The UK Government has implemented an EU directive requiring mandatory disclosure of cross-border tax arrangements, known as the Directive on Administrative Cooperation 6 (DAC6). The International Tax Enforcement (Disclosable Arrangements) Regulations 2020 involves promoters, intermediaries and, in some instances, taxpayers themselves.
It is designed to enable EU tax authorities to share information about cross-border tax schemes, and comes into force on 1 July 2020.
The regulations require UK intermediaries to report to HM Revenue & Customs (HMRC) any cross border tax arrangements which contain a prescribed ‘hallmark’. The information received from these reports will be shared with tax authorities in EU member states so that they can identify any potential tax risks in their jurisdictions. EU tax authorities will in turn share the information they receive about arrangements involving the UK with HMRC.
The primary reporting obligation will fall on ‘intermediaries’. This is very widely defined and includes those who design and market cross-border arrangements as well as those who provide aid, assistance or advice in respect of such arrangements. In some circumstances the taxpayer will be obliged to make the report.
There are several criteria outlining whether a cross-border arrangement is subject to mandatory reporting – known as the main benefit test.
The central point is establishing if the individual may “reasonably expect” to gain a tax advantage.
Transactions must be reported even if:
- There is a condition of confidentiality linked to the arrangement;
- The intermediary is set to receive a fee either based on the tax advantage or not. In the latter case, if the advantage was not partially or fully achieved, the intermediary would need to refund fees, accordingly;
- It is an arrangement that doesn’t need customisation to be implemented;
- It is an arrangement involving the purchase of a loss-making company for it to be discontinued and used to reduce the participant’s tax liability;
- The aim of the transaction is to convert income into capital, gifts or other types of revenue taxed at a lower level or are completely exempt from tax;
- Circular transactions are made resulting in the round-tripping of funds or transactions that offset or cancel each other;
- The arrangement involves deductible cross-border payments made between two or more entities;
- Deductions for the same depreciations are claimed in more than one jurisdiction;
- Relief from double taxation on the same income is claimed in more than one jurisdiction;
- Assets transferred have a material difference in the payable amount compared to the assets in the jurisdictions involved;
- The arrangement undermines reporting obligations under EU law;
- A transaction involves a non-transparent legal or beneficial ownership chain;
- It uses unilateral safe harbour rules – the provisions that relieves taxpayers from obligations otherwise imposed by a country’s general transfer pricing rules;
- The transaction involves ‘hard-to-value intangibles’; and,
- The projected annual earnings before interest and taxes (Ebit) for three years after the transfer of functions and/or risks and/or assets by an intragroup, are less than 50% of the projected annual Ebit if the transfer had not been made.
- HMRC said it will provide guidance and case studies to clarify any confusion regarding the applicability and compliance with the regulation before the 1 July 2020 deadline.
To ensure Brexit does not impact the legislation, the UK Government has made clear what will happen post-January 31st.
“The UK is legally obliged to transpose this directive before the UK leaves the European Union,” HMRC said.
“That obligation will continue during the implementation period, under the terms of the withdrawal agreement. The UK’s commitment to tax transparency will not be weakened as a result of leaving the EU.
“The government will continue to work with international partners to tackle offshore tax avoidance and evasion.
“As part of this collaboration, we will consider amending the rules further, if necessary, to ensure they work as planned,” the Revenue added.