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Tax planning may be subject to reporting duty

In mid-March, the ECOFIN Council reached political agreement on the rules requiring intermediaries (tax advisors, attorneys, other advisors) or taxpayers to disclose information on potentially aggressive cross-border tax planning arrangements. This information will subsequently be part of the international exchange of information. The new rules will be incorporated into the Directive on Administrative Cooperation in the Field of Taxation (DAC), in particular into its sixth amendment: DAC6.

In principle, the directive should apply to all types of direct taxes imposed by the member states, but not to VAT, excise duties, customs and mandatory social security premiums.
 
The directive’s central term arrangement is not defined in the proposed text, leaving room for various interpretations. It is therefore important to find out how the directive’s provisions will actually be transposed into Czech legislation. Cross-border transactions are subject to the reporting duty if they meet one or more characteristic features (or so-called hallmarks) specified in an appendix to the directive. The arrangement will be tested for some hallmarks while also performing the principal benefit of an arrangement test. This test will generally be deemed positive if it can be determined that the principal benefit or one of the principal benefits arising from the particular arrangement is obtaining a tax advantage. In addition to the principal benefit test, the features that may present a strong indication of aggressive tax planning or the undermining of reporting obligations include, e.g., the taxpayer’s obligation to keep the agreement confidential, the artificial use of a loss-making corporation, payments from states or via states offering preferential tax regimes, etc. The existence of certain features will give rise to the duty to report such an arrangement even without it meeting the principal benefit test. This involves, for example, some arrangements relating to transfer pricing and other situations. 
 
The reporting duty is sometimes transferred from intermediaries to taxpayers, e.g., where the intermediary’s reservation applicable to a specific profession prevents it from reporting information (e.g. the duty to maintain confidentiality, most likely) or where the taxpayer implements a reportable arrangement without an intermediary’s assistance.
 
The March version of the text changed after certain states expressed their concern regarding the broad extent of reported information:
  • The definition of an intermediary has been extended and clarified: the intermediary is defined as any person who designs, markets, organises, makes available for implementation or manages the implementation of any reportable cross-border arrangement and any person who knows or could reasonably be expected to know that they have undertaken to provide assistance with respect to a reportable arrangement.
  • For potential multiple reporting, the text elaborates that the reporting duty applies to all parties concerned, with the exception of situations in which liable persons prove that an arrangement has already been reported by another liable person. 
  • The text also further explains that if the member state does not immediately respond to the reported information, it does not mean that it automatically agrees with the arrangement and considers it valid.
  • While proposed in the original text, retroactivity has been restricted. Nonetheless, it is necessary to begin assessing arrangements implemented on the twentieth day after DAC 6 is published in the EU Official Journal.
  • The deadline within which information about the arrangement must be disclosed has been prolonged to thirty days from the original five days after an arrangement’s implementation date. 
  • The European Commission’s authority to alter the characteristic features in the appendix has been excluded from the text. Instead, the EC will evaluate and propose changes to the features every two years.
 
The final DAC 6 is expected to be adopted without further discussion in the upcoming months. The member states must implement DAC 6 in their domestic laws ultimately on 31 December 2019 and apply the new reporting requirements as of 1 July 2020. The important date for taxpayers and tax advisors is the date DAC 6 is published in the EU Official Journal, which may occur sometime in mid-2018. The first cross-border transactions subject to the reporting duty will be those implemented by taxpayers in the period between the twentieth day after DAC 6’s publication in the journal and 1 July 2020, when DAC 6 will enter into effect. Information will have to be reported by 31 August 2020.
 
The reported information must be automatically exchanged each quarter by the competent authorities of each member state via a central directory on administrative cooperation, to be developed by the Commission by the end of 2019. The automatic exchange of information must take place within one month from the end of the quarter in which the information was filed, with the first information having to be communicated by 31 October 2020.