On 25 May 2018, the Economic and Financial Affairs Council of the European Union (ECOFIN) adopted the 6th Directive on Administrative Cooperation (the “DAC6”), requiring so-called tax intermediaries to report certain cross-border arrangements that contain at least one of the hallmarks as defined in DAC6.
Within DAC6, there are five different hallmark categories that represent an indication that a transaction may have a potential risk of tax avoidance.
This blog will focus on the category C hallmarks which are classified as generic hallmarks, and may include one of the following:
1. Cross Border Payments – Deductible cross border payments in certain cases where one of the following occurs:
a. The recipient is not a tax resident in any jurisdiction.
b. The recipient is a tax resident in a jurisdiction with zero or near zero corporate tax rate.
c. The recipient is included in a list of third-country states considered non-cooperative by EU Member states or the OECD.
d. The payment has a full tax exemption in the jurisdiction of the resident.
e. The payment benefits from a preferential tax regime where the recipient is resident.
It is important to note that Cross border payments also require that the main benefit test is met – this is a condition where the main benefit of a transaction is a tax advantage.
2. Same Depreciation: An arrangement where an asset depreciates in value and a tax deduction is claimed in more than one jurisdiction.
3. Double Taxation: Tax relief is claimed in more than one jurisdiction.
4. Transfer of Assets: An arrangement where assets are transferred and there is a material difference between those assets being considered payable.
An example of a category C hallmark would be if a Swiss-based parent corporation makes a tax-deductible payment to a daughter corporation in Luxembourg. The daughter corporation is not a tax resident in any jurisdiction.
DAC6 training and reporting
Failure to report a cross-border transaction under DAC6 will result in effective, proportionate and dissuasive penalties. DAC6 should therefore not be taken lightly. VinciWorks has a DAC6 reporting and training solution to help organisations understand the Directive and efficiently report on their transactions. This includes both an advanced and fundamentals course, as well as a customisable reporting tool to effectively log and track transactions.