The House of Commons has implemented an EU directive requiring mandatory disclosure of cross-border tax arrangements, known as the Directive on Administrative Cooperation 6 (DAC6).
The International Tax Enforcement (Disclosable Arrangements) Regulations 2020 involves promoters, intermediaries and, in some instances, taxpayers themselves.
It requires them to report details of certain cross-border arrangements to HM Revenue & Customs (HMRC).
The taxman will then share the information with other EU member states, which will reciprocate in return.
The regulation was implemented on 13 January 2020 and will come into force on 1 July 2020 in the UK.
It should be noted, however, that the legislation applies retroactively from 25 June 2018.
Any transaction made between that date and 30 June 2020 will need to be reported by 31 August 2020, HMRC said.
A cross-border transaction must be reported if it involves either two member states or one member state and a jurisdiction outside the EU.
‘Main benefit test’
There are several criteria outlining whether a cross-border arrangement is subject to mandatory reporting – known as the main benefit test.
The central point is establishing if the individual may “reasonably expect” to gain a tax advantage.
Transactions must be reported even if:
- There is a condition of confidentiality linked to the arrangement;
- The intermediary is set to receive a fee either based on the tax advantage or not. In the latter case, if the advantage was not partially or fully achieved, the intermediary would need to refund fees, accordingly;
- It is an arrangement that doesn’t need customisation to be implemented;
- It is an arrangement involving the purchase of a loss-making company for it to be discontinued and used to reduce the participant’s tax liability;
- The aim of the transaction is to convert income into capital, gifts or other types of revenue taxed at a lower level or are completely exempt from tax;
- Circular transactions are made resulting in the round-tripping of funds or transactions that offset or cancel each other;
- The arrangement involves deductible cross-border payments made between two or more entities;
- Deductions for the same depreciations are claimed in more than one jurisdiction;
- Relief from double taxation on the same income is claimed in more than one jurisdiction;
- Assets transferred have a material difference in the payable amount compared to the assets in the jurisdictions involved;
- The arrangement undermines reporting obligations under EU law;
- A transaction involves a non-transparent legal or beneficial ownership chain;
- It uses unilateral safe harbour rules – the provisions that relieves taxpayers from obligations otherwise imposed by a country’s general transfer pricing rules;
- The transaction involves ‘hard-to-value intangibles’; and,
- The projected annual earnings before interest and taxes (Ebit) for three years after the transfer of functions and/or risks and/or assets by an intragroup, are less than 50% of the projected annual Ebit if the transfer had not been made.
HMRC said it will provide guidance and case studies to clarify any confusion regarding the applicability and compliance with the regulation before the 1 July 2020 deadline.
What about Brexit?
The taxman has also clarified what will happen once the UK exits the EU.
“The UK is legally obliged to transpose this directive before the UK leaves the European Union,” HMRC said.
“That obligation will continue during the implementation period, under the terms of the withdrawal agreement. The UK’s commitment to tax transparency will not be weakened as a result of leaving the EU.
“The government will continue to work with international partners to tackle offshore tax avoidance and evasion.
“As part of this collaboration, we will consider amending the rules further, if necessary, to ensure they work as planned,” the Revenue added.
