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Draft regulations to implement DAC6

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HMRC is consulting until 11 October 2019 on draft regulations to implement the amended EU administrative cooperation directive (DAC6) into UK law with effect from 1 July 2020 (see The directive introduces new disclosure and reporting rules for intermediaries involved in designing and promoting potentially aggressive cross-border tax planning schemes.

The regulations will require intermediaries and taxpayers to report details of cross-border arrangements to HMRC, where those arrangements meet certain ‘hallmarks’ of tax avoidance. Reports must be made within 30 days of the arrangements being ‘made available’ or ‘ready’ for implementation. HMRC will share information received in these reports with other EU member states, who will in turn share reports they receive with HMRC.

The directive came into force on 25 June 2018 and member states must have their own national legislation in place by 31 December 2019. The reporting requirements will apply from 1 July 2020, which means where the first step of any reportable arrangement takes place on or after 25 June 2018 and before 1 July 2020, details must be reported by 31 August 2020.

The directive defines two distinct types of intermediaries:

  • ‘promoters’, who design, market, organise, make available for implementation or manage the implementation of a reportable cross-border arrangement; and
  • ‘service providers’, who provide aid, assistance or advice in relation to the above.

There is an additional reporting requirement on service providers, who must report within 30 days of providing aid, assistance or advice in respect of a reportable arrangement. However, service providers may argue as a defence that they did not know, and could not reasonably be expected to know, that they were involved in a reportable arrangement.

Under the regulations, intermediaries must report to HMRC if they:

  • are UK resident for tax purposes;
  • have a permanent establishment in the UK;
  • are incorporated in the UK; or
  • are registered with a professional association relating to legal, taxation or consultancy services in the UK.

Where an individual employed by a firm takes actions on behalf of the firm, which fall within the definition of intermediary, it is the firm who is the intermediary.

The hallmarks for arrangements to be reportable fall into five broad categories, some of which must meet a main benefit test of obtaining a tax advantage:

  • category A includes generic hallmarks linked to the main benefit test, such as confidentiality, remuneration related to tax advantage, and standardised documentation;
  • category B includes specific hallmarks linked to the main benefit test, such as loss buying, converting income into capital, and circular transactions;
  • category C includes specific hallmarks related to cross-border transactions, such as deductible cross-border payments (linked in certain cases to the main benefit test), depreciation claimed in more than one jurisdiction, double taxation relief claimed in more than one jurisdiction, and transfers of assets;
  • category D includes specific hallmarks concerning automatic exchange of information and beneficial ownership, similar to the OECD’s mandatory disclosure rules, such as undermining or circumventing reporting obligations under the CRS and obscuring beneficial ownership; and
  • category E includes specific hallmarks concerning transfer pricing, such as unilateral safe harbours, hard-to-value intangibles, and intra-group cross-border transfers.

Zoe Andrews, senior tax PSL at Slaughter and May, said: ‘HMRC is taking a pragmatic approach in the way that certain parts of DAC 6 are interpreted. For example, "tax advantage" is given a scope that is both narrower and wider than in DAC 6. It is narrower because something will not be a tax advantage if the tax consequences of the arrangement are entirely in line with the policy intent of the legislation upon which the arrangement relies. It is also wider because the UK draft regulations define tax more broadly than DAC 6 for the purposes of the tax advantage definition and will apply to tax advantages arising in a non-EU member state.’

Deductible cross-border payments under category C must meet the main benefit test where:

  • the jurisdiction imposes corporate tax at the rate of zero or almost zero;
  • the payment is fully exempt in the jurisdiction where the recipient is resident for tax purposes; or
  • a preferential tax regime applies to the payment in the jurisdiction where the recipient is resident for tax purposes.

The regulations and the draft guidance limit the scope of some of the hallmarks and/or offer more clarity on what is intended to be caught.

It is important to give feedback to HMRC on any areas of the draft regulations that still cause concern or require further clarification in guidance.

The government intends the International Tax Enforcement (Disclosable Arrangements) Regulations 2019 to come into force on 1 July 2020. They will apply to reportable cross-border arrangements:

  • made available for implementation on or after 1 July 2020;
  • ready for implementation on or after 1 July 2020;
  • for which an intermediary provides aid, advice or assistance on or after 1 July 2020 in relation to designing, marketing, organising, making available for implementation or managing the implementation of the arrangements; or
  • for which the first step in implementation took place on or after 25 June 2018.

‘HMRC has emphasised that these rules will remain in place post-Brexit to tackle international tax avoidance and evasion,’ Andrews commented. ‘So it is worth spending some time now to get workable rules in place by the end of the year.’

The regulations also make provision for penalties, similar to the DOTAS regime, of £600 per day during the initial period for failing to make reports or notify legal professional privilege, or fixed penalties of £5,000 in other cases. Relevant taxpayers who fail to make annual reports will incur further penalties, rising to £10,000 for repeated failures.

HMRC intends to publish guidance on the directive alongside the finalised regulations.

Issue: 1453
Categories: News