Mandatory Disclosure Rules: Implementation of DAC 6 in domestic law

By Costas Savva and Artemis Loucaidou

1. Introduction

Mandatory Disclosure of information has been introduced in the European Union through Directive 2018/822[1] on Administrative Cooperation. This Directive provides for disclosure of “reportable cross-border arrangements” which may constitute aggressive tax planning by “intermediaries” or taxpayers in order to facilitate Exchange of Information and enhance Tax Transparency in the European Union.

1.1. Legal Framework

On June 5^th, 2020 the legislation has been filed in the Cypriot parliament for voting a bill to transpose amendments to the Mutual Assistance Directive (2018/822) (hereinafter the DAC-6 or the Directive) into domestic law. The implementation of the Directive is expected, in general, to be closely aligned with the scope and requirements of the Directive. The scope of the bill relates only to cross-border arrangements reportable if certain characteristics (“hallmarks”) included in the DAC-6 are triggered.

According to DAC 6, the new EU Mandatory Disclosure Rules should (have) become applicable on July 1^st 2020.

According to the Directive reporting must take place within 30 days beginning[2]:

on the day after the reportable cross-border arrangement is made available for implementation; or
on the day after the reportable cross-border arrangement is ready for implementation; or
when the first step in the implementation of the reportable cross-border arrangement has been made, whichever occurs first.

The Cyprus tax authorities on July 27, 2020, have announced some extensions on the reporting as follows:

Any Declarable cross-border arrangement that has been carried out between June 25 2018 and June 30 2020, is submitted until February 28 2021.
Any Declarable cross-border arrangement that has been carried out between July 1, 2020, and December 31, 2020 is submitted within 30 days starting from January 1 2021.
Any Declarable cross-border arrangement that has been carried out from January 1 2021 onwards, is submitted within 30 days from the date it becomes available for implementation or is ready for implementation or the first step towards its implementation has been taken, whichever occurs first.
The first periodic report on general-purpose settings is submitted by April 30, 2021.

2. What is an arrangement?

The Directive defines a “cross-border arrangement”[3] as: an arrangement concerning either more than one Member State or a Member State and a third country where at least one of the following conditions is met:

not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

An arrangement shall also include a series of arrangements and an arrangement may comprise more than one step or part.

This means that a purely domestic arrangement will not fall within the scope of the Directive whereas a domestic arrangement having tax implications in another jurisdiction will trigger the reporting obligation.

3. Who must report?

(a) The Intermediary

The primary obligation to report rests with the intermediary. An intermediary is:

any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement; or
any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to provide such services, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement.

An intermediary must also meet one of the following additional conditions:

be resident for tax purposes in a Member State;
have a permanent establishment in a Member State through which the services with respect to the arrangement are provided;
be incorporated in, or governed by the laws of, a Member State;
be registered with a professional association related to legal, taxation or consultancy services in a Member State.

The same conditions are applicable for choosing the Member State in which the reporting will take place.

Tax advisors, accountants, auditors, lawyers and consultants are likely to qualify as intermediaries.

There are two cases where the intermediary does not have to report:

The intermediary is exempt from reporting where there is a multiple reporting obligation and the intermediary has proof that the same information has been filed in another Member State.[4]
The intermediary can wave the reporting obligation under where there would be a breach of the legal professional privilege under the national law of that Member States[5]
- The Legal Professional privilege can apply for auditors, tax advisors and lawyers

Where the intermediary is exempt from reporting Member States must require the intermediary to notify other intermediary to make the disclosure or the relevant taxpayer.

(b) The taxpayer

The relevant taxpayer is any person:

to whom a reportable cross-border arrangement is made available for implementation, or
who is ready to implement a reportable cross-border arrangement, or
has implemented the first step of such an arrangement.[6]

The reporting obligation falls on the relevant taxpayer when:

an intermediary is a non-EU intermediary. An intermediary is considered non-EU when it is neither:
- resident in a Member State; nor
- Maintains a PE in a Member State through which the services in respect of the arrangement are provided; nor
- Incorporated/governed by the laws of a Member State; not
- A member of a professional association in a Member State
there is no intermediary involved e.g. An in-house arrangement
the taxpayer is notified that an intermediary has the right to a waiver due to legal professional privilege.[7]

4. Hallmarks and the Main Benefit Test

A cross-border arrangement is reportable if it contains at least one of the hallmarks set out in Annex IV of the Directive.[8] A hallmark in accordance with the Directive is “a characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance”.[9] The Directive creates five categories of hallmarks. It is important to note that certain hallmarks are only met if they fulfil the Main Benefit Test (“MBT”).

The MBT is met “if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may be reasonably expect to derive from an arrangement is the obtaining of a tax advantage”. For the hallmarks not subject to the MBT it means that any arrangement which might not even have tax implications must be reported.

The following table presents the hallmarks and indicates those which must fulfil the MBT.

Categories	Hallmarks	MBT
A. Generic Hallmarks	1. taxpayer or participant under confidentiality condition as to how the arrangements secure a tax advantage	✓
	2. intermediary receives performance-based remuneration by reference to the amount of the tax advantage derived or the effectiveness of the arrangement	✓
	3. Standardised documentation and/or structure available to more than one taxpayer without need for substantial customisation	✓
B. Specific Hallmarks linked to MBT	1. Participant acquiring loss-making company and using its losses to reduce its tax liability	✓
	2. Arrangement which has the effect of converting income into capital, gifts or a category which is subject to low tax or tax exempt.	✓
	3. Arrangements including circular transactions resulting in round-tripping of funds with no other primary commercial function	✓
C. Specific Hallmarks related to cross-border transactions	1. Arrangements involving deductible cross-border payments made between two or more associated enterprises where at least one of the following conditions occurs:
	(a) recipient is not resident for tax purposes in any tax jurisdiction
	(b) although the recipient is resident for tax purposes in any tax jurisdiction, the jurisdiction:
	(i) does not impose any corporate tax, or imposes corporate tax at the rate of zero or almost zero	✓
	(ii) is included in a list of non-cooperative tax jurisdictions
	(c) the payment benefits from full exemption from tax in jurisdiction where recipient is resident for tax purposes	✓
	(d) the payment benefits from a preferential regime in jurisdiction where recipient is resident for tax purposes	✓
	2. deductions for the same depreciation on the asset are claimed in more than one jurisdiction
	3. relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction
	4. Asset transfer arrangement where there is material difference on amount treated as payable in consideration between jurisdictions involved.
D. Specific Hallmarks concerning AEOI and beneficial ownership (BO)	1. arrangement which undermines reporting obligation for automatic exchange of Financial Account information. Such arrangements include at least the following:
	(a) use of account/product/investment that does not purport to be a Financial Account but has features substantially similar to those of a Financial Account
	(b) transfer of Financial Accounts or assets to jurisdictions that are not bound by AEOI for Financial Accounts with State of resident of the relevant taxpayer
	(c) reclassification of income and capital into products/payments not subject to AEOI for Financial Accounts
	(d) transfer or conversion of Financial Institution or Financial Account or assets therein into one not subject to reporting under AEOI for Financial Accounts
	(e) use of legal entities/arrangements/structures that eliminate reporting of one or more Account Holders or Controlling Persons under AEOI for Financial Accounts
	(f) arrangements that undermine or exploit weaknesses in due diligence procedures used by Financial Institutions to comply with obligations to report Financial Account information, including use of jurisdictions with inadequate or weak regimes of enforcement of anti-money laundering legislation or with weak transparency requirements or legal persons or legal arrangements
	2. Arrangement involving a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures: (a) that do not carry a substantive economic activity supported by adequate staff, equipment, assets and premises; and (b) that are incorporated, managed, resident, controlled o established in any jurisdiction other that the jurisdiction of residence of one or more of the BOs of the assets held by such persons, legal arrangements or structures; and (c) where the BOs of such persons, legal arrangements or structures as defined in Directive 2015/849, are made unidentifiable.
E. Specific Hallmarks Concerning Transfer Pricing	1. arrangement which involves the use of unilateral safe harbour rules
	2. arrangement involving the transfer of hard-to-value intangibles.
	3. arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected actual earning before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less that 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made.

5. Practical examples

The following are examples of common structures that are potentially reportable:

Example 1: Contribution of an interest-bearing receivable

Example 2: Lending of securities

Example 3: Debt/Equity Swap

Example 4: circular transactions with no commercial function

Examples 5-8: deductible cross border payments between associated persons

Example 9: Double Tax Relief claimed in more than one jurisdiction

Example 10: Deductions for depreciation claimed in more than one jurisdiction.

Example 11: Arrangements involving the use of unilateral transfer pricing safe harbour rules

Example 12: Asset transfer where amount treated as payable materially different between jurisdictions

[1] Directive 2018/822 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.

[2] Directive 2011/16/EU, Article 8ab(1).

[3] Directive 2011/16/EU, Article 3(18).

[4] Directive 2011/16/EU, Article 8ab(4).

[5] Directive 2011/16/EU, Article 8ab(5).

[6] Directive 2011/16/EU, Article 3(22).

[7] Directive 2011/16/EU, Article 8ab(6).

[8] Directive 2011/16/EU, Article 3(19).

[9] Directive 2011/16/EU, Article 3(20).

Costas Savva
T: +357 22 875 720
E: csavva@cy.taxand.com