The Irish Finance Act 2019 was signed into law by the Irish President on 22 December 2019 and enacts EU Directive 2018/822 ("DAC6") into Irish law. This is a significant new measure requiring certain intermediaries and taxpayers based in or with a connection to Ireland to report information on a broad range of reportable cross-border arrangements to the Irish Revenue authorities. This briefing outlines the key features of this new legislation both in Ireland and the EU.
What is DAC6?
Directive 2018/822 (DAC6) is an EU Directive requiring intermediaries or taxpayers based in or with a connection to the EU to report information on certain cross-border arrangements to their local tax authorities. The stated purpose of DAC6 is to strengthen global tax transparency.
DAC6, adopted by the EU Economic and Financial Affairs Council (ECOFIN) on 25 May 2018, amends Directive 2011/16 on administrative cooperation in the taxation field. DAC6 was enacted in response to Action 12 of the OECD's BEPS (Base Erosion and Profit Sharing) project and focuses on cross-border arrangements and the disclosure of actual transactions. The EU has said that the objective of DAC6 is to enable the tax authorities of EU Member States to obtain knowledge and take action to counteract harmful tax practices, close potential loopholes and deter taxpayers from taking advantage of aggressive tax planning.
DAC6 Disclosure Requirements
The key development under DAC6 is the imposition of mandatory reporting of cross-border arrangements where such arrangements affect at least one EU Member State and fall within one of a number of 'hallmarks'. The obligation to report falls upon intermediaries and, in certain cases, upon the taxpayers themselves. This information will be stored in a central repository accessible by the competent authorities of the EU Member States.
As will be seen below, the scope of DAC6 is very wide, leaving Member States to set out the details in their domestic legislation. This domestic legislation was due to be implemented by 31 December 2019 at the latest. The first reports will be due on 31 August 2020.
DAC6 can apply to transactions where no tax advantage results and transactions which are driven by purely commercial as opposed to tax planning motives. This may bring within scope certain ordinary transactions such as investment fund structures, cross-border asset transfers, cross-border leasing, securitisation structures and standard group funding structures.
What is a Reportable Cross-Border Arrangement?
The arrangement will be considered to be 'cross-border' where it concerns either more than one EU Member State, or concerns one EU Member State and a third country (i.e. a non-EU Member State) provided at least one of the following conditions is fulfilled:
a) Not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
b) One or more of the participants is resident for tax purposes in more than one jurisdiction;
c) One or more of the participants carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or all of the business of that permanent establishment;
d) One or more of the participants carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment in that jurisdiction; or
e) The arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
In addition, a domestic transaction will also fall within the scope of DAC6 if it has tax implications for another EU Member State, making for a very broad territorial scope of application.
'Arrangement' is not defined in DAC6, but it is defined broadly in the Finance Act 2019 to include courses of action which are not legally binding, extending to the following:
a) Any transaction, action, course of action, course of conduct, scheme, plan or proposal;
b) Any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings; and
c) Any series of or combination of the circumstances referred to in paragraphs (a) and (b), whether entered into or arranged by one or two or more persons
(i) Whether acting in concert or not;
(ii) Whether or not entered into or arranged wholly or partly outside Ireland; or
(iii) Whether or not entered into or arranged as part of a larger arrangement or in conjunction with any other arrangement or arrangements
but does not include an arrangement referred to in section 826 of the Irish Taxes Consolidation Act ("TCA").
A cross-border arrangement will be reportable if it falls within any one of the five main categories of so-called "hallmarks", set out below.
What are the Hallmarks?
There are five main categories of hallmarks, two of which must also satisfy the 'main benefit test' and three of which do not generally have this requirement.
Main Benefit Test
Some of the hallmarks only give rise to a reportable transaction if the main benefit test is met. This test will be met where obtaining a tax advantage is one of the main benefits which a person may reasonably expect to derive from an arrangement, having regard to all relevant facts and circumstances.
The term 'tax advantage', not originally defined in DAC6, is defined in the Finance Act 2019 as meaning:
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 of 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 of, or payment of, an amount of tax 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.
Broadly, and in the absence of a clearly defined scope, the main benefit test is likely to be fulfilled where the tax outcome is a significant driver in how the arrangement is structured and not simply incidental.
Hallmarks linked to the Main Benefit Test ("MBT")
(1) General Hallmarks linked to the MBT:
a) The taxpayer undertakes to comply with a confidentiality condition;
b) The intermediary is entitled to a contingency fee based on the success of the tax advantage; or
c) Standardised documentation and/or structure available to more than one taxpayer.
(2) Specific Hallmarks linked to the MBT:
a) Acquisition of loss-making companies to reduce tax liability;
b) Converting income to a category that is taxed at a lower level, e.g. capital, gifts; or
c) Circular transactions through interposed entities resulting in the round-tripping of funds.
Hallmarks not linked to the MBT
In these cases, the transaction may be reportable it if meets a hallmark, regardless generally of whether the main benefit test applies.
(3) Specific Cross-Border Hallmarks not all linked to MBT (note, in this case, certain hallmarks are still linked to the MBT): deductible payments between associated enterprises with at least one of the following characteristics;
a) Payment benefits from full tax exemption from tax in recipient's jurisdiction;
b) Payment benefits from preferential tax regime in recipients jurisdiction;
c) Recipient is not tax resident in any jurisdiction;
d) Recipient is tax resident in a jurisdiction that does not impose corporate income tax or imposes at an almost zero rate, or which is on an EU or OECD blacklist;
e) Depreciation claimed in relation to the same asset in different jurisdictions;
f) Double tax relief claimed in more than one jurisdiction; or
g) Material difference in value of assets transferred to another jurisdiction.
(4) Specific Automatic Exchange of Information ("AEOI") & Beneficial Ownership Hallmarks not linked to the MBT:
a) Arrangements which may have the effect of undermining reporting obligations under EU AEOI rules, e.g. CRS and FATCA; and
b) Arrangements involving non-transparent structures that aim to make the beneficial owners unidentifiable.
(5) Specific Transfer Pricing Hallmarks not linked to the MBT:
a) Arrangements involving the use of unilateral safe harbour rules;
b) Transfer of hard to value intangibles (e.g. IP); and
c) Intra-group cross-border transfers of risks or assets / re-organisations if projected EBIT during three year period post transfer of the transferor is less than 50% of the projected EBIT during that period if the transfer had not been made.
Data to be Collected
Once DAC6 is implemented, the following information will need to be reported:
a) Identification of the taxpayers and Intermediaries involved in the transaction, including name, address, date of birth, tax identification number, associated enterprises;
b) Details of the hallmarks making the arrangement reportable;
c) A summary of the reportable cross-border arrangement;
d) Date on which the first step in implementing the reportable arrangement was or will be made;
e) Details of relevant domestic tax rules that form the basis of the reportable arrangement;
f) Value of the reportable arrangement; and
g) Identification of any other EU Member State or person affected by the reportable arrangement.
Who Needs to Report
Intermediaries: The reporting obligation lies with all intermediaries involved in a transaction, unless an intermediary can prove that another intermediary involved has reported the arrangement. Disclosure need only be made once in respect of an arrangement. The term 'intermediary' is very broad and may involve a number of different participants. It includes anyone who designs, markets, organises or makes available or implements a reportable arrangement or anyone who helps with reportable activities and knows or could reasonably be expected to know that they are doing so. This also extends to in-house advisers. This could include:
a) Accountants, financial advisers, lawyers;
b) Holding companies, group treasury functions; and
c) Banks, insurance intermediaries and fiduciary companies.
Intermediaries must have an EU connection to fall within the scope of DAC6. This is determined by (1) tax residence or place of incorporation, (2) the presence of a permanent establishment or branch connected with the provision of the services, or (3) being registered with a tax, consultancy or legal professional association in the EU. Intermediaries should conclude a formal agreement setting out who will make the report.
As the report need only be made once, disclosure need only be made to the competent authority of one EU Member State. Where possible, disclosure should be made in the place of tax residence. Failing this, the report should be made in the country where there is a permanent establishment connected with the provision of the services. As a final resort, the report should be made in the place of incorporation and location of a tax, consultancy or legal professional association in which the intermediary is registered. Certain transactions will involve multiple intermediaries. An intermediary will be exempt from reporting where they receive written confirmation from another intermediary that the necessary reporting has been completed and can provide the reference number assigned to the arrangement by the Irish Revenue authorities. Correspondingly, the intermediary that has completed such reporting must provide confirmation in writing to any other intermediaries, as well as the taxpayer, and the reference number for the arrangement.
Legal Professional Privilege
Under the Irish Finance Act 2019, an intermediary is not required to report information with respect to which a claim of legal professional privilege could be maintained by the intermediary in legal proceedings. This will apply to lawyers in certain cases. However, in such cases the intermediary must, without delay, notify any other intermediary, or the relevant taxpayer if there are no other intermediaries, of the obligations imposed on the other intermediary/relevant taxpayer as appropriate.
Taxpayer: The obligation to report rests on the taxpayer if:
a) No external intermediary is involved in the arrangement;
b) All intermediaries involved are based outside the EU; or
c) All EU-based Intermediaries invoke legal professional privilege.
Notably, a taxpayer may include a director of a company. Where no intermediary is involved, in-house counsel of the taxpayer should consider its obligation, as someone who 'could be reasonably expected to know'.
When to Report
The first reports will need to be made by 31 August 2020 and will cover arrangements between 25 June 2018 and 1 July 2020. From 31 August 2020, reportable arrangements must – unless otherwise prescribed by domestic legislation – be reported within 30 days of:
a) The day after the arrangement is:
(i) Made available for implementation, or
(ii) Is ready for implementation, or
(iii) When the first step in the implementation has been made
whichever is first, or
b) The day after the intermediary provided – directly or by means of other persons – aid, assistance or advice
As DAC6 had not set out applicable penalties for non-compliance by intermediaries or taxpayers, leaving these to be defined by the domestic legislation of each EU Member State, the Irish implementing legislation has provided provisions in this regard. Broadly speaking, the level of penalties depends on the type of breach involved.
In respect of both intermediaries and taxpayers, Finance Act 2019 provides that in certain cases a penalty of up to €4,000 may apply with a further penalty of up to €500 per day for each day on which the failure continues.
Furthermore, the mere failure by the taxpayer to include the reference number assigned to a reportable cross-border arrangement in a return made by a taxpayer under the new rules exposes such person to a penalty of up to €5,000.
How can the Maples Group help?
The Irish implementation of DAC6 is a significant new development potentially affecting many ordinary course cross-border commercial transactions. Intermediaries and taxpayers will need to monitor transactions and assess whether they are reportable, particularly bearing in mind the legal interpretation of the legislation and potential exclusions, for example on the grounds of legal privilege or reporting by another intermediary.
We can provide legal guidance through our dedicated DAC6 team, which comprises tax and dispute resolution lawyers, on both the legal and practical application of these rules.
In particular, we can:
a) Advise companies who may have reporting responsibilities as intermediaries or taxpayers in discharging those responsibilities appropriately and within the terms of the legislation;
b) Advise companies as to their rights in situations where another intermediary (such as a tax adviser) has said that a matter concerning them is reportable in a case where it may not be;
c) Advise companies on setting up internal reporting procedures to comply with their responsibilities;
d) Advise with regard to the applicability of legal professional privilege; and
e) Advise companies as to whether a particular matter is reportable.
For further information on the matters covered in this update, please contact the partners below or your usual Maples Group contact.