Strategizing International Tax Best Practices – by Keith Brockman

DAC6: Best Practices (updated 7/13/2020)

DAC6 (Directive 2018/822/EU) represents the sixth revision of the EU Directive on Administrative Cooperation (Directive 2011/16/EU).  It is broad in scope, subjective and imposes significant penalties for non-disclosure.  A cross-border arrangement that meets one of the listed hallmarks is subject to timely reporting, for which the first (retroactive) report is due for transactions on or after June 25, 2018 to July 2020.

Member States were to have DAC6 legislation for direct taxes enacted by December 31, 2019 although some are still in process.  Most importantly, a Member State may include additional reporting requirements in addition to the enumerated DAC6 items, thereby posing a separate reporting (and language) requirement to the relevant Member State in addition to the EU central reporting framework.  Due to this dynamic legislation among the Member States and differing interpretations, many taxpayers are analyzing implementation/reporting tools, in addition to a cross-functional governance process.

This page will provide reference to the Directives, OECD BEPS Action 12 Mandatory Disclosures, EU list of non-cooperative jurisdictions, insights, and suggested transactions that may be subject to reporting.  Your comments and insights are welcome, following up global interest in this subject.

EU Directive 2011 16.   EU Directive 2018 822

EU Directive 2020/0081 has been proposed to defer the reporting deadlines by 3-months.  The initial report would be due November 30, 2020 and the 30-day reporting effective from July 1st would be delayed to October 1st. This deferral was not adopted, although a 6-month optional deferral was recommended.  Finland and Germany have not adopted this 6- month deferral, thus their reporting dates revert to the end of July 2020 for 30-day reporting, and 31 August 2020 for historical arrangements.  Austria will not apply penalties for historical arrangements that are reported by October 31, 2020 (2-month extension), with the 30-day reporting due one month later.  

EU Member States: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Ireland, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Spain, Slovakia, Slovenia and Sweden.  (Note, UK legislation has adopted DAC6)

EU list of non-cooperative jurisdictions (EU black list): As of 27 February 2020 (date of publication in the Official Journal), the EU list is composed of:  American Samoa, Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu, and Seychelles.  For purposes of hallmark C1, Spain legislation currently provides that the EU list should not be followed, substituting “non-cooperative jurisdictions” of Spanish law as the relevant source. 

OECD black list: no jurisdiction is currently listed as an unco-operative tax haven by the Committee on Fiscal Affairs

DAC6 applies when there is a cross-border arrangement to/from a Member State and one hallmark is met.  (No de minimis / immaterial safe-harbor provisions)

TPA Global DAC6 17062020

Principles / Hallmarks potential transactions

Main Benefit Test  

Principles

  1. Consider current and deferred taxation (e.g. Sweden), unless explicitly stated
  2. Analyze in a global manner, considering tax effects in both EU and non-EU States
  3. Objective assessment (refer to OECD Action 12) unless explicitly stated (e.g. Ireland)
  4. Domestic tax advantage s/not be reportable via policy incentive (Member State is aware)

Main Benefit Test (MBT)

The main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage. (Applies for hallmarks A, B and certain items of C)

OECD Action 12, Mandatory Disclosure Rules

  1. Threshold test: requires an objective assessment of the tax benefits by comparing the value of the expected tax advantage with any other benefits likely to be obtained
  2. De minimis test would not align with threshold test
  • France
    • Analyzed in a global manner; deferred taxation is considered as a tax advantage
    • The main determining factor is whether the cross-border arrangement would have been carried out in the same way if the tax advantage did not exist
    • French tax incentive scheme is n/a
    • The benefit is understood as a tax benefit,.  A tax benefit is deemed to exist when the cross-border arrangement allows for, among other things, a tax refund, tax relief or reduction, a reduction in tax debt, a tax deferral or no taxation
  • Germany
    • A German tax advantage, intended by law, is n/a
    • It must be demonstrated that a “tax advantage” is not a major advantage of the arrangement
    • Mandatory disclosure regime for domestic tax arrangements; all domestic hallmarks are linked to the MBT
  • Ireland
    • “Main purpose test” references sections of domestic law
    • Simple test for MBT: A number of reasons for the transaction, and one reason is to gain a tax advantage, and the transaction would not been entered into had the possibility of the tax advantage not been there
    • Objective and subjective test considered
    • “Tax advantage” means (a) relief or increased relief from, or a reduction, avoidance or deferral of, any assessment, charge or liability to tax, including any potential or prospective assessment, charge, or liability, (b) a refund or repayment of, or a payment of, an amount of tax, or an increase in an amount tax refundable, repayable or otherwise payable to a person, including any potential or prospective amount so refundable, repayable or payable, or an advancement of any refund or repayment off, or payment of, an amount of tags to a person, or (c) the avoidance of any obligation to deduct or account for tax, arising out of or by reason of an arrangement, including an arrangement where another arrangement would not have been undertaken or arranged to achieve the results, or any part of the results, achieved or intended to be achieved by the arrangement
  • Luxembourg
    • Objective, not subjective (reference to OECD Action 12)
    • Domestic benefit s/not be reportable
  • Sweden
    • Includes deferred taxation, based on current rules
    • A “tax advantage” includes a tax advantage outside of Sweden and there is no requirement that the tax advantage occurs during the current year, it can occur also in the future re: deferred taxation, although the tax advantage is based on current rules
  • UK:
    • “Tax advantage” includes (a) relief or increased relief from tax, (b) repayment or increased repayment of tax, (c) avoidance or reduction of a charge to tax or an assessment to tax, (d) avoidance of a possible assessment to tax, (e) deferral of apyament of tax or advancement of a repayment of tax, and (f) avoidance of an obligation to deduct or account for tax, where the obtaining of the tax advantage cannot reasonably be regarded as consistent with the principles on which the relevant provisions that are relevant to the cross-border arrangement are based and the policy objectives of those provisions

Hallmark A1: Confidentiality 

Principles

  • A condition of confidentiality is required (verbal arrangement / email / written agreement), and
  • A tax advantage is required under the MBT, generally an objective assessment comparing the value of the expected tax advantage with any other benefits likely to be obtained

 Hallmark A1 (& MBT)

An arrangement where the relevant taxpayer or a participant in the arrangement undertakes to comply with a condition of confidentiality which may require them not to disclose how the arrangement could secure a tax advantage vis-à-vis other intermediaries or the tax authorities

  • France
    • Confidentiality is met for the following:
      • Signing / written correspondence regarding non-disclosure of the arrangement
      • Proof of verbal or written agreement provided on an obligation of confidentiality
    • Confidentiality is not met for the following:
      • A confidentiality clause to protect a commercial, industrial or professional secret
      • The legal and ethical obligations that may apply with respect to confidentiality 
  • Germany
    • It is not intended that legal and professional confidentiality clauses would fall in scope.
    • Trade secrets should be able to be maintained through confidentiality clauses but that if the tax authorities are specifically included in such a clause, disclosure may be required

Hallmark A2: Intermediary

Principles

  • An arrangement via an intermediary (or in-house tax department for different Member States), that provides a fixed fee arrangement re: the amount of tax advantage, or whether or not a tax advantage is actually derived, and
  • A tax advantage is required under the MBT, generally an objective assessment comparing the value of the expected tax advantage with any other benefits likely to be obtained

Hallmark A2 (& MBT)

An arrangement where the intermediary is entitled to receive a fee for the arrangement and that fee is fixed by reference to (a) the amount of the tax advantage derived from the arrangement; or (b) whether or not a tax advantage is actually derived from the arrangement

Council Directive (EU) 2018/822 defines “intermediary” as:

Any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement.  To be an intermediary, a person shall meet at least one of the following conditions:

  • be resident for tax purposes in a Member State, or
  • have a PE in a Member State through which the services with respect to the arrangement are provided, or
  • be incorporated in, or governed by the laws of, a Member State, or
  • be registered with a professional association related to legal, taxation or consultancy services in a Member State.
  • France
    • When a natural person is an employee of a company and acts on behalf of that company, it is the company that is considered to be the intermediary
  • Germany
    • Reporting n/a where the service and object value for determining the fee payable to the intermediary increase solely as a result of the expected tax advantage
    • For an in-house arrangement, intermediary rules will apply
  • Netherlands
    • Success fees should be reportable where the fee depends on the realization of a tax benefit or the amount of the tax benefit realized
  • Spain
    • A success fee, wholly or partly, linked to the tax advantage might be reportable

Example: R&D/tax credit arrangements for agreements/amended returns

Hallmark A3: Standardized documentation

Principles

  • A “plug-and-play” standardized arrangement, and
  • A tax advantage is required under the MBT, generally an objective assessment comparing the value of the expected tax advantage with any other benefits likely to be obtained

Hallmark A3 (& MBT)

An arrangement that has substantially standardized documentation and/or structure and is available to more than one “relevant taxpayer” without a need to be substantially customized for implementation

Council Directive (EU) 2018/822 defines “relevant taxpayer” as:

Any person to whom a reportable cross-border arrangement (RCBA) is made available for implementation, or who is ready to implement a RCBA or has implemented the first step of such an arrangement.

  • France
    • A standardized share savings plan is a RCBA
  • Germany
    • Standardized documentation that exclusively pursues non-tax purposes is not reportable
    • Standardized documentation is not applicable if changes to the content or concept of the tax structure are required (vs. changes to amount, names, etc.)
    • Standardization refers to both external documentation and internal structure of the design
    • A “white list” includes the following exclusions from the notification requirements:
      • Granting of loans,
      • Licensing,
      • Secondment of employees,
      • Service agreements,
      • Opening a bank account, or settlement of standard banking transactions

Examples:

  • Pension/ insurance products
  • Expat assignments
  • Intercompany service/royalty template agreements
  • Cash pooling agreements

B: (subject to MBT) Loss company benefits / revenue conversion / circular transactions

  • Germany: The concept of loss-making company must be interpreted broadly and covers companies with loss carry forward or current losses, as well as losses, which are already invested, but which can only be realized for tax purposes in the future (“silent readings”)
  • Sweden: the hallmark should be met irrespective of whether the main business activity of the company is discontinued before or after the acquisition
  • Germany: Circular transactions include sale/leaseback and cash pools
  • Round-tripping funds; clearing intercompany balances, capital contributions to facilitate repayment of intercompany balances
  • Cash pooling agreements
  • Intercompany loans, via holding companies or offsetting transactions
  • Dividend-in-kind of note receivable
  • Converting fully taxed income into a lower-taxed element (e.g. capital gain)
  • Hybrid instruments
  • Finance leasing
  • Derivatives
  • Contracts on financial instruments

C: Cross-border transactions:

C1(a): A deductible payment to a cross-border payee who is not resident for tax purposes in any jurisdiction (not subject to MBT);

  • Deductible payments to a transparent entity (Partnerships / US single member LLC)
    • If there is not an intercompany agreement, each payment should be reported separately (or a practical approach may be possible)

C1(b): Cross-border payee is a tax resident, and that jurisdiction either (i) does not impose any corporate tax or imposes a rate of -0- or almost zero (if it fulfills MBT), or (ii) is included in the EU list of noncooperative jurisdictions (not subject to MBT);

  • Germany: A zero-rate jurisdiction exists when a tax jurisdiction does not collect tax, does not levy a tax comparable to corporation tax, or a corporate tax rate but the nominal corporate tax rate is small or equal to 4%
  • Sweden: The explanatory notes state that it interprets “tax at the rate of zero or almost zero” as being the level of the nominal tax rate and that it is only the tax rate which generally applies to the particular kind of income and not cases where certain types of entities or operations are taxed at a zero rate (e.g. Jersey, UAE, which has a zero tax rate)
  • Deductible payments to EU (Domestic/OECD?) black list jurisdictions (MBT not applicable) Germany: As soon as a state is no longer on the respective list of non-cooperating third countries of the EU or the OECD, the fact of this mark is no longer fulfilled
  • Reinsurance transactions with low-tax jurisdictions

C1(c): Cross-border payment benefits from a full tax exemption in payee’s jurisdiction, if it fulfills the MBT;

  • Dividend payments to a jurisdiction with a tax exemption regime

C1(d): Cross-border payment benefits from a payee’s preferential tax regime, if it fulfills the MBT;

  • Patent / Innovation boxes
  • Sweden: includes the Dutch innovation box regime and UK patent box regime
  • FDII (Royalties / COGS for tangible goods purchased from US, at time of purchase)
  • Interest payments 

C2: Deductions for identical depreciation on same asset are claimed in more than one jurisdiction (not subject to MBT);

  • Depreciation deductions (and amortization deductions in some countries)
  • Dual-resident company/Disregarded entities claiming depreciation in both jurisdictions

C3: Double taxation relief is claimed for the same item in more than one jurisdiction (not subject to MBT);

  • Share repo agreement

C4: Asset transfer with a material difference in payable amounts for differing jurisdictions (not subject to MBT).

  • Different valuations/discount rates may produce a material difference

D: Specific automatic information exchange and beneficial ownership, includes 4th Anti-Money Laundering Directive (EU) 2015/849

  • Employee’s salary is partly given via the company’s shares or bonds

E: Transfer pricing (TP)

E1: Unilateral safe harbour rules

  • OECD safe-harbour rules for low-value-added activities (i.e. cost+5% services)
  • Germany: If a recommendation affected by the label is accepted by the OECD under the OECD Transfer Pricing Guidelines for multinational companies and tax administrations or the EU in the Framework of the Joint Transfer Pricing Forum, it is not a unilateral recommendation.  This is the case, for example, in the treatment of so-called low value-added services.
  • NL – n/a if supported by a TP study
  • Sweden: Multilateral safe harbor rules are not covered by the hallmark and therefore arrangements complying with the OECD Transfer Pricing Guidelines should not be reportable
  • UK: must be interpreted in accordance  with the OECD Transfer Pricing Guidelines

E2: Transfer of hard-to-value intangibles

  • Cost sharing agreement transfers

E3: Intragroup transfer of functions/risks/assets if EBIT is < 50% after 3 years if the transfer had not been made

  • TP transfers of functions/risks/assets are to have EBIT projections before/after
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