The sixth version of the European Union’s Directive on Administrative Cooperation — commonly referred to as DAC6 — brings new corporate tax reporting obligations into full force on July 1.
DAC6 is coming.
This mandatory disclosure regime affects all multinational companies with business operations in the European Union (EU). It also applies to these companies’ tax-planning intermediaries including banks, law firms, and tax advisory firms.
DAC6 is intended to increase transparency and curtail tax evasion. It requires companies to report cross-border tax arrangements that impact at least one EU country and meet certain criteria known as hallmarks. Tax advisory firm Deloitte has said DAC6 “represents one of the most significant changes for tax advisors, service providers, and taxpayers in recent years.”
Failure to comply with the new requirements can lead to significant fines and reputational risk; but, as a recent Thomson Reuters webinar made clear, compliance is complicated. The webinar, Non-Compliance is Not an Option: DAC6 is Here — Why it’s Important to Get it Right, featured panelists Dickson Alfred, senior solution consultant at Thomson Reuters; Carol Chamberlin, managing director at Orbitax; and Orbitax CEO Gratian Joseph.
Reporting requirements vary from country to country
While the EU directive establishes minimum reporting requirements, each of the 27 EU member states can implement local variations and additional obligations. For example, DAC6 addresses direct taxes and international arrangements, but some jurisdictions are expanding its reach to value-added taxes (VAT) and domestic arrangements.
“There are certainly challenges when it comes to complying with DAC6, and at first blush it could all be very daunting,” Orbitax’s Joseph noted. “Not only do you have to report separately to as many as 27 countries, but each country is allowed to implement its own rules, its own reporting forms and reporting formats, and its own specifications for transmitting the completed forms to the tax authority.”
Chamberlin agreed, citing two examples. “Poland greatly expanded the reporting requirements to cover… not just cross-border arrangements but also domestic arrangements,” she said. “It also covers VAT. There’s a great deal more (information that filers must provide to the Polish government) in each report than the EU directive specifies.
“Along those lines, we’ve gotten an initial look at the Netherlands reporting scheme, and they seem to want an actual organizational chart of the entities involved in (reportable cross-border arrangements),” she added.
Looking back & looking ahead
While the new rules go into effect July 1, the first reports are due from taxpayers and intermediaries on July 30 and must cover all reportable cross-border tax arrangements that occurred during the previous two years.
Annual reports of transactions associated with arrangements are due in December. Here again, countries’ rules deviate from the EU directive’s reporting requirements. “There is a lot of nuance here, and a lot of country-specific application that needs to be addressed when you’re thinking about your cross-border arrangements,” Chamberlin explained, adding that after the initial submission in July, cross-border tax arrangements that meet the filing criteria must be reported no more than 30 days after they are ready for implementation.
Thomson Reuters’ Alfred noted that from now through July, corporate taxpayers are expected to focus on the one-time project of fulfilling retroactive reporting requirements. After that, they will need systems and processes to manage these reporting obligations on an ongoing basis.
Chamberlin agreed. “There is much to be considered prior to that first due date, especially since the retroactive look-back covers arrangements going back to June 25, 2018,” she said. “Then, there needs to be some business-as-usual process built into the compliance function in every company. Every 30 days you could have a reporting requirement.
“If (your company has) discussed a possible arrangement that meets the hallmarks, then you could have 30 days to report that,” she added. “You need a process to identify those reportable cross-border arrangements and be ready to report within that 30-day period.”
Data management obstacles
The operational challenges are steep for corporate tax departments, Joseph said. “There’s the frequency of the reporting given that each reportable cross-border arrangement has to be submitted separately,” he said. “You could be reporting a lot more frequently than just once a year and to multiple jurisdictions.”
Andbecause you are reporting on arrangements within 30 days of them becoming ready for implementation, there is no existing data source that you can leverage, he observed. “For example, the required data cannot be downloaded from an [Enterprise Resource Planning] ERP system, because you will need to report before that data has made its way into the ERP system,” Joseph said.
Indeed, data collection may require a wide-ranging scavenger hunt. “The data you are looking for (covers) things like planned M&A transactions, proposed cross-border payments, movement of personnel, various treasury activities, changes in business activities that could have transfer pricing implications,” Joseph explained. “These could all be decisions that are being made outside of the tax department, and you want a way to gain access to the right people within the multinational enterprise and ask them basic, but timely, questions to determine whether (business activities) being planned could rise to the level of a reportable cross-border arrangement.”
Corporate tax specialists, he said, will be required to “analyze the data to determine if it needs to be reported, determine which country to report it to, populate the form, generate the (extensible markup language), and transmit to the tax authority — and do this all within 30 days of the plan being ready for implementation.”
Develop workflow processes
Orbitax recommends taxpayers start in a “pre-arrangements stage” to gather data needed to identify reportable activity. Steps may include the following:
- Identify internal keepers of relevant data from across regions and functions — including tax, treasury, strategy, human resources, and operations.
- Design a set of questions that will surface the information needed to identify tax arrangements and determine if they meet the criteria for reportable activity.
- Solicit answers to these questions monthly in order to be available to file reports within the 30-day window.
- Establish new workflows — several may be needed — to efficiently complete these steps on an ongoing basis.
An automated reporting solution can support a “well-defined workflow to take you from data collection to filing,” Joseph noted, adding that this would include a database of country-by-country rules and the ability to automatically apply hallmarks, identify reportable cross-border arrangements. and filter requirements by due date and reporting jurisdiction.
And keep in mind that this may be just the beginning, because non-EU countries, including Mexico and Norway, are exploring similar reporting regimes of their own.