DAC6 compliance – Category C: Specific hallmarks relating to cross-border transactions – which transactions should you be aware of?

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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

Gif showing the DAC6 reporting portal
VinciWorks’ DAC6 portal is a secure, enterprise-wide data management tool for recording cross-border tax arrangements that may need to be reported under DAC6.

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.