29 January 2020, London
Over 100 people from 50 top law firms, accounting firms and banks gathered at the offices of Freshfields Bruckhaus Deringer in a meeting organised by VinciWorks to fire questions at HMRC regarding the latest EU tax transparency law, DAC6.
HMRC have just published legislation implementing DAC6 and firms are scurrying to fully get to grips with the tremendous impact it will have on how law firms, banks and accountants do business. In response to a question about the impact of DAC6, the head of compliance at a top-five global law firm described the Directive as “the most difficult piece of legislation we’ve ever had to grapple with”.
Aimed at promoting tax transparency and information sharing across tax authorities, Directive 2011/16/EU (DAC6) requires the mandatory reporting and exchange of tax information amongst EU member states.
It is set to come into force on 1 July 2020 but applies retroactively to all transactions made since June 2018.
Any financial transaction that crosses EU borders and provides a tax benefit could be subject to DAC6. In that event, lawyers, tax advisors or bankers involved in the transaction must report the transaction to the local tax authorities. Those authorities will subsequently share that information across borders, or at least coordinate amongst themselves as to who will report and in which country.
A majority of the transactions that are reportable under DAC6 will be fully legal and innocuous, but the compliance burden on law firms is likely going to be substantial.
In a survey conducted by VinciWorks, 25% of law firms believe that DAC6 will impact 1 in 5 clients. A further 25% believe it will impact at least 1 in 10 clients.
The administrative burden of DAC6 is immense. Clients must be notified that transactions are now going to be reported (and asked to waive privilege), all historical transactions dating back to 2018 must be reviewed and all matters need to be regularly analysed for DAC6 compliance. A typical global law firm usually has over 25,000 open matters at any time.
In addition, each EU country has implemented DAC6 slightly differently. DAC6 names certain “hallmarks” or criteria for reporting. These hallmarks include questions such as:
- Is the transaction from a high-tax jurisdiction to a low-tax jurisdiction?
- Does the transaction involve selling a loss making company?
In some countries, the hallmarks are worded differently to encompass more transactions. In others, DAC6 has been expanded to domestic transactions. All of these issues combine to one of the biggest challenges for compliance in years.
DAC6 requires fundamental changes to the ways law firms do business, it involves changes to client communication, IT changes and significant administrative burden. Based on the principle that there is no competitive advantage in compliance, VinciWorks is continuing to consult with leading firms to help establish best-practice DAC6 compliance.
According to VinciWorks’ CEO, Howard Finger, “The concept of collaboration with competing firms on establishing a compliance standard has been working since 2004 and continues to produce outstanding products that establish best practice, mitigate regulatory risk and reduce the cost of compliance”.
Over 90% of firms say that DAC6 will bring fundamental changes to the way law firms operate
Vinciworks conducted an extensive survey of views towards DAC6 compliance. Here are some of the findings:
- Over 90% of firms say that DAC6 will bring fundamental changes to the way law firms operate
- 25% of law firms believe that DAC6 will impact 1 in 5 clients. A further 25% believe it will impact at least 1 in 10 clients