EU mandatory disclosure rules for transactions with certain tax consequences

By Grant Wardell-Johnson, Lead Tax Partner, KPMG Economics & Tax Centre, KPMG Australia

As outlined by Grant Wardell-Johnson, taxpayers with operations in any of the EU member states will need to understand the impact of these rules.

In the European Union (EU), mandatory disclosure requirements (the DAC6 rules) now apply to certain types of cross-border transaction that have taxation consequences.

Under the regime, any reportable arrangements entered into since 25 June 2018 must be reported by the taxable entities or by their intermediaries (i.e. external tax advisers).

Taxpayers with operations in any of the EU member states will need to understand the impact of these rules, assess their activities and determine what needs to be reported, by whom and to which jurisdiction.

The trigger for reporting is the earliest of the dates on which the arrangement was available or ready for implementation, or on which the first implementation step was taken.

Taxable entities or their intermediaries must report by 28 February 2021 on arrangements for which the first reportable step occurred between 25 June 2018 and 30 June 2020.

For arrangements whose first reportable step occurs between 1 July 2020 and 31 December 2020, the reporting deadline is 30 days after that step occurred, unless the relevant EU member state has granted a deferral (which many member states have). The deferral generally means that these arrangements must be reported by 30 January 2021.

All member states will require reporting within 30 days of all arrangements whose first reportable step occurs after 31 December 2020.

What are the DAC6 rules?

The EU mandatory disclosure rules were introduced as an amendment to the Directive on Administrative Cooperation in the Field of Taxation (DAC6), to apply from 1 July 2020.

The DAC6 rules introduce an obligation on taxable entities or their intermediaries to disclose information on cross-border arrangements that meet certain criteria to their domestic tax authorities. The DAC6 rules also provide for the subsequent exchange of this information between tax administrations.

A reportable transaction is generally one involving two or more jurisdictions (of which at least one is an EU member state) and which exhibits one or more “hallmarks” of aggressive tax planning. Where a transaction only exhibits certain hallmarks, reporting is not required unless one of the main benefits of the transaction is the tax benefit.

The hallmarks include features such as:

  • a confidentiality clause covering the expected tax consequences of the arrangement*;
  • a contingent fee payable to advisers based on the tax outcomes of implementing the arrangement*;
  • a deductible payment to a recipient entity that is resident in a very low tax jurisdiction, or for whom the particular type of receipt is specifically tax-exempt in its country of residence*; and
  • the use of unilateral safe harbour rules from a transfer pricing perspective.

*This hallmark would also require satisfaction of the main benefit test.

Key action for business

Divergence in interpretation and, potentially, in reporting timelines across EU member jurisdictions will create many challenges for organizations that have an extensive European footprint and need to navigate the DAC6 rules.

It is vital that local implementation of the rules and reporting deadlines continues to be actively monitored by potentially impacted groups.

This article was originally published on KPMG Tax Now, KPMG Australia’s subscription news service for tax and finance professionals.

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