DAC6 compliance – seven timely recommendations


Gary Yantin

Gary Yantin, Director of Best Practice, VinciWorks.

By Legal Futures’ Associate Gary Yantin, VinciWorks Director of Best Practice

The EU Council Directive 2018/822, commonly known as DAC6 (which amended the Directive 2011/16/EU on Administrative Cooperation), came into force last June, requiring intermediaries involved in cross-border tax transactions with certain hallmarks to retain details of potentially tax advantageous matters in order to report them to relevant tax authorities.

EU Member states have until 31 December 2019 to transpose the Directive into national law and intermediaries are not required to file reports until 31 August 2020. However, the ruling requires filings to be backdated to the date of the Directive – 25 June 2018. The natural question is what steps should a firm take to prepare for DAC6 compliance?

Since DAC6 covers cross-border transactions with EU member states, the effect of the UK’s Brexit arrangements will have no impact on this Directive. DAC6 will apply to the UK post Brexit and it is expected that the relevant provisions will be included in the 2019 Finance Bill.

1. Review your engagement letter

You need to let clients know about the new requirements and the potential reporting obligation. One way to do this is to include the DAC6 reporting requirements in your client engagement letter. Some firms may decide to rely on legal professional privilege asserting that confidential client information does not need to be divulged to tax authorities. Firms using professional privilege will need to advise clients of their responsibility to report to another intermediary.

2. Modify matter inception process

Flagging potential transactions that might be caught by DAC6 will help you track details when the reporting requirements are in force. Some firms have added a question on client/matter intake forms to determine whether DAC6 is likely to apply.

3. Trawl previous tax transactions since June 2018

Although the reporting requirements are not in force until the end of August 2020, all reportable transactions since 25 June 2018 will need to be filed. Firms that are not already recording details of cross-border transactions affected by DAC6 will need to review all previous transactions to see whether any DAC6 hallmarks apply.

4. Keep a register of all potentially reportable transactions

Not every transaction will be reportable, so tracking those that might be will help firms to decide which arrangements ultimately require reporting. DAC6 compliance requires firms to capture all the details of relevant transactions and later analyse whether they warrant further investigation. An online register will track and record transactions when hallmarks are present, flag those transactions and alert the appropriate staff.

5. Train staff on hallmarks

Not every cross-border transaction will be caught by the Directive, only transactions that display the hallmarks. A hallmark is a characteristic that highlights that a transaction has a potential tax advantage. Hallmarks can be generic or specific. Some hallmarks need to comply with the “main benefits test” that determines whether a tax advantage is the main benefit of the transaction. Staff should take DAC6 training to help familiarise themselves with what a hallmark is and how to spot them in cross-border transactions.

6. Institute a review process with tax and compliance departments

Firms should consider which transactions display hallmarks, whether legal professional privilege applies, whether another intermediary has an obligation to report and a myriad of other technical issues discussed in the Directive. It is critical to appoint a department to have ultimate responsibility for DAC6 compliance. Some firms are placing the onus on the risk and compliance teams while others believe it is the tax team that is responsible for compliance with the directive.

7. Track EU country rules on filing requirements

One of the major issues with DAC6 is that there will be up to 28 different requirements for filing reports. Each member state’s tax authority will decide what information they require intermediaries to report, together with their penalty regime for non-compliance.

Although August 2020 seems a long way off, firms that I speak to are putting plans in place now to avoid the work and confusion later. To download an easy-to-read guide that defines the new hallmarks and reportable transactions, click here.

Gary is a former in-house lawyer and private practice solicitor. He consults with law firms in the UK and internationally on a wide range of compliance and risk management topics including GDPR, AML, the Modern Slavery Act and emerging regulatory developments. You can reach him at gary.yantin@vinciworks.com.

 

Associate News is provided by Legal Futures Associates.
Find out about becoming an Associate

Tags:




Loading animation