Many people are surprised when they hear that DAC6 affects not only tax advisors, lawyers and financial services providers, but also multinational groups across all industries (even if headquartered in Switzerland). In this blog, which is part of a series, we provide examples of how multinational groups could be involved in reportable arrangements, discuss reporting obligations, and share our views on what should be done next.
To quickly recap, DAC6 requires reporting of ‘reportable cross-border arrangements’ (RCBAs). These are arrangements that:
- concern either more than one EU member state or an EU member state and a third country, including Switzerland (i.e. ‘cross-border arrangements’); and
- have at least one of the characteristics or features that are listed in the Annex to the Directive, as an indication of aggressive tax planning or tax avoidance (so-called ‘hallmarks’).
A key feature of DAC6 is its retrospective reporting requirement. This means not only RCBAs entered after ‘go-live’ on 1 July 2020 are reportable, but also RCBAs implemented between 25 June 2018 and 30 June 2020.
Multinational groups across all industries are regularly involved in cross-border arrangements in connection with intra-group transactions or restructurings. Every transaction between a Swiss company and its EU subsidiary comes within this definition and would be reportable under DAC6 if it meets one of the hallmarks. In addition, an RCBA may arise through interaction with third parties, e.g. tax advisors.
The non-exhaustive examples below describe common situations where multinationals may be involved in RCBAs:
- Cross-border group restructurings, e.g. a centralisation of functions involving at least one EU group entity, where the transaction significantly reduces the projected EBIT of the transferring entity.
- Cross-border transfers of ‘hard-to-value intangibles’ between group entities: these could include situations where the intangible is only partially developed at the time of the transfer or is not expected to be exploited commercially until several years following the transfer.
- Deductible payments from an EU group entity to a group entity in a non-cooperative jurisdiction, e.g. the United Arab Emirates.
- Deductible cross-border payments to a group entity that benefits from a preferential tax regime with respect to the payment, e.g. a patent box regime. Due to the retrospective element of DAC6, this may also include deductible cross-border payments made after 25 June 2018 from an EU group entity to a Swiss group entity with cantonal holding, mixed or administrative company status, if the preferential regime applied to the respective payments.
- Receipt of advisory services from foreign third party intermediaries in relation to an arrangement, one of the main benefits of which is obtaining a tax advantage, if either (i) the relevant contracts include a confidentiality clause, (ii) the advice concerns an arrangement with standardised documentation/structure or (iii) the fees are based on the tax advantage obtained from the advice.
In general, DAC6 imposes reporting requirements on intermediaries with certain ties to the European Union. Thus, if an EU intermediary is involved in the arrangement, e.g. if an EU tax adviser advises on the reportable transaction, the EU intermediary would do the reporting. However, multinational groups are likely to want to know whether and what information about them is reported.
Further, DAC6 stipulates a subsidiary reporting requirement for the relevant EU taxpayer (i.e. the party benefiting from an arrangement) if there is no EU intermediary to report the RCBA. This includes situations where the intermediary has no EU nexus or where the arrangement is developed in-house. For example, if the group tax department of a Swiss-headquartered group designs a reportable transaction between the Swiss parent entity and an EU subsidiary, the EU subsidiary will be required to report as a relevant taxpayer. The subsidiary reporting requirement may also apply if the EU intermediary is exempt from reporting due to legal professional privilege.
Multinational groups should be aware that reporting may occur under DAC6, regardless of whether they do the reporting themselves, or someone else reports. After all, it is information about them that is being reported to the tax authorities. This reinforces the need for multinational group across all industries to stay on top of the new rules and perform an impact assessment as soon as possible. Once the potentially reportable arrangements and the respective reporting parties have been identified, this should serve as a basis for the next steps, which should include:
- Raising awareness across the organisation
- Taking strategic decisions about whether to discontinue certain transactions
- Training of involved staff
- Building a robust governance framework with suitable policies, procedures and controls
- Establishing adequate communication channels with third parties involved in relevant transactions (e.g. tax advisors or lawyers)
- Creating a database for audit-proof documentation of arrangements, which the multinational decides are not reportable
- Implementing a system or procedure for capturing information about reportable arrangements and reporting if required.