Impact of DAC 6 on the Middle East based companies and individuals

What is DAC 6 all about? Why act now?

A new EU Directive (the EU Council Directive 2011/16) imposes mandatory reporting of potentially aggressive tax planning arrangements involving EU Member States (also known as DAC6).

The new mandatory disclosure regime is very broadly defined and could capture various ordinary commercial transactions. The directive affects many EU companies and multinationals active within the EU to strengthen transparency and fairness on cross-border tax arrangements. Failure to comply with DAC6 could mean facing significant sanctions under local law in EU countries and reputational risks for businesses, individuals and intermediaries.

Middle East based individuals and companies cannot assume they will not be impacted by the new EU disclosure regime. Instead, on transactions into or within the EU, advisers to Middle East based individuals and companies may be obliged to make a disclosure to EU tax authorities. Additionally, in some circumstances, the reporting obligation can fall on the Middle East individual or company itself. Non-compliance is expected to result in penalties for the relevant parties.

There will be a mandatory automatic exchange of information on such reportable cross-border schemes via the Common Communication Network (“CCN”) which will be set-up by the EU.

Although the directive is not effective until 1 July 2020, taxpayers and intermediaries need to monitor their cross-border arrangements already as of 25 June 2018. Therefore the time to act is now.

Could DAC6 be relevant to you?

If your answer is “yes” to the below questions keep reading

Are you considering a transaction or structure into an EU Member State?

Yes/No

If the answer is "Yes", the following question should also be answered:

Is it likely at this stage that your advisor is EU based or will subcontract the provision of local advice and/or implementation assistance to one or more advisors in the EU?

Yes/No

If the answer is "Yes", then you’re advisor could have a DAC 6 reportable transaction and will need to consider if any of the “hallmarks” are displayed.

Is it likely at this stage that you won’t engage any EU based advisor on the cross-border transaction or structure? Or would you engage with an EU based advisor that would benefit from a legal/ professional privilege?

Yes/No

If the answer is "Yes", then you could have a DAC 6 reportable transaction and will need to consider if any of the “hallmarks” are displayed.

Background

As well as the OECD (by means of the different BEPS Action plans), the EU is trying to design rules to increase transparency and prevent tax evasion. DAC6 is one of the EU measures. The main purpose of DAC6 is to facilitate EU member states of gathering insight in international tax arrangements, so they will become able to take legislative actions against tax avoidance. Even though the main purpose of DAC6 is to fight tax avoidance, it is important to note that DAC6 does not only capture cross-border tax arrangements that can be perceived as being aggressive, but any cross-border arrangement that meets certain characteristics (so-called ‘hallmarks’).

Which type of transactions are reportable?

Transactions need to be reported when they are ‘cross-border’ and fall within the ‘hallmarks’. Cross-border arrangements are arrangements involving at least two EU jurisdictions, or at least one EU jurisdiction and one or more non-EU jurisdictions. The hallmarks describe certain characteristics of arrangements; they are broadly worded and are expected to apply to a wide range of transactions. In some specifically mentioned cases the tax arrangement only becomes reportable if the main or expected benefit of the arrangement is a tax advantage.

Who is affected?

Middle East based individuals and companies cannot assume they will not be impacted by the new EU disclosure regime. Instead their advisors and potentially the Middle East individual or company itself could have a reporting obligation, possible scenarios caught by the new rules include:

Middle East HQ group with EU subsidiaries and transactions with those EU subsidiaries.
Middle East based advisors using local EU offices to provide services to Middle East clients.
Middle East clients undertaking inward transactions into the EU.
Any EU transactions from a country on the EU Blacklist (e.g. Oman and UAE).

The EU member states then will share the information reported with all other member states via the Common Communication Network (“CCN”) on a quarterly basis.

When?

25 June 2018: Directive comes into force and transitional period starts.
December 2019: directive implemented in local legislation.
July 2020: legislation/regulations implementing DAC6 in member states is effective.
July 2020: first possible reporting deadline.
August 2020: reporting deadline for legacy arrangements.
October 2020: first quarterly governmental exchange.

What needs to be disclosed

The information required to be reported include:

Middle East Participant’s name, place and date of birth (for individuals), associated enterprises details, tax residence and tax identification number.
Details of the characteristics or features that make the cross-border arrangement reportable (including Details of the national provisions and Hallmark description).
A summary of the content of the reportable arrangement (including value, Intermediary details and member states concerned).
The date on which the first step in implementing the reportable cross-border arrangement has or will be made.

How?

The hallmarks

Hallmarks which require the main benefit test to be met

The main benefit test would be satisfied if it can be established that the main benefit or one of the main benefits for an arrangement is to reasonably expect to obtain a tax advantage (having regard to all relevant facts and circumstances).

A. Generic hallmarks - Certain confidentiality and fee arrangements with intermediaries and the use of standardized documentation and/or structures.

B. Specific hallmarks - The following types of cross-border transaction:

Acquiring a loss making company,
Converting income into capital which is taxed at a lower level or exempt from tax, and
Circular or offsetting transactions.

C. Specific hallmarks related to cross border transactions - Tax-deductible cross-border payments between two or more associated enterprises, where the recipient is resident in a state where:

The corporate tax rate is zero or "almost zero" (not defined), or
The receipt benefits from a full exemption from tax, or
The receipt benefits from a preferential tax regime.

Hallmarks which do not require the main benefit test to be met

C. Specific hallmarks related to cross border transactions
Tax-deductible cross-border payments between two or more associated enterprises, where the recipient:

Has no tax residency in any tax jurisdiction, or
Is resident in a State which is included in an EU or OECD list of uncooperative tax jurisdictions; Arrangements involving at least one of the following:
Deductions for depreciation on the same asset are claimed in more than one jurisdiction;
Double tax relief is claimed in more than one jurisdiction; or
There is a transfer of assets and there is a material difference between the consideration in the two jurisdictions.

D. Specific hallmarks concerning the automatic exchange of information and beneficial ownership - including structures involving holding companies and trusts, whereby the identity of the beneficial owners is made “unidentifiable”.

E. Specific hallmarks related to transfer pricing - The following hallmarks concerning transfer pricing:

Arrangements involving unilateral “safe harbor” rules;
Arrangements involving the transfer of hard-to-value intangibles; and
Cross-border transfer of functions/risks/assets which result in the EBIT of the transferor to fall to less than 50% of what it would have been if the transfer had not been made.

A number of terms used in the hallmark descriptions are currently undefined and unclear.

Taxpayer readiness considerations

What controls and processes do you need to have in place to identify relevant cross-border arrangements and analyse whether a transaction or reorganization needs to be reported?
How will you determine whether you are required to make the disclosure or whether there are intermediaries involved who are obliged to report?
How can you leverage your existing controls and processes?
How will you monitor compliance? Are all of your relevant staff appropriately trained to identify potential transactions on an ongoing and timely basis?
Can you capture all the relevant information from your systems?
How will you identify what intermediaries are reporting about your arrangements and how will you reconcile their reports with your own information?
How will you ensure the consistency of cross-border arrangement reporting with your other tax filings?

Get in touch with our experts

Our team combines experts in tax, people, processes, data and technology. By bringing together these different skill sets, we can help clients to understand DAC6, and the broader tax policy context, and implement effective controls and processes to ensure all reportable cross-border arrangements are proactively identified and managed.

For further information, please contact your local PwC firm’s tax policy or DAC6 contact.

Get in touch with our experts

It is crucial to stay on the right side of the new rules. We are reviewing the Middle East practical impact of the directive including working closely with our client and our PwC network colleagues in EU member states. For more detailed information, please call or email one of the following contacts or your usual PwC contact.