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The DAC 6 Directive – an obligation to disclose the cross-border arrangements

In this issue:

The EU directive (DAC 6) requiring the disclosure of certain cross-border tax arrangements

The European Union Council adopted Directive 2018/822 (‘DAC 6 Directive’) on the mandatory disclosure and exchange of information in respect of cross-border tax arrangements on 25 May 2018.

Member States are required to transpose the provisions of the   DAC 6 Directive into domestic legislation by 31 December 2019. The disclosure is required to be made to the relevant national tax authority and then will be automatically shared with all other member state tax authorities.

Romanian authorities are working on transposing the provisions of the DAC 6 Directive into domestic law within the deadline set by the Directive, however as at this date, no official draft legislation has been released.

 

What would be reportable under DAC 6?

Under the DAC 6 Directive, an obligation (for intermediaries) to disclose any cross-border arrangement that meets at least one of the hallmarks set by the Directive is introduced. A hallmark is a characteristic or feature of a cross border arrangement or series of arrangements, which – according to the EU – presents an indication of a potential risk of tax avoidance.

The scope of the hallmarks however, is very broad, covering both generic and specific criteria.

A “main benefit test” would apply to the generic hallmarks as well as several of the specific hallmarks. As per the DAC 6 Directive, the main benefit test will be satisfied if it can be established that, having regard to all relevant facts and circumstances, the main benefit or one of the main benefits a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.

It should be noted that, considering the broad scope of the hallmarks set by the DAC 6 Directive, not only complex tax planning or restructuring arrangements could be reportable, but also many cross-border transactions performed in the ordinary course of business, such as:

  • A transfer of functions or an organized part of a business;
  • A payment to a foreign entity with limited business substance;
  • A merger with a company in a tax loss position;
  • Debt to equity swap;
  • Deductible cross-border payments between associated enterprises, etc.
 

The scope of the reporting requirements comprises arrangements within the EU, as well as between Member States and third countries.

Under the Directive, the disclosure regime applies to all taxes except value added tax (VAT), customs duties, excise duties and compulsory social security contributions.

 

Who will have the reporting obligation?

The reporting obligation would fall on intermediaries but also, in some specific cases, on relevant taxpayers.

An intermediary would be defined as any person who designs, markets, organizes, makes available for implementation or manages the implementation of a reportable cross-border arrangement as well as any person that, having regard to the relevant facts and circumstances and based on available information and the relevant expertise and understanding required to provide such services, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to the activities mentioned above.

The DAC 6 Directive gives Member States the option to exempt intermediaries from the obligation to report where the reporting obligation would breach legal professional privilege (n.b. such may be the case of lawyers). If there are no intermediaries which can report, the obligation to report will shift to the taxpayers.

 

Reporting timeframe

Under the Directive, cross-border reportable arrangements, where the first step of implementation is taken during the transitional period between 25 June 2018 and 30 June 2020, are required to be reported by 31 August 2020. As of 1 July 2020, reporting will be required within 30 days of a triggering event, e.g., the cross-border arrangement being ready for implementation.

Prepared by:
Miruna Enache Partner, Direct Tax
 
For additional information, please contact:
Alex Milcev – Partner, Head of Tax&Legal
 

Ernst & Young SRL

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