MDR/DAC6

The EU Mandatory Disclosure Regime of DAC6 in a nutshell

What is DAC6/MDR?

The European Union (‘EU’) has expanded the scope of Directive 2011/16/EU on Administrative Cooperation in the field of taxation. With the aim to strengthen tax transparency, Directive (EU) 2018/822 is a sixth amendment of the EU Directive on Administrative Cooperation and therefore referred to as ‘DAC6’. DAC6 responds to the recommendations of Action 12 of the OECD/G20 Base Erosion and Profit Shifting (‘BEPS’) project regarding Mandatory Disclosure Rules (‘MDR’).   

In short, DAC6 directs the EU Member States to transpose a mandatory disclosure regime into domestic law. This includes a reporting obligation for intermediaries and taxpayers in relation to reportable cross-border arrangements and mandatory automatic exchange of information between the EU Member States.  

Why is it important?

The DAC6 disclosure regime has an extremely broad scope. Not only with respect to the scope of the parties that are involved but also with respect to the extensive information that must be disclosed to the competent authorities. Failure to correctly (and timely) file a report or other non-compliance may result in extremely high penalties (up to EUR 870,000 in the Netherlands).

Who has to report?

The reporting obligation lies primarily with EU-based intermediaries unless a right of legal professional privilege applies. However, if no intermediaries are involved in making a cross-border arrangement available or implementing the process, the relevant taxpayer becomes responsible for filing with the competent authorities (usually the Tax Administrations).

When to file reports?

DAC6 requires the mandatory disclosure within 30 days after a reportable cross-border arrangement is ready or made available for implementation, or a first step in the implementation has been completed. In most cases, MDR reporting obligations are effective as of 1 January 2021.

What is the scope?

DAC6 applies to all taxes imposed by the EU Member States, excluding customs duties, excise tax, VAT, and social security tax. In principle, reporting obligations apply to (a series of) reportable cross-border arrangements within an MNE or its group, which means an arrangement between two or more EU Member States, or between at least one EU Member State and a non-EU tax jurisdiction. In addition, please note that some EU Member States, such as Poland and Portugal, have decided to implement mandatory reporting obligations regarding certain domestic arrangements.

Who qualifies as an intermediary?

In short, this is any person that is actively involved in making available, or in implementing (a step in) the process, or who has either directly or through other persons provided aid with respect to a reportable cross-border arrangement (i.e., accountants, tax advisors, trust officers, and lawyers).

What is a reportable cross-border arrangement?

Under DAC6, cross-border arrangements are reportable only if certain characteristics or features indicate a potential risk of tax avoidance, referred to as ‘hallmarks.’ Arrangements involving at least two EU Member States, or one EU Member State and one or more third-country (non-EU) jurisdictions, are considered as cross border within the meaning of DAC6. An arrangement is defined as (amongst others) a transaction, action, or agreement, including a combination or series of arrangements.  

Furthermore, some hallmarks must also fulfill a ‘main benefit test’ before a cross-border arrangement must be reported. In short, this main benefit test is met if it is reasonable to conclude that the main benefit (or one of the main benefits) of an arrangement is obtaining a tax advantage.

What are DAC6 compliance challenges?

Under DAC6 intermediaries primarily have a disclosure obligation, but the local implementation of DAC6 is different in each EU Member State. Reportable data is not automatically available in systems, and the location of the responsibility can be uncertain. Regardless of whether an intermediary is involved, the taxpayer should make sure that the appropriate analysis and filing will be made. This requires good governance, and clear responsibilities must be established, ideally integrated into a tax control framework with effective controls and instructions readily available.

What is a reportable cross-border arrangement?

Under DAC6, cross-border arrangements are reportable only if certain characteristics or features indicate a potential risk of tax avoidance, referred to as ‘hallmarks.’ Arrangements involving at least two EU Member States, or one EU Member State and one or more third-country (non-EU) jurisdictions, are considered as cross border within the meaning of DAC6. An arrangement is defined as (amongst others) a transaction, action, or agreement, including a combination or series of arrangements.

Furthermore, some hallmarks must also fulfill a ‘main benefit test’ before a cross-border arrangement must be reported. In short, this main benefit test is met if it is reasonable to conclude that the main benefit (or one of the main benefits) of an arrangement is obtaining a tax advantage.

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