The DAC6 directive requires stakeholders and tax advisors to report any attempt to optimise taxes through international arrangements.

The DAC6 directive was only recently implemented in most States of the EU. Since it came into force on the 1st July 2020 it has attracted the attention of many businessmen, investors, and of course, tax advisors and lawyers, which is why we have decided to write about it; to clarify how it really affects us in practice.

At Tax Free Today, we provide information and advice on tax issues, among many others. Of course, we do not deal with tax evasion, but rather how to legally avoid taxes and regulations, that different countries try to impose on us.

At Tax Free Today, we develop strategies that provide the best outcomes for our clients, despite the CFC rules, exit tax, BEPS and a long list of others. Now, DAC6 has been added to that list of regulations.

States with high tax burdens don’t realise that their endless spiral of regulations will never work successfully. For example, the well-known automatic exchange of banking information had as many holes in it as a Swiss cheese. But still it exists, now alongside the latest achievement of the OECD and EU collaboration: DAC6, which aims to prevent all long-term tax design models that are geared towards “abusable tax benefits”.

But is this directive really that terrible? Could DAC6 lead to a ban for Tax Free Today and our advisory services? Could it end up making whistle-blowers out of everyone who offers any kind of tax advisory service?

Hardly. DAC6 seems to have been written from the offices of the Big4 firms, namely Ernst & Young, Deloitte, PWC and KPMG. Arguably, it is an attempt on behalf of these big companies to make things more difficult for their smaller competitors within the EU.

For the Big4, the additional effort required for them to comply with this directive is minimal, compared with the possible benefits that it could have for the tax planning market. It is undoubtedly the small agencies and in-house advisors offering tax planning services in the EU, who will feel the impacts of DAC6 the most.

In any case, given that DAC6 does not apply outside of the European Union, the impact for Tax Free Today is minimal, if existent at all. Following our Flag Theory, we operate from “reasonable” states, so we are not required to report anything.

Moreover, the possible reporting obligation about international arrangements would be passed on to the client, and even then, only if they live in the EU.

In order to clarify how all this works, we think it is important to know what the possible obligations under the DAC6 Directive actually are.

What is the DAC6 directive?

DAC6 stands for “Administrative Cooperation Directive” (Spanish: Directiva de Cooperación Administrativa) and it refers to a set of measures used to combat “abusive” tax regimes, which EU member states were to incorporate into national law by the end of 2019.

It is part of the BEPS reforms (Base Erosion and Profit Shifting), agreed upon by member states in the Panama Papers (specifically Article 12 on disclosure obligations).

Essentially, it is also an extension on the 2010/24/EU Directive on mutual assistance.

DAC6 came into force on the 25th June 2018, and since then, it has been introduced in various member states.

Member states can have stricter legislation than what is outlined in the DAC (for example, Germany wants a reporting obligation on certain national structures). Abusable tax arrangements must be submitted 30 days after the tax assessment date at the latest.

Since the law was brought into force, the appropriate authorities must be notified within a month at the latest.

In Europe, the first exchange of information on abusive tax models will take place on a quarterly basis from the 30th October 2020. By doing so, the tax authorities in different EU countries will be able to access each other’s submitted models and agree on possible solutions.

It is vital to understand that DAC6 is aimed at cross-border tax planning models. A tax structuring model is considered to be cross-border when it affects one or more EU states, including third countries.

Therefore, DAC6 does not apply if the tax structure is purely domestic. Not only must you consider the tax residence, i.e. the place from which the company operates, or the tax residence of an individual in the EU, but you must also take into account the country of the business activity in question. Also, a possible lack of tax residence or circumvention of the automatic information exchange or of the identification of the beneficial owner must be taken into account.

The requirement to report arises from certain tax design models that contain certain characteristics (see below).

In the event of having to report, the intermediary or taxpayer must include information about the content, the date of implementation, reference to national tax regulations, the members concerned and the value of the arrangement.

It should be noted that only companies that have their headquarters or business centre in the European Union are required to report these agreements on their own behalf.

If tax advisors, lawyers or other intermediaries outside of the EU are involved, they do not need to report their tax arrangement. This exemption also partly covers tax advisors who invoke their duty of confidentiality.

But the reporting obligation can be passed on to the individual or to the EU company that has been advised. Thus, in certain cases, they will have to report themselves, or else, face sanctions.

In general, any EU customer who has been advised on the design, marketing, organisation, implementation or mediation of an abusable tax regime will be affected.

The declaration must be made within 30 days, as soon as the proposal has been fully elaborated and is ready to be implemented. But as we previously mentioned, the definition of an abusable tax regime is subject to a number of characteristics.

The following chart summarises the situation quite well:

What is meant by abusive tax planning?

If we look at the characteristics required to trigger the reporting obligation, we realise that the majority of clients advised by Tax Free Today do not fall within the scope of the directive, since we mostly deal with people who wish to change their tax residence.

It’s quite unlikely that enquiries about the workings of foreign companies with business substance will be subject to reporting requirements. Therefore, ultimately, only the more sophisticated arrangements for large corporations, which Tax Free Today rarely deal with, would need to be reported.

However, given that there are still some cases that could trigger a reporting obligation, we will look a little more into the cases that would lead to this obligation.

There are both general and specific characteristics of international arrangements that can lead to reporting obligations.

The general characteristic is shown through the main benefit test, which will have a positive result if the arrangement is primarily geared towards achieving a specific tax advantage.

This happens when the person concerned is subject to a confidentiality clause; the intermediary receives a commission depending on the amount of the tax advantage; or if there are standardised models that can be applied to different taxpayers.

If the main benefit test is positive, a number of additional characteristics are also necessary, before there can be a reporting obligation.

These characteristics include models with scheduled losses, circular transactions or changes in income rates in order to benefit from lower taxation.

A reporting obligation also arises when the main benefit test is positive and there is also the additional characteristic of transactions between connected companies, to which a specific favoured tax model is applied, with little or no tax burden for the companies.

There is no need to carry out a main benefit test in the event of transactions with countries on the EU/ OECD blacklist of tax havens. In general, if one of those countries (for example, Trinidad and Tobago) is involved in the tax structure with an EU company, it will fall under the reporting obligation.

This is the same for any kind of transfer pricing (especially when it comes to pricing of hard-to-value cases); when it comes to avoiding information exchange or transparency registers; or when it comes to double tax relief or avoiding taxation by relying on double taxation agreements.

The following chart summarises all this:

How does DAC6 affect those with no fixed residence?

In the event that you book a Tax Free Today consultation, the reporting obligation will always lie with you as the client, since the companies we use to offer our services are located outside of the European Union.

Even so, the reality is that very few clients would actually be required to report something, since the characteristics mentioned above do not apply in their cases. For example, trying the change residence generally falls outside of the scope of DAC6.

The most likely situation wherein reporting would be required is if you wish to use an international tax optimisation model with economic substance that provides a specific tax advantage while an EU resident.

Given that our solutions can generally be standardised (here, the Big4 have come up with a clever way around it), the reporting obligation not only applies when the structure comprises jurisdictions on the EU/OECD list of tax havens (on which it is currently only worth mentioning Panama and the United Arab Emirates), but also in the event that it involves other jurisdictions with low tax burdens.

It is essential to understand that there is no obligation to report the use of these jurisdictions per se, but there is an obligation to report the transactions with these jurisdictions.

Therefore, according to DAC6, if instead of registering your company in a foreign country with a low tax burden in order to invoice your company in the EU, what you do is use the company independently for any kind of business, DAC6 does not require you to report.

However, we have long stopped recommending these sorts of transactions between related companies in our consultations, since there are hardly any attractive options, that are not illegal, for small companies.

It is easier to fall under the requirement to report if a customer wants information about how to avoid information exchange. But of course, if a person does want to avoid exchanging information, why would they declare their intention not to report?

As you can see, DAC6 is unlikely to affect you, but who knows what our dear Eurocrats will come up with next. Without a doubt, the sooner you stop being tied to an EU country, the better.

Fortunately, the rumours that the EU would sanction anyone who talked about helping their clients to get “tax advantages”, “tax optimisation” and the like do not seem to be true. Be that as it may, the never-ending spiral of regulations will persist, making it harder for taxpayers to keep the states away from their money.

We are looking forward to the next EU/OECD initiatives. If you are fed up of being a puppet that they can do whatever they like with, you can sign up to our subscriber content, have a look at our encyclopaedia of the most attractive countries to migrate to, or even book a consultation directly.

Because your life is yours!