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18 March 2021
What is the good news?
What were the original requirements of DAC6?
What has changed?
What constitutes an 'arrangement'?
Is an arrangement 'cross-border'?
What are the requirements of DAC6 generally and the DAC6 regulations?
What are the relevant dates for the purposes of the DAC6 regulations?
The start of 2021 has had its ups and downs. However, the new year brought some welcome news for lawyers, accountants and other professionals in the United Kingdom working on cross-border transactions and other arrangements, and for their clients.
The good news related to the announcement that with effect from 11:00pm on 31 December 2020, the reporting requirements under the EU Directive on Administrative Cooperation in the Field of Taxation (DAC6, 2011/16/EU) as it applies in the United Kingdom are now restricted to cross-border arrangements falling within one specific category of hallmark, Category D, rather than all of Categories A to E listed in DAC6. This change has retrospective effect, so it takes effect from the original implementation of DAC6 into UK law on 1 July 2020.
On 1 July 2020 the International Tax Enforcement (Disclosable Arrangement) Regulations 2020 came into force in the United Kingdom. These implement DAC6, requiring disclosure to the United Kingdom's national tax authority, Her Majesty's Revenue and Customs (HMRC), of certain cross-border arrangements that potentially facilitate tax evasion or avoidance. Such arrangements are identified in DAC6 (and in the original UK implementing regulations) according to whether they meet certain hallmarks listed in Categories A to E.
Following the conclusion of the free trade agreement between the European Union and the United Kingdom, and with effect from the end of the Brexit transition period on 31 December 2020, the United Kingdom amended the DAC6 implementing regulations (the 'DAC6 regulations', as so amended). The arrangements that require identification are now restricted to those meeting only one category of hallmark. This is Category D, relating to arrangements that seek to either:
The CRS referred to in Hallmark D1 is an Organisation for Economic Cooperation and Development (OECD) initiative that requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. In most situations, it should be relatively straightforward to determine whether cross-border arrangements involve an effort to undermine obligations under the CRS.
In contrast, for the purposes of Hallmark D2, obscuring beneficial ownership is defined broadly as arrangements that involve non-transparent legal or beneficial ownership chains which use persons, arrangements or structures:
Almost any cross-border nominee arrangement could fall within this definition. However, HMRC's guidance in its internal manual is helpful in this regard, indicating that where a person is obliged to identify beneficial ownership under anti-money laundering legislation in accordance with the Financial Action Task Force, and successfully does so, this would generally mean that the test in the third limb of Hallmark D2 was not met, as the beneficial owners would be identifiable.
Given the stringent know-your-client requirements to which UK and EU professionals are subject, it should be uncommon for this test to be met where professional intermediaries are involved. Of course, there may be circumstances under which the test is met nonetheless and, as a result, an arrangement would be reportable.
An 'arrangement' for the purposes of the DAC6 regulations is "any scheme, transaction or series of transactions". However, this is not exhaustive, and it is generally necessary to look at any arrangement holistically, rather than looking at an arrangement as a series of small steps or separate transactions.
Where a pre-existing arrangement is being extended, this would not normally be viewed as a new arrangement, unless there is some material change.
Following the end of the Brexit transition period, to be 'cross-border' for the purposes of the DAC6 regulations, an arrangement must concern either more than one "State", defined as an EU member state or the United Kingdom, or one state and a third country.
Under DAC6, the obligation to report an arrangement to the tax authorities falls primarily on intermediaries involved in promoting, planning or advising on relevant types of cross-border arrangement. If there is no intermediary involved in a transaction, or the intermediary is prevented from reporting, perhaps as a result of the application of the rules of legal professional privilege, the obligation to report falls on the taxpayer, assuming that the taxpayer is resident in the United Kingdom or an EU member state.
For UK intermediaries and UK resident taxpayers who are subject to the DAC6 regulations, if a cross-border arrangement does not fall within either of the Category D hallmarks, there is no obligation to report. However, if a taxpayer or an intermediary involved in such an arrangement is resident in an EU member state, they may have an obligation under DAC6 (as implemented in their jurisdiction) to report the arrangement to their own tax authorities if it falls within another category of hallmarks. As this is not a matter of UK law, it falls outside the scope of this article, but such an intermediary or taxpayer would have to determine the position under the law of the relevant member state.
DAC6 applies to reportable cross-border arrangements that were entered into on or after 25 June 2018. The original dates for first reports to be made were delayed in many EU countries, including the United Kingdom, as a result of the COVID-19 pandemic.
In the United Kingdom, under the DAC6 regulations, for arrangements made available for implementation or where the first step was implemented between 1 July 2020 and 31 December 2020, the new deadline for a report to be made was 30 January 2021.
Relevant arrangements entered into between 25 June 2018 and 30 June 2020 were reportable by 28 February 2021, and those which became or become reportable on or after 1 January 2021 must be reported within 30 days of the relevant date. This date will be the day after the reportable arrangement is made available or is ready to be implemented (ie, the design has been finalised) or when the first step in its implementation has been made. For intermediaries which are service providers, it could also be the day after aid, assistance or advice (including legal advice) is provided in respect of the arrangement.
The reporting rules under the DAC6 regulations are intended to be temporary. The government plans to consult on and implement the OECD's Mandatory Disclosure Rules in 2021, and documents supporting the Budget 2021 indicate that the promised consultation may be published on 23 March 2021. This is with a view to replacing DAC6 entirely and transitioning from European to international rules. However, in the meantime, the current reporting rules remain in place.
For further information on this topic please contact Nicole Aubin-Parvu, Julia Ramsden Gunduz or Robert Payne at Forsters LLP by telephone (+44 20 7863 8333) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Forsters LLP website can be accessed at www.forsters.co.uk.
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