The EU Mandatory Disclosure Regime of DAC6 in a nutshell

What is DAC6/MDR?

The European Union (hereinafter the ‘EU‘) has expanded the scope of its Directive 2011/16/EU on Administrative Cooperation in the field of taxation. With the aim of strengthening tax transparency, Directive (EU) 2018/822 is the sixth amendment of the EU Directive on Administrative Cooperation and is therefore referred to as ‘DAC6‘. DAC6 responds to the recommendations of Action 12 of the OECD/G20 Base Erosion and Profit Shifting (‘BEPS‘) project regarding the Mandatory Disclosure Rules (‘MDR‘).

In short, DAC6 directs the EU Member States to transpose a mandatory disclosure regime into their domestic law. This includes a reporting obligation for intermediaries and taxpayers in relation to their reportable cross-border arrangements and mandatory automatic exchanges of information between the EU Member States.

Why is it important?

The DAC6 disclosure regime has an extremely broad scope, not only with respect to the scope of the parties that are involved but also with respect to the extensive information that must be disclosed to the competent authorities. A failure to correctly (and timely) file a report or another act of non-compliance may result in extremely high penalties (up to EUR 870,000 in the Netherlands).

Who has to report?

The reporting obligation lies primarily with the EU-based intermediaries, unless a right of legal professional privilege applies. However, if no intermediaries are involved in making a cross-border arrangement available or in implementing the process, the relevant taxpayer becomes responsible for filing a report with the competent authorities (usually the local Tax Administration).

When to file the reports?

The DAC6 directive requires a mandatory disclosure within 30 days after a reportable cross-border arrangement has been readied or made available for implementation, or when a first step in the implementation of such an arrangement has been completed. In most cases, the MDR reporting obligations are effective from January 1, 2021.

What is the scope?

DAC6 applies to all the taxes imposed by EU Member States, excluding customs duties, excise tax, VAT, and social security tax. In principle, the reporting obligations apply to (a series of) reportable cross-border arrangements within an MNE or its group, which means an arrangement between two or more EU Member States, or between at least one EU Member State and a non-EU tax jurisdiction. In addition, please note that some EU Member States, such as Poland and Portugal, have decided to implement further mandatory reporting obligations regarding certain domestic arrangements.

Who qualifies as an intermediary?

In short, an intermediary is any person that is actively involved in making available, or in implementing (a step in) the process, or who has either directly or through another person provided aid with respect to a reportable cross-border arrangement (i.e., an accountant, tax advisor, trust officer, or lawyer).

What is a reportable cross-border arrangement?

Under DAC6, cross-border arrangements are reportable only if they have certain characteristics or features that indicate a potential risk of tax avoidance, referred to as ‘hallmarks.‘ Arrangements involving at least two EU Member States, or involving one EU Member State and one or more third-country (non-EU) jurisdictions, are considered as cross-border arrangements within the meaning of DAC6. An arrangement is defined (amongst other definitions) as a transaction, action, or agreement, which may include a combination or series of arrangements.

Furthermore, certain hallmarks must also fulfill a ‘main benefit test‘ before a cross-border arrangement must be reported. In short, this main benefit test is met if it can be reasonably concluded that the main benefit (or one of the main benefits) of an arrangement is to obtain a tax advantage.

What are the DAC6 compliance challenges?

Under DAC6, the intermediaries have the primary disclosure obligation, but the local implementation of DAC6 is different in each EU Member State. Furthermore, the reportable data is not automatically available in all systems, and the location of the responsibility can be uncertain. Regardless of whether an intermediary is involved, the taxpayer should make sure that the appropriate analysis and filing has been performed, all of which requires good governance. Clear responsibilities must be established, which should ideally be integrated into a tax control framework with effective controls and instructions that are readily available.

DAC6 hallmarks:

A cross-border arrangement becomes reportable only if certain characteristics or features are present, which are referred to as ‘hallmarks.‘ Since most EU Member States have transposed the definitions of hallmarks into their domestic mandatory disclosure regimes in line with DAC6, we will provide an overview that outlines the different hallmarks as defined in the DAC6 regulations.

Main Benefit test:

Please note that some hallmarks are linked to the main benefit test. This means that certain hallmarks make an arrangement reportable only if it passes that main benefit test, which is fulfilled if it can be reasonably concluded that the main benefit, or one of the main benefits of an arrangement, is to obtain a tax advantage. This will be the case if such a tax advantage is more than merely incidental.

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