DAC6 in action: What we’ve learned from the first 18 months of disclosures

The EU Mandatory Disclosure Directive (DAC6) requires taxpayers, advisors and intermediaries to release details of “potentially aggressive” cross-border tax planning arrangements. A number of non-EU jurisdictions could eventually bring in comparable reporting requirements in line with the BEPS accords.

Following a delay because of COVID-19, live reporting began in most EU member states in January 2021. What do the initial disclosures tell us about the practicalities of DAC6 compliance? What are the implications for tax management?

Open to interpretation

While DAC6 applies common principles, EU member states vary quite markedly in their interpretations of the ‘hallmarks’ that define aggressive planning and the penalties for non-disclosure.

Germany stood out by opting not to defer reporting. It’s thus provided a useful ‘testbed’ and potential model for disclosure elsewhere. Poland and Portugal highlight just how much application can differ by choosing to include domestic arrangements as well as cross-border ones.

Hallmarks dominating reporting

The most commonly reported transactions fall under the B2 and E hallmarks.

• Hallmark B2 captures arrangements that convert income streams into capital or another lower taxed category. B2 is a conditional hallmark as a potential tax advantage has to be one of the main benefits of the arrangement for it to be reportable under DAC6.
• Hallmark E2 captures the transfer of ‘hard-to-value’ intangibles between associated enterprises. An intangible is deemed hard-to-value if no reliable comparable exists and the projected future cash flows are highly uncertain at the time the transaction is entered into.
• Hallmark E3 captures the intergroup transfer of functions and/or risks and/or assets resulting in a 50% or more reduction in the transferer’s projected three-year pre-tax earnings.

Tax probes on the rise

The number of queries from tax authorities is rising now that they’ve had time to familiarise themselves with the practicalities of DAC6, share data with their peers and use the intelligence gathered through the new disclosures. Audits and penalties for non-compliance are set to become more prevalent as a result.

In addition, some tax authorities, such as Ireland, are strengthening their audit powers so they can step-up investigations into whether taxpayers, advisors and intermediaries have appropriate systems in place to meet their DAC6 reporting requirements.

Up to speed

With investigations increasing and some non-EU jurisdictions looking to bring in DAC6-type disclosures, the big lessons from the first 18 months of the Directive are the need to be clear about what’s expected in different jurisdictions and make sure your compliance systems are up to speed. Getting DAC6 right first time demands care and attention. But this is better than the time and cost of investigation.

If you would like to know more about DAC6 and how we could help you to comply, please feel free to get in touch.

How can Grant Thornton help

We can assist in implementing effective processes to ensure all reportable cross-border arrangements are identified and managed accordingly:

• Impact assessment report
• Training and awareness
• Governance and procedures
• Ongoing compliance management and recommended software solutions
• Reporting and filing