On July 1, 2020, the reporting obligations under DAC6, the EU’s new mandatory disclosure rules, will come into force in Germany. Under these rules, taxpayers and their advisors need to report cross-border arrangements to local tax authorities if these arrangements meet certain criteria - even when no aggressive tax planning is involved. Below we explain why you should care about these new rules. COVID-19 will likely extend the time for compliance with DAC6 to sometime in Q3/4 of 2020.
Mandatory disclosure – come again?
To increase transparency, the European Union (EU) has drafted obligations for EU member states to introduce rules that will force intermediaries (tax advisors, accountants, lawyers, bankers and other service providers) and taxpayers to report arrangements (including structures or transactions) that bear certain hallmarks. These arrangements must be reported to local tax authorities but may also have to be reported abroad, depending on the countries involved. The relevant tax authorities will then exchange the information with their counterparts in other EU countries. The new mandatory disclosure rules are included in an amended EU Directive on the automatic exchange of information between taxing authorities in the EU.
The rules have three functions:
- To determine risks of tax avoidance so loopholes can be closed;
- To supervise and enforce taxation rules; and
- To dissuade taxpayers and their advisors from making use of aggressive tax planning.
Notifications on cross-border tax arrangements must be submitted from July 1, 2020. However, the rules will have retroactive effect as, in short, all reportable transactions, designed or implemented from June 25, 2018, need to be reported.
Why is this important?
The reporting of arrangements under the rules will impact on taxpayers and their advisors. The reporting obligations and the exchange of the reported information will likely result in more investigations and audits by tax authorities and an increase in tax disputes. Not meeting the reporting obligations can give rise to serious penalties (up to €25,000 per case). Tax authorities should be able to apply sanctions to structures whose first steps of implementation take place after June 30, 2020. The broad scope of the hallmarks, the multiple reporting obligations, the patchwork of rules in Europe, the lack of consistency in the interpretation of these rules and the threat of fines creates a risk of over-reporting as well as under-reporting. These obligations should not be taken lightly.
Who must report?
Intermediaries, which are either resident in Germany or which provide their services in a German establishment, will be obliged to report to the authorities. In short, intermediaries are all persons involved in the design or implementation of a reportable arrangement. If there is no intermediary, for example because the taxpayer came up with the arrangement, the taxpayer is obligated to report. Some advisors qualifying as an intermediary may fall under special rules of professional privilege, such as attorneys-at-law and civil law notaries. Professional privilege rules prohibit these intermediaries from reporting any information about their clients to the authorities. In this case, the intermediary must report anonymized data on a structure despite the professional confidentiality obligation. With regard to the reporting of personal data, there are three options for intermediaries obliged to maintain professional confidentiality:
- The user releases the intermediary from the obligation of confidentiality. Then the intermediary must also report the personal data.
- The user can report all data, so that the intermediary is no longer required to report.
- The intermediary reports the anonymized data for a structure. The user reports the personal data himself. Despite the existence of a professional confidentiality obligation, the intermediary's duty of disclosure shall not pass to the user until the intermediary has fulfilled its duty of disclosure and the intermediary has provided the user with the registration number and the disclosure number of its report. It should be noted that the 30-day notification obligation of the user only begins with the expiration of the transaction, when the user receives the necessary information from the intermediary.
When is an arrangement reportable?
Cross-border arrangements (e.g. structures or transactions) have to be reported if they bear certain criteria or hallmarks as they are referred to. Hallmarks are characteristics or features of a cross-border arrangement that may be an indication of a potential risk of tax avoidance or abuse. The EU Directive sets out five categories of hallmarks. For some categories, considerable weight is given to the purpose of the arrangement and whether obtaining a tax advantage was a main driver. However, a transaction or a series of transactions can also be reportable even if it was not tax-driven. The requirement to report an arrangement or structure does not imply that it is harmful, only that it may be of interest to taxing authorities for further scrutiny.
The EU Directive covers all types of taxes except VAT, customs duties and harmonized excise duties.
Timing of reporting
Information on reportable arrangements must be filed with the relevant tax authority within 30 days starting on the day after the reportable cross-border arrangement was made available for implementation, is ready for implementation or when the first step of implementation was taken, whichever occurs first. Intermediaries providing aid, assistance or advice will also be required to file information within 30 days beginning on the day after they provided aid, assistance or advice.
This results in the following concrete timelines and postponements, respectively:
- Structures implemented as from July 1, 2020 must be reported within 30 days.
- Structures implemented between August 25, 2018 and July 1, 2020 must be reported by August 31, 2020.
Due to problems with data transmission in Germany, the deadline is likely to be extended to September 30, 2020 for both cases, according to a draft statement of the Federal Ministry of Finance.
However, due to the COVID-19 crisis the European Commission has proposed a postponement of three months, i.e:
- The start of the 30-day deadline for reporting cross-border tax structures is postponed from July 1, 2020 to October 1, 2020. Yet, the date of application remains July 1, 2020 and structures implemented between July 1, 2020 and October 1, 2020 must be reported after the postponement.
- Structures implemented between August 25, 2018 and July 1, 2020 will not need be reported by August 31, 2020, but by November 30, 2020.
What must be reported?
Information to be reported includes:
- Identification of intermediaries and relevant taxpayers
- Information on group companies
- Details of the relevant hallmarks
- Summary of the arrangement
- Date of first step of implementation
- Details of the national provisions forming the basis of the arrangement
- Value of the arrangement
- EU member states involved in the arrangement
- Identification of any other person in a member state likely to be affected by the arrangement
These new obligations require adequate documentation of arrangements, even if the arrangement is not reportable. We advise taxpayers and their advisors to review their structures, transactions, products (and other arrangements) to determine if there is a reporting obligation. It does not stop there; if there is a reportable arrangement in place thought should go into how to report the arrangement and how to defend the arrangement if it is scrutinized and/or challenged by tax authorities.
Need assistance? Wish to make use of Q2/3?
Determining if there is a reportable cross-border arrangement is complex and technical. If you have any questions on these new reporting obligations and their potential implications for your business or if you need assistance in determining whether an arrangement is reportable, please contact our team.
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