DAC 6: a new weapon in the fight against aggressive tax planning

Marie Melikov - Senior Program Manager of Degroof Petercam Foundation

The European Union has issued a new directive, called DAC 6, aiming at more fiscal transparency and better cooperation between the Member States.

Various scandals have recently revealed large multinationals' tax optimization schemes (more specifically, the GAFAs). These companies artificially transferred profits to tax havens to pay virtually no tax. Tax planning structures are incredibly complicated and take advantage of the increased mobility of capital and persons. National economies and markets have been merging more and more rapidly in recent years, challenging the international tax system designed more than a century ago. The erosion of sovereign tax revenues is central to government policy. With budget deficits skyrocketing as a result of the crisis, this theme is more topical than ever.

Strive for better fiscal transparency

The OECD and the G20 have been working towards fair, transparent taxation since 2015. Their report on the fight against tax evasion and profit shifting (Base Erosion and Profits Shifting or 'BEPS') strives to harmonize national rules, tax transparency, and better exchange of information between countries so profits can be taxed locally. Action 12 of this report aims, among other things, to create mandatory, multilateral disclosure rules specifically aimed at identifying international tax structures and remedying shortcomings in the exchange of bank information.

In this context, on May 25, 2018, the European Union Council adopted the sixth Directive for Administrative Cooperation (DAC 6) , which imposes an obligation to declare specific potentially aggressive cross-border schemes. Although the original intention was to end the bold tax optimization schemes of multinationals, the Directive aims to impact multinationals and every type of taxpayer, including private individuals.

Detecting and discouraging are the keywords of this new reporting obligation.

Who is obliged to report?

To gain access to the information, DAC 6 calls upon the 'intermediaries' (such as lawyers, accountants, banks, managers ....) who may hold this information. The obligation to collect and transmit data to the competent tax authorities rests with those intermediaries or, if there is no reporting intermediary, with the taxpayer who benefits from the tax regime.

However, in some cases, intermediaries have been protected by professional secrecy. In such cases, they are not obliged to report the identified scheme. In Belgium, lawyers benefit from this protection; in Luxembourg, lawyers, auditors (especially from BIG 4) and accountants. However, such intermediaries protected by professional secrecy are then still obliged to inform the other intermediaries of the scheme. It concerns those who are not covered by professional secrecy (or if an intermediary is not identified: the taxpayer himself). They must comply with the reporting obligations relating to the scheme.

Thus, as of January 1, 2021, when acting as an intermediary in a scheme covered by DAC 6, Bank Degroof Petercam will be obliged to communicate all information at its disposal to the tax authorities. If the bank does not do so, it will be subject to sanctions. In Luxembourg, for example, in the event of failure to notify, the fine can amount to up to 250,000 euros.

What needs reporting?

Intermediaries should report only potentially aggressive cross-border arrangements. To assist them in collecting information, DAC 6 provides a list of key features to determine whether a scheme is potentially aggressive.

These key features can be used in many situations, ranging from transfer pricing issues and bypassing information exchange under the CRS to the use of schemes whose main benefit is a more favorable tax rate.

However, value-added tax ("VAT"), customs duties, excise duties and social security contributions are outside the application scope.

The key features, which are deliberately broadly defined, are highly open to interpretation by the intermediaries. Moreover, the transpositions into national law of each of the Member States, as well as the comments of the various local tax authorities, suggest different assessments for the same situation.

Some of the key features trigger an obligation to report if a more favorable tax regime is the most important benefit, or one of the most important benefits, that a person can reasonably expect to receive due to the arrangement.

However, suppose the totality of the facts and circumstances show that the main benefit, or benefits, of structuring, are other than a more favorable tax regime. In that case, there is no need to report the regime.

How fast?

If an arrangement falls within the scope of CAD 6, the bank is obliged to report the nominative information to the tax authorities within 30 days. Based on this information, Member States should carry out targeted tax audits or even reform their legislation to eliminate the gaps identified based on DAC 6.

However, for some operations set up after June 25, 2018, it is already too late. DAC 6 has provided for retroactive effect, which means that potentially aggressive cross-border schemes set up after that date must be reported by January 31, 2021, or February 28, 2021, at the latest.

¹ The impact is not negligible. Therefore, you need guidance from experienced experts to identify the risks of international structuring correctly. Incidentally, discouragement is an essential objective of this Directive.

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