The European Union's Mandatory Disclosure Directive (DAC6) requires taxpayers, advisers and intermediaries to publish details of "potentially dangerous" cross-border tax planning situations. A number of non-EU jurisdictions could eventually introduce the option of comparing reporting requirements under BEPS agreements (BEPS = Base Erosion and Profit Shifting). After the delay due to the pandemic, reporting began in January 2021 in most countries.

Main features of DAC6

While DAC6 applies fairly common principles, EU members differ in their interpretations of the “features” that define hazardous planning and the penalty for non-disclosure. Some countries, such as Germany, stand out by not delaying the report, while some, such as Poland and Portugal, point out how different the application can be by choosing to include domestic options as well as cross-border ones. The most frequently reported transactions fall under codes B2 and E.

Code B2 covers arrangements that convert revenue streams into capital or another category with a lower tax. B2 is a conditional feature, as potential tax advantage must be one of the main options in order to be reported under DAC6. Hallmark E2 records the transfer of “heavy value” intangible assets between related companies. Intangible assets are difficult to measure if there is no reliable comparison, and if the projected future cash flows are highly uncertain at the time the transaction is agreed. Hallmark E3 records a group transfer of function and / or risk and / or assets resulting in a reduction of 50% or more in the projected three-year profit of the transferor before tax.

Tax investigations are on the rise

The number of inquiries from tax authorities is growing now that they have had time to learn about the practical possibilities of DAC6, share data with their colleagues and use the intelligence gathered by new publications. Audits and penalties for non-compliance with tax laws will therefore become more frequent.

In addition, some tax authorities are strengthening their audit powers to intensify investigations into whether taxpayers, advisors and intermediaries have an appropriate system that meets DAC6 reporting requirements.

Tax consulting from Grant Thornton experts

Grant Thornton experts assist in proven effective processes to ensure all cross-border situations need to be reported, identified and managed in accordance with the law:

• Impact assessment report
• Training and awareness
• Management and procedure
• Continuous compliance management and recommended software solutions
• Reporting and archiving

Data source: Grant Thornton Global