Transparency and fairness are fundamental concepts in international tax, and global tax authorities are becoming increasingly interested in the cross-border transactions undertaken by their taxpayers. As a result, a new transparency initiative came into effect on 1 July 2020 and imposes mandatory reporting of certain cross-border arrangements. The rules are surprisingly wide in scope and are not just limited to large corporate groups or the obtaining of a tax advantage, and purely commercial transactions may be caught.
Background into cross-border transactions
The DAC6 (Directive on Administrative Cooperation) provisions were introduced on 1 July 2020, but apply from 25 June 2018, and focus on cross-border arrangements concerning more than one EU Member State, or a Member State and a third (non-EU) country. The rules include all taxes other than VAT, customs and excise duties and social security contributions. The provisions concern all taxpayers, individuals and corporates, and although the UK is no longer an EU Member State, the rules continue to apply during the transition period (and potentially beyond should the government so wish). If there are tax consequences in another jurisdiction as a result of the arrangement in question, information will be shared with the relevant tax authorities.
The scope of the arrangements included within these rules is potentially broad, but it is only those schemes and transactions that contain certain ‘hallmarks’ that must be reported to HMRC. The provisions start from the principle that it is appropriate for arrangements to be disclosed, and consequently the hallmarks are very wide and do not have de minimis limits, and have the potential to catch a large number of transactions that would not normally be regarded as involving tax avoidance. It should be appreciated that the presence of any of the hallmarks will not necessarily mean that an arrangement represents unacceptable tax planning. A brief summary of the Hallmarks is as follows:
|Category A||Marketed tax avoidance schemes||The taxpayer is under a confidentiality condition. |
The intermediary is paid by reference to the amount of tax saved.
The scheme uses standardised documentation.
|Category B||Structured arrangements seen in avoidance planning||Tax structured arrangements involving:|
Converting income into capital or
Circular transactions involving the round-tripping of funds with no other commercial purpose.
|Category C||Cross-border transfers and payments, may include many ordinary commercial transactions.||Cross-border payments and transfers including deductible cross-border payments between associated persons where the recipient is subject to minimal tax or a preferential tax regime.|
Deductions for the same depreciation on an asset are claimed in more than one jurisdiction;
Double tax relief for the same item of income or capital is claimed in more than one jurisdiction;
The arrangement includes a transfer of assets and there is a material difference in the amount treated as consideration for the assets in the jurisdictions involved.
|Category D||Undermining of tax reporting and transparency.||An arrangement is reportable if it has the effect of undermining the rules on anti-money laundering, transparency of beneficial ownership or the automatic exchange of financial account information|
|Category E||Non arm’s length transfer pricing and base erosion transfers||Specific hallmarks concerning transfer pricing:|
The use of unilateral safe harbours;
The transfer of hard-to-value intangible assets when no reliable comparables exist
Cross-border transfer of functions, risks, assets causing a more than 50% decrease in earnings before interest and tax during the next three years.
For reporting to be required under hallmarks A and B, and some of the hallmark C subcategories, the arrangements must satisfy a ‘main benefit test’. The main benefit test will be satisfied if it can be established that obtaining a tax advantage is one of the main benefits to be derived from an arrangement, where obtaining this tax advantage is not consistent with the principles and policy objectives of the relevant provisions. The other hallmarks do not have a main benefit test, although it is relevant to note that hallmark E does not apply where small and medium enterprises are covered by the UK transfer pricing exemption.
A cross-border arrangement which meets one or more of the hallmarks must be reported within thirty days of an earliest date of implementation. The primary reporting obligation is on anyone who is an intermediary, and this includes service providers that provide assistance or advice in respect of the arrangement. However, in certain circumstances, the relevant taxpayer will need to report, such as if there is no intermediary, or if the intermediary does not have an EU nexus. The report to the tax authority is required to include information such as details of the transaction (including values), identification of the parties and the Member States that are likely to be concerned by the arrangement.
The reporting tracks back to 25 June 2018, and any reportable arrangements between that date and 30 June 2020 require reporting by 28 February 2021. For transactions that take place between 1 July 2020 and 31 December 2020, reports must be made by 31 January 2021. Thereafter all arrangements must be reported within 30 days. A fixed penalty of up to £5,000 may be levied for failure to comply. In exceptional circumstances, where there is a failure which is deliberate and which has serious consequences, or there is repeated failure to comply, the tribunal may increase the penalty up to £600 per day or if more appropriate up to an amount not exceeding £1 million.
It is important to appreciate that international transactions may now need to be reported to the tax authorities, and these strict disclosure requirements represent a significant change for taxpayers and their advisers. From now on, conversations around DAC6 and the reporting requirements will come up frequently on cross-border arrangements, and all parties are going to need to familiarise themselves with the rules.