‘Vague’ EU tax rules create cross-border headache

Financial advisers working in the cross-border space should be familiar with the Directive on Administrative Cooperation 6 (also known as Dac6).

It was introduced by the European Commission in 2017 to tackle tax avoidance and evasion across the continent.

Legislation was supposed to be passed by all member states no later than 1 January 2020, so that Dac6 could come into force by 1 July 2020.

But not all of them have drafted or passed domestic regulation to meet the deadline.

There is some leeway, but those that are lagging behind must ensure the legislation is implemented by July.

So, what does it mean for intermediaries?

A matter of definitions

Dac6 applies to all cross-border intermediaries and mandates that they report any such transaction or arrangement intended to achieve a tax benefit.

Intermediaries are defined as those who design and market cross-border arrangements and those who provide aid, assistance or advice in respect of such arrangements, according to Catherine Robins and Jason Collins, partners at law firm Pinsent Masons.

Under the rules, any transaction designed to gain a tax advantage and involving at least one member state has to be reported.

Arrangements should only be reported once and to a single EU tax authority, no duplication is required.

Check-list legislations

Problems are already arising, however, as the directive is “extremely complex” and “not detailed at all”, Vincent Derudder, honorary chairman at the European Federation of Financial Advisers and Intermediaries (Fecif) told International Adviser.

The UK implemented only Dac6 through the International Tax Enforcement (Disclosable Arrangements) Regulations 2020 on 13 January.

The British government had to provide a lengthy list of ‘hallmarks’, or criteria, which would require a transaction to be reported – also known as the ‘main benefit test’.

But HM Revenue & Customs (HMRC) said it will provide further guidance and case studies to show intermediaries how this would work in practice.

Additionally, the directive is applied retroactively.

This means that, by the first reporting deadline of 31 August 2020, all cross-border transactions that took place between 25 June 2018 and 1 July 2020 must be reported.

After that, intermediaries will have 30 days to report any other arrangement that fits the directive’s criteria.

Vague is en vogue

“Definitions in Dac6 leave much room for interpretation,” Valérie Mariatte-Wood, regulatory affairs director at Lombard International Assurance, told IA.

“Thinking that it is only relevant for entities which manufacture or distribute cross-border ‘aggressive’ tax planning instruments is a misconception – intermediaries must ‘get with the lingo’.

“For example, the term ‘arrangement’ can cover a number of financial instruments, including life insurance and banking products.

“However, this does not mean that such arrangements are reportable en masse simply because they are cross-border,” she added.

This has caused some confusion among member states, which had to clarify the concept of a ‘tax advantage’ to transpose the directive’s instructions.

According to Mariatte-Wood, a tax advantage has to be determined based on “whether a particular tax outcome is or isn’t fully in line with the policy intent of the legislation upon which it relies”.

But what makes this problematic is that member states will have different interpretations and, as a result, different versions of the same directive.

This could potentially lead to some transactions being subject to reporting obligations in one country and not in another, she added.

The Italian case

Some banks in Italy have already reached out to tax and compliance professionals to understand what Dac6 will mean, in practice, to them, Fulvia Astolfi, partner and head of tax at Hogan Lovells, told IA.

She said there are three circumstances where intermediaries might be excluded from reporting to Italian taxman the Agenzia delle Entrate:

  • Confidentiality: “If we are working with an individual who, in theory, should be subject to reporting, we are excluded from communicating the arrangement.”
  • Duplication: “If the transaction has already been notified to another member state’s tax authority, intermediaries are exempt from reporting it to the Agenzia delle Entrate”; and
  • Self-incrimination: “An intermediary is excluded from reporting obligations if, by doing so, they would self-incriminate.”

Astolfi said, however, that the first exclusion cannot apply to financial advisers since confidentiality is not part of their jobs.

This can only apply to lawyers, solicitors and accountants.

Helping the taxpayer

The reporting burden would then fall on the taxpayer if any of the above exemptions are triggered, or if an intermediary is not involved.

So, firms are engaging with their clients on this.

“We have started to add a disclaimer in our letters where this directive is mentioned and where we set out all the reporting obligations and the types of arrangements that could fit Dac6’s description,” Astolfi told IA.

Law firm CMS previously revealed to IA that it was working on a tool which will be able to evaluate whether a transaction is subject to reporting or not.

Nothing is set in stone, however, because Italy has only published a draft legislation, which means a lot could change in the final draft.

But Astolfi warned that, even though some countries have introduced domestic legislations and others haven’t, if a cross-border transaction happens in a country where Dac6 is already enforceable, this must be reported to that member state.

Critical approach

Astolfi added that Italy, like many other EU states, has similar reporting mechanisms when it comes to money laundering.

She believes that, while Dac6 will require extra work and admin, the anti-money laundering processes could be replicated to speed up implementation.

But not everyone has had a positive reaction to the directive.

Fecif’s Derudder said it will “make [intermediaries’] lives a bit more difficult, because of the extremely difficult combination of Mifid; [the Insurance Distribution Directive (IDD)]; [the Packaged Retail and Insurance-based Investment Products (Priips)] and the rest”.

He believes this is going to cause tensions between intermediaries and their clients due to the increasing amount of admin and bureaucracy they will go through.

Comply or pay, a lot

And intermediaries face hefty financial penalties for non-compliance.

Derudder said that, depending on the member state, fines can be as high as €250,000 (£210,722, $275,569).

The UK, for example, has set penalties at £5,000 ($6,532, €5,926), with additional daily fines applicable to more serious cases.

According to KPMG, however, fines across EU states range between a few thousand euros to as much as €1.5m.

Politics over tax?

Derudder also accused Dac6 of being “very politically motivated”.

“Our parliaments are badly in need of money and they would do anything they could to try and get some cash,” he said.

He claimed the directive is problematic because it is very vague, as opposed to the “too detailed” Priips and Mifid II.

“Dac6 means more reporting and more cost because you need people to handle the information; you need a new IT system, and this means that if [Dac6] has to be implemented by 31 August 2020, companies will only have six months to have the right software and recruit people.

“It’s a nightmare.”

He added that, over the last decade, about 200,000 to 250,000 intermediaries EU-wide, “have been pushed out of their jobs because of regulations”.

Lombard International’s Mariatte-Wood believes there could be a political aspect to the directive.

“Dac6 is drafted so as to have a dissuasive effect. The experience of the [Disclosure of tax avoidance schemes (Dotas)] regime in the UK is that advisers may think twice before promoting arrangements which are deemed reportable,” she added.

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