Sinan Sar and Kai Mirkes, director and tax manager of United International Management, say corporate service providers face a challenge to meet new reporting requirements on cross-border transactions in relation to potential aggressive tax- planning arrangements, but it’s also an opportunity to enhance their service to clients.
What is DAC-6 and what are the deadlines for compliance?
On the 21th of March, Luxembourg’s Chamber of Deputies approved legislation transposing the EU’s sixth Directive on Administrative Co-operation of May 25th, 2018 – usually known as DAC-6 – into national law. The legislation provides for exchange of information about potentially aggressive cross-border tax planning arrangements involving EU member states, and third countries in order to flag up and facilitate better understanding of companies’ transactions. The directive requires also the reporting on a retroactive basis of arrangements in place between June 25th, 2018 and June 30th this year. Under the currently planned schedule, these past arrangements were due to be reported by August 31st 2020, while arrangements set up from July 1st 2020 were to be reported within 30 days. However, the European Commission has proposed a three-month delay to these deadlines in response to the Covid-19 pandemic. The deadline for retroactive reporting of arrangements since June 2018 would become November 30 2020, while reporting on ongoing arrangements from July 1st 2020 will become due 30 days after October 1st 2020. In addition, the first date for exchange of information between member states would be deferred from October 31st 2020 until January 31st 2021. This proposed delay is currently under discussion and in case of an agreement, it would need to be adapted by the single Member State.
“Reporting obligation will likely fall mainly on corporate service providers, which must ensure their systems and procedures are capable of detecting and reporting transactions or arrangements covered by the rules.”
Who is subject to the reporting obligation?
The directive places the reporting obligation in principle on intermediaries, defined as any promoter that designs, markets, provides or manages the implementation of a reportable cross-border arrangement, or service providers that knowingly facilitate the provision or implementation of such arrangements, or that should be aware that arrangements fall into the reportable category. Luxembourg’s DAC-6 legislation exempts lawyers registered with the Luxembourg bar, certified accountants and independent auditors from their reporting obligation, on grounds of professional confidentiality, leaving the responsibility with the other intermediaries or ultimately the taxpayer itself. Intermediaries may be exempt from reporting in Luxembourg if the required information have been filed by another intermediary in the Grand-Duchy or another EU member state. This makes the directive a major issue for members of L3A, which has therefore established a dedicated DAC-6 working group.
How should reportable arrangements be identified?
The legislation covers cross-border arrangements, whether involving two EU member states or a third country, relevant to taxes and duties covered by Article 1 of Luxembourg’s amended law of March 29th, 2013 on administrative co-operation on tax matters. These include notably corporate income tax, municipal business tax and withholding tax, but not VAT, customs and excise duties or social security contributions. Arrangements are reportable if they meet one of the hallmarks listed in the Appendix to the law. In some cases, these hallmarks are subject to the so-called main benefit test. Based on the OECD’s BEPS action 12 initiative the main benefit test is defined as: “the tax advantage is or might be expected to be the main benefit or , one of the main benefits of entering into the arrangement”.. This requires an objective assessment of tax benefits, which may be difficult in the absence of other guidelines. Hallmarks of reportable arrangements may include confidentiality requirements or success fees relating to tax advantages, acquisition of loss-making companies, conversion of income into capital or other types of revenue subject to a lower tax rate, round-trip transactions, payments to preferential tax regimes, low- or no-tax jurisdictions or third-country jurisdiction which have been assessed by Member States collectively or within the framework of the OECD as being non-cooperative and characteristics relating to automatic exchange of information or transfer pricing.
How will corporate service providers cope?
Since various categories of professional are exempt, the reporting obligation will likely fall mainly on other intermediaries, especially corporate service providers, which must ensure their systems and procedures are capable of detecting and reporting transactions or arrangements covered by the rules. Since the hallmarks are complex and in the current absence of further guidelines from the Luxembourg tax authorities, there is significant room for interpretation – a cause for concern in the market, even with the deadlines pushed back – but the L3A DAC-6 working group is working to ensure that all members enjoy a common understanding of the rules. In addition to analysis and reporting of transactions, the legislation presents challenges to service providers in areas including data management, processes and client relationships – but it’s also an opportunity to adapt and enhance their service offering and quality.