EU Mandatory Disclosure regime
The sixth EU Directive on Administration Cooperation (DAC 6) introduces a new mandatory reporting regime in respect of certain “reportable cross-border arrangements”. Under these rules, “intermediaries” have an obligation to automatically report on certain “cross-border arrangements” which involve one or more of a list of specified “hallmarks”.
Although the first reporting of transactions will not occur until August 2020, there is a retro-active element to the Directive which requires that transactions which commence on or after 25 June 2018 be included in the first batch of reporting. Thereafter reporting will occur every 30 days.
An “intermediary” is defined as any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement. It also includes any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to provide such services, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance, or advice in relation to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement.
This very wide definition may, in certain situations, impose reporting obligations on persons who are not providing tax advice in relation to a transaction such as fund managers, administrators, and custodians.
Reportable cross-border arrangements and hallmarks
A cross-border arrangement concerning one or more EU Member States or a Member State and a third country will include arrangements between a person resident in / having a commercial presence in one country and a person resident in / having a commercial presence in another country. However, in order for a cross-border arrangement to be reportable, it must involve one or more of a list of specified hallmarks.
Some of the hallmarks specified in the Directive are linked to a “tax main benefit” test such that reporting only applies in the event that a tax advantage is the main benefit or one of the main benefits to the arrangement. These include:
- Condition of confidentiality in respect of how the arrangement could secure a tax advantage.
- A fee which is fixed with reference to a tax advantage.
- Arrangements including substantially standardised documentation.
- Arrangements that include contrived steps related to loss-making companies.
- Converting income into capital, gifts or other categories of lower taxed revenue.
- Circular transactions resulting in round-tripping of funds or offsetting or cancelling transactions.
- Cross-border transactions involving a deductible payment made between 2 or more associated persons where the recipient jurisdiction has an (almost) zero tax rate, or the receipt is exempt or benefits from a preferential tax regime.
However, a number of the hallmarks are not linked to a “tax main benefit” test and, therefore, are reportable irrespective of whether or not there is any tax benefit. The following are some of the hallmarks which are not linked to this “tax main benefit” test:
- Cross-border arrangements between 2 or more 25%+ associated persons involving a deductible payment to a recipient not resident anywhere or resident in an EU Blacklist or OECD non-cooperative jurisdiction.
- Cross-border arrangements where there are deductions for the same depreciation on an asset in more than one jurisdiction.
- Cross-border transactions where relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction.
- Cross-border asset transfers, material difference in the consideration amount treated as payable in those jurisdictions involved.
- Specific hallmarks concerning the automatic exchange of information and the accessibility of beneficial ownership information.
- Specific hallmarks concerning transfer pricing.
We have prepared a more detailed note for Irish Funds members for use by client service teams which can be accessed through the IF Member Portal.
As such, members should consider whether it is appropriate to begin collecting and collating all of the reportable transactions where they have an obligation to report. Between now and the first reporting date we anticipate that Ireland will enact implementing legislation and Irish Revenue will have published its detailed guidance in relation to this area and we may have greater clarity on a number of uncertain areas by that time. In the interim, Irish Funds will seek to work with Revenue as they prepare their guidance and legislation.
Gareth Bryan, Partner, KPMG