AGN EMEA Tax Committee News.
EU Directive 2018/822 (known as ‘DAC 6’) amended and significantly expanded the existing Directive on administrative cooperation in the field of taxation (2011/16) by introducing a reporting regime for professional advisers where they are involved in tax planning which meets certain hallmarks.
The reporting obligations can default to the taxpayer in certain situations. The Directive came into force on 25 June 2018, and the associated reporting regime was originally intended to take effect from 1 July 2020 (with retrospective effect), although this was delayed into 2021 in many jurisdictions due to the pandemic.
1. The EU Hallmarks
As a reminder, the five hallmarks can be divided between those qualified by a main benefit test and those who do not. A and B fall into the former, while D and E are in the latter. C straddles the divide.
Hallmark A captures planning containing certain generic features (confidentiality, fees based on the tax saving, standardised documentation); B captures circular transactions, loss buying and/or schemes which re-characterise income receipts.
Hallmark C deals with deductible cross-border payments between associated enterprises where the recipient is in a tax-advantaged position. Payments where the recipient is based in a zero (or almost zero) regime, benefits from a full exemption or preferential regime are reportable subject to the main benefit qualification. Situations where the recipient does not have a tax residence or is based in a regime black-listed by either the EU or OECD are always reportable.
Hallmark D, which is based on the work of the OECD, deals with attempts to frustrate reporting under the common reporting standard (‘CRS’) regime or which involves opaque offshore structures, while Hallmark E deals with transfer pricing.
None of the Hallmarks contain any financial de minimis threshold, although they do require a cross-border element.
2. The UK approach
DAC 6 was fully implemented into UK legislation during the Brexit transition period. However, as the six-month pandemic-related delay to actual reporting under the regime pushed the start date beyond the transition period, the UK significantly watered down implementation to the minimum level required to comply with the final Trade and Cooperation Agreement between the UK and the EU. As a result, Hallmarks A, B, C and E were removed such that only Hallmark D came into force with practical effect.
As permitted by recital 13 of the Directive, Hallmark D was introduced in the UK with an explicit statement that it was to be interpreted based on the Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures approved by the OECD together with the associated Commentary.
It was perhaps no great surprise when the residual DAC 6 provisions were repealed in the UK and replaced in March 2023 by a Disclosure regime based wholly on the OECD Model. Given that the EU Directive on Hallmark D was based on the OECD Model anyway, this does not appear to involve any great change in substance, although some additional points were introduced, including (i) for CRS avoidance in the look-back period between the June 2018 and March 2023, accounts containing less than US$1m are excluded and (ii) the maximum potential penalty under the new regime has been increased to £1m.
3. CRS avoidance/Opaque offshore structures (Hallmark D)
Given its importance in UK and international tax as well as in the EU Directive, it is worth looking at these provisions in more detail.
Both elements have an over-arching generic summary of what is intended, which is then supplemented by specific examples based on known examples.
A ‘CRS Avoidance Arrangement’ is any Arrangement for which it is reasonable to conclude that it is designed to circumvent or is marketed as, or has the effect of, circumventing CRS Legislation or exploiting an absence thereof.
While the summary is largely self-explanatory, two points are worth noting. Firstly, it is limited by the underlying CRS legislation in that it is only concerned with financial accounts. Matters outside the scope of that legislation, such as real property, are by definition outside the scope of these provisions. Secondly, the Commentary helpfully clarifies that providing an Opinion on whether an existing or proposed arrangement is subject to CRS reporting does not fall within the scope of the provisions, although using that Opinion to sell an investment or investment structure based on its CRS treatment would be caught.
An Opaque Offshore Structure means a Passive Offshore Vehicle that is held through an Opaque Structure. This is slightly less self-explanatory, and each of the two limbs needs to be considered.
A passive offshore vehicle means a legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in its jurisdiction where it is established or tax resident. Note that the definition here relates to the nature of the activities carried out by the entity/arrangement and not the tax characterisation of its income. Activity contracted out to a provider does not count as activity of the entity in question. There is a carve-out for entities wholly owned by institutional investors or entities wholly owned by beneficial owners in the same tax jurisdiction as the entity, although the Commentary highlights that the latter exclusion will not apply if a single beneficial owner resides elsewhere.
An opaque structure is one which is reasonable to conclude is designed to have, marketed as having, or has the effect of allowing, a natural person to be a Beneficial Owner of a Passive Offshore Vehicle while not allowing the accurate determination of such person’s Beneficial Ownership or creating the appearance that such person is not a Beneficial Owner.
This is something of a hybrid definition. It is subjective in part but also objective in part. If the passive offshore vehicle is set up in a non-cooperative jurisdiction, it will, as a matter of fact, allow the beneficial owner to be concealed, whether or not that was the intention. The rules also highlight the use of nominee arrangements.
It should also be noted that the opaque offshore structure rule is independent of the CRS avoidance rules. As such, they are not limited to concealment of financial accounts but apply whenever the definition is met.
4. Final remarks
In our experience, these disclosure requirements have not been given the attention they require within the accounting profession. They now need to be considered as a matter of course when dealing with cross-border issues and even more so when it involves an EU Member State when the additional Hallmarks of the EU Directive will also need to be considered.
Brought to you by the AGN EMEA Tax Committee
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