual), residence for tax purpose, TIN and, where appropriate, the persons that are associated enterprises to the relevant taxpayer;
- The hallmark(s) that gives rise to the reporting obligation;
- A summary of the arrangement(s), including start dates and any domestic tax rules applicable;
- The value of the reportable cross-border arrangement;
- A description in abstract terms of the relevant business activities involved (some protection given to specific information);
- The identification of the other Member States involved, or likely to be concerned by the arrangement, and the person in them that may be affected.
The Law Society will assess the implications of the Directive for our members. We are aware that the Directive raises a number of important practical and operational questions around the Directive’s application. We are also engaging with HMRC on how the rules will work in practice with a view to issuing further guidance in due course.
As noted above, we recommend that in the meantime members should keep a record of any matters in which they are involved that fall within any of the hallmarks, so that they are able to meet their compliance obligations in 2020.