BlueBridge’s DAC6 State of Play (Issue no. 2)

• The advances of DAC6 legislation and accompanying regulatory guidance in various EU Members States;

• Updates on reporting portals, XML schema and other IT infrastructure;

• The progress surrounding evolving topics, such as the treatment of EU-approved, special regimes, exemptions for legal professional privilege (LPP), mechanisms of local enforcement and other topics that may vary across EU jurisdictions;

• The evolving interpretations of the hallmarks that determine the reportability of cross-border arrangements;

• The compliance techniques adopted by assorted industries; and

• The news from the non-EU states that are implementing the OECD Mandatory Disclosure Rules (MDRs).

Most of the above topics remain suspended for the time being as few tax authorities had the wherewithal to produce the necessary guidance or other materials. Consequently, the parties affected by DAC6 continue to operate under uncertainties and on assumptions. There were, however, some significant EU-wide and UK-specific developments over the past few weeks and this issue of BlueBridge’s DAC6 State of Play will concentrate on those.

Regulatory and IT Update

The seismic development of the past weeks from a DAC6 perspective was the proposal from the European Commission to delay the start of reporting for DAC6 and the responses of certain EU Member States. Please refer to our blogs on the topics for detailed descriptions of the proposal and the subsequent reactions (available: here and here, respectively). The end result has been a patchwork of deadlines, but most EU Member States have adopted the full 6-month delay in full, with Germany as the significant exception thus far.

As noted in BlueBridge’s DAC6 Overview State of Play (Issue no. 1), only a few EU tax authorities–e.g. France, Holland, Luxembourg–have issued the guidance notes needed to implement the new regime. In early May, the UK’s HMRC released a set of preliminary draft guidance, which has been subsequently revised through assorted updates in June and early July. The UK guidance is likely to have an outsized influence because many EU countries–notably those with common law legal systems–tend to follow HMRC’s lead on international tax matters. Moreover, the experience implementing the UK’s DOTAS regime, a quasi-precursor to DAC6, endowed HMRC with valuable and recognized expertise. As such, we perused the UK guidance for insights into key topics of EU-wide significance and the following items of interest emerged:

• Meaning of “Concerning” in respect of a Cross-Border Arrangement: As a threshold matter, an arrangement can be reportable only if it is cross-border, meaning that it “concerns” more than one jurisdiction. In the absence of further elaboration, the term “concerns” in this context is ambiguous. As such, the UK guidance seeks to develop and set limits on the scope of the term within the DAC6 context by requiring that a jurisdiction have “material relevance” to an arrangement in order to be “concerned” by it. Each jurisdiction’s material relevance to any specific arrangement must be assessed on a facts and circumstances basis, but–at a minimum–any jurisdiction that incurs a tax impact due to its role in the arrangement has “material relevance” to that arrangement. Critically however, the mere involvement in an arrangement of intermediaries operating in multiple jurisdictions does not automatically make it a Cross-Border Arrangement (CBA) for DAC6 purposes.

• Tax advantage under the Main Benefit Test: Certain DAC6 Hallmarks must also satisfy the Main Benefit Test (MBT) before a CBA becomes reportable. “Obtaining of a tax advantage” is an integral element of the MBT. In addition to listing the various types of tax relief, reduction and deferral that could qualify as tax benefit, the UK guidance limits the application of the test. To wit, so long as the tax benefit is consistent with the principles and policy objectives of the local tax legislation, the MBT is not met. This narrowed construction of the test will help eliminate DAC6 reporting on commonplace and customary arrangements.

• Reporting by multiple Intermediaries: Upon submission of a DAC6 report, Intermediaries will receive a unique report confirmation number for each submitted DAC6 report (referred to as the Arrangement Reference Number (ARN) in the UK) . Under the UK guidance, the reporting Intermediary must share the ARN with any other parties to the Reportable Cross-Border Arrangement (RCBA) that qualify as Intermediaries. These other Intermediaries are, thereby, relieved of their own reporting duties unless they have any reason to suspect that the report was not in fact submitted.

• Jurisdiction through Membership in a Professional Association: In order to determine whether an Intermediary is directly affected by DAC6 (i.e. regulated as an EU Intermediary), a four-part test is set forth in the DAC6 protocol. The final criterion cites membership in a professional association located in an EU Member State. The UK guidance narrows this qualification strictly to membership in associations that exercise a supervisor or governance authority over their members. For example, the association must have the power to restrict a member from conducting his/her professional duties or impose fines and other disciplinary actions, if any such member is found in breach of his/her professional duties.

• Limit on CRS Avoidance Arrangements: DAC6 Hallmark D applies if a transaction has the effect of undermining or circumventing CRS reporting. At its most basic, where the result of a transaction is that the Account Holder, the account or some material portion of the assets in the account is no longer reportable under CRS, the Hallmark is met. However, the UK guidance clearly states that the defective reporting is not alone sufficient so long as the non- or partial reporting does “not undermine the policy intent of [the local] CRS Legislation.” The UK guidance cites to the example from the OECD MDR Commentary, which contends that the purchase of real estate using assets in an reportable account is not a CRS Avoidance Arrangement because non-reporting on real estate holdings is plainly contemplated in the CRS standard.

• Local tax code provisions: The item of reportable information prone to become the most demanding, or the most neglected, or both, concerns the requirement to include the provisions in the local tax code that the RCBA exploits. The UK guidance takes steps in both directions. It concedes that for certain Hallmarks, namely CRS Avoidance Arrangements, no provision of the tax code is relevant and, therefore, the reporting requirement for this specific item may be disregarded. However, the UK regulations also oblige reporting parties to include provisions from the tax codes of other jurisdictions to the extent those provisions are relevant to the particular RCBA. Such expertise in multi-jurisdictional tax regulations is uncommon amongst tax practitioners and virtually unimaginable for any Relevant Taxpayer obliged to report.

The UK guidance sheds light on many parts of the law which are needlessly strict and/or open to varying interpretation. It is, nonetheless, mere guidance. Therefore, it will be interesting to see whether other EU member states will follow the UK’s guidance and interpretations of DAC6 or develop their own and how all these competing interpretations will co-exist.

Updates on reporting portals, XML schema and other IT infrastructure

In addition to the guidance dissected above, the UK released its DAC6 reporting schema on 29 May. HMRC provides for both XML file upload and manual input submissions of DAC6 submission. Hopefully, the other EU Member States will follow the UK lead and hew closely to the schema model adopted thus far across the EU.

News from the states implementing the OECD Mandatory Disclosure Rules (MDRs)

As part of its 2020 tax reform package, Mexico enacted a version of the MDRs into the domestic tax code. It’s a doozy. Unlike other jurisdictions implementing the scaled-down version of the MDRs, CRS Avoidance Arrangements and Opaque Offshore Structures, Mexico included all the Hallmarks from DAC6 as well. Furthermore, several unique provisions will make compliance in Mexico more challenging than elsewhere:

• Any arrangements resulting in a Mexican tax benefit–even if the taxpayer and the advisor are not resident in Mexico–are in-scope

• All RCBAs initiated in 2020 must be reported in bulk in 2021

• Pre-2020 RCBAs must be reported for any subsequent year in which there are tax effects attributable to the RCBA

• Each February, qualifying intermediaries must file an annual summary of all the RCBAs to which they were party and the identities of the clients benefitting therefrom, even if not resident in Mexico

• In addition to the standard MDR reporting items, the identities of the intermediaries’ and clients’ legal representatives must be disclosed as well

Based on the above and other stand-out items from the Mexican MDR regimes, it is clear that Mexico determined to enhance the disclosure requirements beyond the OECD’s suggestions.