DAC6 reporting – What is so special about hallmark D?

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In response to the Brexit Free Trade Agreement, the UK has limited the scope of DAC6 to only apply where a Category D hallmark is present. 

This dramatic change is in line with the UK’s obligations under the Fair Trade Agreement that requires the UK to implement, at a minimum, the standards and rules which have been agreed by the OECD concerning potential cross-border tax planning arrangements.

Hallmark D arrangements are those designed to undermine tax reporting under common reporting standard and transparency rules. This shares substantial common ground with the Mandatory Disclosure Regime (MDR) developed by the OECD. 

The hallmark D category is split into two types of arrangements:

  • D(1) Arrangements that have the effect of undermining reporting requirements under agreements for the automatic exchange of information.
  • D(2) Arrangements that obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.

Hallmarks under category D are not subject to the main benefit test, and so are still reportable if the arrangement in question is not expected to generate a tax advantage.

Arrangements will be caught by hallmark D(1) if they undermine reporting obligations under DAC2 or equivalent agreements on the automatic exchange of financial account information, including those arrangements which take advantage of the absence of the  Automatic Exchange of Information. 

This would include undermining reporting obligations under the Common Reporting Standard (CRS). This hallmark does not usually include an arrangement that seeks to avoid reporting under the Foreign Account Tax Compliance Act (FATCA).

The test for hallmark D(1) is an objective one, but in determining whether an arrangement has the effect of undermining the CRS the intent of those involved will be relevant as it will offer a good indication as to whether the arrangement may have the relevant effect. 

Hallmark D(2) arrangements include those that obscure beneficial ownership. This applies to arrangements that involve non transparent legal or beneficial ownership chains with the use of persons, legal arrangements or structures that contain all the elements below:

  • No substantive economic activity nor substance;
  • Incorporation, residence, management, control or establishment in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures;
  • Unidentifiable beneficial owners

Institutional investors, and entities wholly-owned by one or more institutional investors, are not considered to be structures which obscure beneficial ownership.

HMRC has made it very clear in their DAC6 guidance that they intend to interpret the category D hallmarks in accordance with the OECD’s Mandatory Disclosure Rules commentary.

What do the UK’s changes to DAC6 implementation mean for VinciWorks’ reporting solution?

We have already started updating our DAC6 reporting solution to reflect the Brexit changes. If you would like to learn more about how our reporting solution, training and resources can help your firm with compliance, contact us using the short form below.