Reporting cross-border transactions
On 5 June 2018, DAC 6 was published in the EU Official Journal. It introduces a new reporting duty and automated information exchange for cross-border arrangements motivated by obtaining a tax advantage.
The term ‘cross-border arrangement’ has not been defined, and any arrangement will be subject to the reporting duty if it meets at least one of the characteristic features (‘hallmarks’) listed in the annex to the directive. Some hallmarks will be tested together with the main benefit of the transaction: the main benefit test will be met if it is determined that obtaining a tax advantage was the main benefit or one of the main benefits of the arrangement. Some hallmarks will render the arrangement reportable even without it meeting the main benefit test. The reported information will then be automatically exchanged between member states.
Examples of hallmarks rendering an arrangement reportable if the main benefit test is also met:
- an arrangement with a taxpayer or participant being under a confidentiality obligation requiring them not disclose how such an arrangement may secure a tax advantage vis-à-vis other intermediaries or tax authorities
- an arrangement whereby a participant in the arrangement takes contrived steps consisting of acquiring a loss-making company, discontinuing the main activity of such company and using its losses to reduce their tax liability, including transferring those losses to another jurisdiction or accelerating the use of those losses
- an arrangement having the effect of converting income into capital, gifts or other categories of revenue taxed at a lower level or exempt from tax.
- an arrangement including circular transactions resulting in the round-tripping of funds, namely through involving interposed entities without any other primary commercial functions or transactions that offset or cancel each other or that have other similar features.
Examples of hallmarks rendering an arrangement reportable even without meeting the main benefit test:
- An arrangement which may have the effect of undermining the reporting obligation under the laws implementing union legislation or any equivalent agreements on the automatic exchange of financial account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements.
- An arrangement involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures that have some characteristic features, for instance, not carrying out a substantive economic activity supported by adequate staff, equipment, assets and premises.
- Hallmarks concerning transfer pricing, including:
- an arrangement involving the use of unilateral safe harbour rules
- an arrangement involving the transfer of hard-to-value intangibles
- an arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the transferor’s or transferors’ projected annual earnings before interest and taxes (EBIT) during the three-year period after the transfer are less than 50% of the projected annual EBIT of such transferor or transferors had the transfer not been made.
A number of questions and the setting of relevant rules remain for the member states. This concerns, e.g., determining relevant sanctions or rules regulating the reporting duty if it conflicts with the intermediaries’ confidentiality; in such cases, the duty to report shall rest with the taxpayers.
Timing is of key importance. The new directive entered into force on 25 June 2018. The member states have to implement it by 31 December 2019 and apply its provisions starting from 1 July 2020. However, the reporting duty will already apply to arrangements whose first steps were taken after the directive entered into force (i.e. after 25 June 2018); these have to be reported by 31 August 2020. This means that all present and planned cross-border transactions have to be viewed from this perspective and assessed as to whether they are subject to the reporting.