How to choose a DAC6 reporting tool

What is DAC6  

The 6th Directive of Administrative Cooperation (“DAC6”) is a new European Union (EU) mandatory disclosure regime that imposes extensive reporting of cross-border arrangements and transactions by intermediaries and in some cases taxpayers to the tax authorities. Such arrangements must involve at least one EU Member State and satisfy one of the specific DAC6 characteristics, referred to as hallmarks. Subsequently, the information reported will be uploaded to a central depository to be shared among the EU Member States. The objective of DAC6 is to improve transparency and discourage aggressive tax planning. 

Who is affected by DAC6

The first step is to understand the regulations’ key terms in order to establish whether you are in scope of DAC6. For instance, you could be in scope because you engage in cross-border arrangements or activities as defined in the regulations, and you or one of your group companies is incorporated in one of the EU Member States. You can also be indirectly impacted by DAC6 if your client is an EU resident. 

For that reason it is possible that you might be subject to reporting under DAC6 and, as such, should consider the advantages of using a good reporting tool to comply. 

DAC6 is complex 

The extensive scope of reporting obligations under DAC6 could cause a real headache. Not only is the technical analysis challenging due to a lack of clear guidance, but also the scope of reportable transactions is wide, and the definition of intermediary catches any intermediary from the fiduciary, private banker, accountant to the tax advisor involved in the cross-border arrangement. Add a 30 day rolling reporting deadline and the retrospective bulk reporting for the period from 25 June 2018 to 30 June 2020 and you might be in trouble. The fact that most EU jurisdictions delayed the reporting deadline by six months with the first reporting deadline being 31 January 2021 buys some time but does not solve the problem of DAC6 compliance in the long term. 

Penalties for non-compliance

The EU envisaged effective penalties for non-compliance with DAC6 and the Member States are keen to catch those who do not comply with the regime. Intermediaries or taxpayers who file late, incomplete or false reports or do not file at all will be charged with an average fine of EUR 20,000 or in some jurisdictions like Poland, up to EUR 5.5 million in extreme cases. 

It is therefore time to assess your obligations under DAC6 and the ways to comply with the regime that aims to minimize impact on your daily operations. 

How and what to report 

Having determined that you might be in scope of DAC6, the next step is to think through how you will identify and gather the reportable data, where will you find the specific XML schema in your jurisdiction, how you will convert the data into the right DAC6 reporting format and, finally, how you will file it online, passing all the validation checks in order to have the report accepted by the local tax authorities. 

The report submitted must contain the following items of information:

• the identification information of intermediaries and relevant taxpayers, including their name, date and place of birth, address, tax residency and tax identification number

• the details of the hallmarks relevant to the reportable cross-border arrangement

• the summary of the content and value of the reportable cross-border arrangement

• the date on which the first step triggering the reporting has been made or will be made

• the details of the national provisions that form the basis of the reportable cross-border arrangement

• the identification of the Member State of the relevant taxpayer(s) and any other Member States which are likely to be concerned by the reportable cross-border arrangement

• the identification of any other person in a Member State likely to be affected by the reportable cross-border arrangement, indicating to which Member States such person is linked.

It is not an easy task given the complexity of the DAC6 specific hallmarks and country specific schemas and possible requirements to file in multiple jurisdictions and that you must file within 30 days from the event triggering the reporting. 

DIY or outsource dilemma 

There is a wide spectrum of possibilities on how to organise yourself in time for reporting. I have discussed them below:

• dealing with DAC6 reporting by using solely in-house resources, 

• by working with a DAC6 expert advisor, 

• by applying a pay as you go model for reporting, 

• buying an actual reporting tool and 

• by fully outsourcing DAC6 compliance.

Although there are quite a few reporting tools available on the market already, it is worth investing time to review your own requirements before starting to browse tool offering. 

Do you actually need to own or licence a reporting tool at all? Are you able to do it in-house with the already available resources? The decision will depend on a number of factors such as: 

• the type of the organisation (intermediary) you are representing: a small local service provider or an international group

• the number of jurisdictions you will be reporting to

• the complexity of cross-border arrangements and transactions you are involved in 

• the volume of cross-border transactions 

• the resources available to you: technical and IT expertise

• the desired level of involvement in DAC6 reporting operations 

• the cost and time considerations 

• the risk appetite. 

How does DAC6 fit with your overall corporate strategy and objectives is also a crucial consideration. If regulatory compliance such as DAC6 is an inherent part of the client experience you are delivering, you should start thinking about how you will organise the reporting. 

Do DAC6 reporting yourself 

If you have the resources, expertise and technology to deal with similar disclosure regimes and are anticipating to be impacted by the DAC6 regulation, you might want to consider taking control of your organization’s entire DAC6 workflow and process. In other words, hands-on regulatory compliance is one of your organization’s strategic choices, and with incremental investment in tweaking the technology and training staff you are convinced you will be able to file DAC6 returns in an effective and efficient manner. All that combined with low volume, repetitive cross-border arrangements could mean that doing the DAC6 reporting yourself may prove inexpensive and engaging a DAC6 expert may not be necessary. 

On the other hand, dealing with DAC6 yourself could also be tricky, especially for smaller service providers or those where regulatory compliance is a peripheral ad-hoc activity, performed when required. Also, those organisations that are already struggling to fulfill their current regulatory obligations under FATCA and/or the Common Reporting Standard (CRS) might find DAC6 a real challenge. Instead of saving money by doing it yourself, you might find it time-consuming and difficult to comply with the complex demands of DAC6 and thus the cost of compliance will increase as a result. It may be tempting to use current office resources, but you might mandate already overloaded compliance officers with DAC6 only to find that you have no means to neither properly assess the cross-border arrangements and identify the relevant hallmarks, nor collate data and prepare a valid report using the correct schema and converting the data into the right XML reporting format. If you do not have enough technical or IT expertise, you risk failing to fulfill your reporting obligations as an intermediary or filing an incorrect report or reporting an arrangement or transaction outside the scope of DAC6. 

Obtain DAC6 advisory services 

For those organisations that are technology savvy, know how to prepare the information and can convert it into the right reporting format, but are missing the technical regulatory expertise, especially the reportabity analysis of complex arrangements, it could be a good idea to invest in engaging a DAC6 expert. Such an advisor will perform client and transaction assessments to establish a scope of your organization’s DAC6 reporting. Another advantage of hiring an expert is to secure a correct evaluation of data and verify your own analysis. 

Should it turn out that your organisation is obliged to file a few reports to a few jurisdictions a month and the arrangements and transactions are well defined, straightforward and repetitive, then provided that you have enough resources to meet the 30 days rolling deadline and can prepare reports that will be validated on the reporting portal, you may want to give the reporting a try. 

Use a pay as you go model for DAC6 reporting 

You might however find yourself on the opposite spectrum of DAC6 expertise to that detailed in the above paragraph. You are flawless in navigating the international regulatory landscape and can deal with the technical analysis and assessment of your cross-border arrangements, including the interpretation of DAC6 hallmarks, but lack a sound in-house IT solution to perform the reporting. 

If you come to the conclusion, following the review of your cross-border arrangements, that you have a relatively low volume of reportable cases and so need to file reports on an ad-hoc basis, instead of making a commitment to licence or buy a DAC6 reporting software, it might make sense to work with an DAC6 expert that will allow you to use a tool as and when you have something to report. 

Such a reporting model provides much needed flexibility in the current uncertain economic reality and it is cost efficient as there are no upfront costs because you only pay when you have something to report. This way you can allocate resources to your core business projects and maintain strong cost control, while at the same time fulfilling your obligations under DAC6. 

When the preparation of the reporting is done by a third party, it is crucial that you engage a reliable partner that can ensure the reporting tool’s performance and timely DAC6 reporting to the tax authorities. 

Buy DAC6 reporting software 

Whilst having a small volume of reportable cases gives you flexibility to use a pay as you go like reporting model, things get complicated if the DAC6 analysts in your organization anticipate that many cross-border arrangements and transactions will be in scope of DAC6 reporting.

Facing possibly a high volume of reportable transactions, combined with the need to report to more than a couple of jurisdictions, should prompt you to at least consider investing in DAC6 reporting software. It might be a good idea especially if you already have some IT resources that could assist you with the implementation and ongoing maintenance of the software. They do not need to be experts in filing reports under DAC6 but merely help you to co-ordinate system updates and bug fixing. However you will need to train your DAC6 team to properly use the reporting software so that the reportable data in the valid XML format is ready to submit on the online tax portal.

Acquisition of a DAC6 software is a long-term financial commitment. It entails a large outflow of funds during the setup phase and an ongoing annual licence and maintenance fee. In addition, if the collaboration with the DAC6 reporting partner proves unsatisfactory to your organisation, the exit or switching cost could be high. 

 Having an excellent DAC6 reporting tool is however only half of the job done. You need to be able to rely on your internal team’s ability to perform a sound assessment of cross-border arrangements, identify the reportable ones and prepare complete and correct information necessary for reporting. There is an inherent risk that some reporting cases may be misinterpreted as non-reporting or some reportable transactions will be missing or forgotten due to human error. 

Finding a reliable DAC6 partner is even more important when you are looking to purchase a DAC6 reporting software. Although you will still control the data and perform reportabilty analysis yourself thus controlling the information to be submitted online, you will have to trust that the tool is enabling you to file correctly. 

The human error cannot be entirely eliminated from such operations but having some additional system checks and quality controls, perhaps even a second pair of eyes to perform a review of the reportable information, will reduce your risk of failing to fulfil your DAC6 obligations. Having a fully fledged DAC6 solution solves such a problem and is discussed in the next section of this article. 

Fully outsource to a DAC6 expert 

A decision to fully outsource the analysis and reporting to a DAC6 expert should be well thought through. If you anticipate a high volume of cross-border arrangements and transactions that could be in scope, and you find them rather complex to analyze and identify their hallmarks as required by the regulations, then it is likely that you may need assistance performing a review of the entire client base. 

A respected service provider or international financial organization would certainly not risk its reputation by failing to comply with DAC6. Therefore, outsourcing DAC6 in its entirety to an external DAC6 expert, could prove a good solution. While it might be tempting to save funds, this dilemma is that of an opportunity cost. How much would it cost to set up and train a team of DAC6 technical experts and develop the necessary technology to conduct the DAC6 reporting, in an effective and efficient manner on a continuous basis, given the complex requirements of the regime, versus buying this as an all in one service and having a complete peace of mind. 

Such a solution will ensure the correct assessment of cross-border arrangements and transactions and the reportable cases will be identified and reported to the relevant tax authorities.

As an outsourcing party of the agreement, you will still be accountable for the submitted information and ultimately liable for its correctness despite fully relying on the DAC6 expertise of others. However, a more sophisticated DAC6 reporting service provider may offer to submit reports under their own name and relieve you of your DAC6 liability. 

Summary 

However complicated the DAC6 regime might be, there are certainly ways to break down its requirements into smaller, more manageable parts, starting from reviewing your organization’s priorities and capabilities, through to a first attempt to assess its arrangements and transactions in order to decide on the best way forward to compliance. 

It is time for intermediaries to decide how they will approach DAC6, whether by utilizing an in-house team, outsourcing it to a DAC6 expert or using a solution that is a combination of both. 

The clock is ticking and despite deadline extensions in most of the EU jurisdictions, those organizations affected by DAC6 should look into having a good solution to cope with the 30 day rolling deadline, and to cover the entire retrospective period from 25 June 2018 to 30 June 2020, reportable in early 2021.