Countries within the EU have since 2013 been sharing certain information about taxpayers. Initially there was a framework for member states to request details from another member state’s fiscal authority, but this was extended to automatic sharing of certain data, including types of employment income, financial account information, tax rulings, country-by-country transfer pricing reports and beneficial ownership details. Many of these measures extend beyond the EU. Much of this information was already in the hands of tax authorities, but where more information was required the reporting obligation was targeted on say larger companies for country-by-country reporting or financial institutions for financial account details.
Broadening the focus
The sixth update to the EU Directive on Administrative Cooperation (DAC6) casts a wider reporting net and has been implemented in the UK as if the UK is an EU member state. It addresses international tax planning arrangements and applies to all taxpayers – whether individuals or entities – and all taxes except VAT, customs duties and social security. Reports must be made to tax authorities who will then share them with other relevant member states – there is an initial look back period of just over two years ending on 30 June 2020 and future arrangements must be reported within a 30-day period.
The reporting obligation primarily falls on intermediaries – advisers who promote or provide advice in relation to relevant international tax planning arrangements. Arrangements that are reportable arrangements are defined by five categories of hallmarks which target the sorts of planning that fiscal authorities would want to know about but are broad enough to include a number of routine arrangements.
So, fine – over to the accountants and lawyers for them to get on with this? Not quite.
Impact on taxpayers
Once an arrangement has been reported it is allocated an arrangement reference number (ARN). ARNs received must be notified to all intermediaries and taxpayers the recipient knows or should reasonably be expected to know are relevant to the arrangement. Taxpayers must file an annual return giving their associated ARNs and details about the arrangement for each year the arrangement applies – in the UK these details should generally be included in the annual tax return. Taxpayers will therefore have to collate details supplied by their intermediaries.
Where more than one intermediary is involved in an arrangement, each will have to decide if they need to report. An intermediary is exempt from reporting if they have been provided an ARN indicating that the arrangement has already been reported and they are satisfied that it meets their reporting obligation for the work they have done and information of which they are aware.
However, an intermediary might not know who all the other intermediaries they are reasonably expected to know are and will need to rely on the client to tell them. In addition, the statutory obligation to share ARNs is just that – it does not extend to all the details another intermediary may need. Advisers are usually subject to client confidentiality and so they will need to seek authorisation from their client to share the additional details: the client may therefore end up as the hub, sharing information between advisers.
For efficiency, it may be appropriate for taxpayers to take an active management role in coordinating information sharing between advisers. It would also be good practice to minimise the number of reports being made – to avoid the potential for variances between the reports (advisers might only be involved in part of an arrangement and hence their report may not be sufficient to meet another adviser’s reporting obligation), to demonstrate good tax governance and to minimise costs – what does it say about a taxpayer if their tax return includes multiple reports of the same arrangement?
Furthermore, some countries in Europe have more onerous DAC6 reporting arrangements that exceed the minimum requirements in the Directive and so reporting in one country could prevent the need for a top up report in that country if primary reporting is done elsewhere.
Intermediaries are under a legal obligation to report on a short timescale and they may therefore do so on occasion without seeking their client’s approval for the content of the report. Taxpayers may wish to discuss with their intermediary their approach to reporting as part of their tax risk management.
In some instances it is the taxpayer that is required to report – for example, if their intermediaries for a particular arrangement are all outside the EU (including the UK for these purposes) or if the planning has been done in-house.
The penalties for failures to meet DAC6 requirements can be significant – but there is mitigation where proper processes are in place.
All international businesses, but especially those within the Senior Accounting Officer regime and those required to publish a tax strategy, should bring DAC6 reporting management within their overall tax risk governance framework, with due training for relevant staff and by implementing an internal system for identifying arrangements that trigger reports.
Taxpayers should actively manage their DAC6 obligations, whether the reporting actions rest with themselves or their intermediaries.