BlueBridge’s DAC6 State of Play (Issue no. 1)

In these monthly blogs, we will provide reports on:

● 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 DAC6 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).

Regulatory and IT Update

At the time of BlueBridge’s DAC6 State of Play (Issue no. 1), we stand a little over 8 weeks away from the official kick-off date for DAC6 in all EU countries. Thus far, virtually every country has published some form of draft and, in many cases, final DAC6 legislation. Few EU tax authorities, however, have issued guidance notes to elaborate the devilish details needed to implement the new regime. This absence of direction is not looking short-lived: The UK HMRC aims to publish its official guidance notes in June, which leaves little time for adjustments to compliance programs before the onset of DAC6. Moreover, HMRC’s delay will have a ripple effect because many EU countries–notably those with common law legal systems inherited from British colonial times–tend to follow HMRC’s lead on international tax matters. Additionally, many reporting portals remain under-developed with some tax authorities already conceding that their portals will not be operational on day one. Finally, the above analysis does not contemplate the harm wreaked by the covid-19 virus and the safeguards imposed during the current Europe-wide crisis, which will divert attentions, personnel and resources from the DAC6 preparations of all involved parties. Recent public calls for a postponement to DAC6 cite the same reason: Key project milestones are slipping by as we all concentrate on other, more pressing concerns. In the absence of a delay, therefore, we may expect some disorder to infect the opening days of DAC6. Whether these concerns lead to a formal delay or a soft enforcement phase (as we saw with FATCA) is not yet possible to predict. However, in light of the traumas in many EU Member States due to the Covid-19 outbreak, some degree of relief will be appropriate.

Interpretation Update

While the tax authorities compile the guidance notes and set up the reporting infrastructure, the legislatures continue to tinker with the underlying laws in order to better align certain provisions with evolving norms. In mid-January, for example, the State Council in Luxembourg expanded the grant of LPP to cover accountants and auditors involved in tax litigation as well as lawyers. This expansion is rooted in local conventions, but nonetheless highlights a DAC6 topic currently receiving scrutiny across the EU as more law firms awaken to their new compliance duties. Curiously, however, there is dissonance within the industry because–in certain circumstances–lawyers would rather waive the LPP exemption than shift the DAC6 reporting duties onto their clients. As such, many law firms now seek a flexibility in the LPP standard that would allow them to arrange their activities in a way that generally exempts them from DAC6 reporting, but allows them to embrace it when desirable. We at BlueBridge are in the process of collecting various LPP standards for a multi-jurisdiction comparative analysis in one of our forthcoming blogs dedicated to interpretations of specific DAC6 topics.

Market Update

The law firms mentioned above, along with the banks and other financial institutions fretting over DAC6 since many months ago, are at an inflection point concerning their engagement of third-party service providers for DAC6 implementation support. The pivotal decision for those parties, which are squarely affected by DAC6 and anticipating many dozens of reports per year, concerns the licensing of DAC6 software. While most of the software beta versions look sophisticated, two major hang-ups trouble the prospective buyers:

● One, the need for significant internal training so that their own personnel are sufficiently fluent in DAC6 to use the software tools effectively; and

● Two, the upfront cost and commitment, while many remain uncertain as to the fullness of DAC6’S impact.

Accordingly, many will defer the decision on whether or not to embed software into their existing customer relationship management systems for so long as they reasonably can. For affected intermediaries in need of some support–but uncertain as to its breadth–BlueBridge offers DAC6 reporting services on an a pay-as-you-go basis and, further, can limit your role to the collection of data, while we conduct the tax technical analyses and operational labors on your behalf.

MDRs Update

Although the conversation currently revolves around the EU’s DAC6, intermediaries in the EU Member States are not entirely alone in this reporting whirlwind. Several jurisdictions–including EU neighbors like Gibraltar and the Channel Islands, but also South Africa–have committed to implement the OECD MDRs this year. While the MDRs consist of only two of the DAC6 Hallmarks–CRS Avoidance Arrangements and Opaque Off-shore Structures–the other features of DAC6, including the capacious definition of a Reporting Intermediary, the objective standards and the tight deadlines, all remain intact. Despite the more limited set of Hallmarks, those two Hallmarks alone necessitate prompt and focused attention for many involved parties, notably trustees, asset managers and tax advisors.