Have you filed for DAC6?

DAC6 was implemented into Maltese legislation by Legal Notice L.N. 342 of 2019, with effect from July 1, 2020.  The Commissioner for Revenue deferred the first reporting deadlines by six months in view of the COVID-19 pandemic.  DAC6 arose out of Action 12 of the OECD’s base erosion and profit shifting (BEPS) project, which recommended that jurisdictions should introduce a regime for the mandatory disclosure of aggressive cross-border tax planning arrangements.

The DAC, under Directive 2011/16 EU, has requirements for exchanging information about tax rulings, advance pricing agreements, EU Common Reporting Standards, country-by-country reporting and beneficial ownership.  Companies should not underestimate the effort required for the collection and accurate reporting of huge amounts of crucial cross-border arrangement information within an accelerated time frame.

The Regulations brought about several changes, mainly as regards the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.  Following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement, HMRC made an announcement on 31 December 2020 that reporting under DAC6 would only be required for arrangements that meet Hallmark D.

Last January, 2020, the Maltese Commissioner for Revenue published detailed guidance on the DAC6 reporting requirement for intermediaries and taxpayers. The 29-page guidance provides information on intermediaries, relevant taxpayers, reportable arrangements, the hallmarks, information to be reported, and penalties for non-compliance.  According to the guidance, the term ‘tax advantage’ should be broadly interpreted and includes a repayment of tax, a tax relief, a reduction in the tax charge, a tax deferral or an absence of taxation.

In terms of the Regulations for the 27 states, local intermediaries are required to file information within their knowledge, possession or control on reportable cross-border arrangements to the Malta Commissioner for Revenue.  Failing to report information or failing to report complete and accurate information will result in penalties of €200 plus €100 per day of default, up to €20,000.  A penalty of €2,500 will also apply for failing to maintain documentation and information for a minimum period of five years.

Furthermore, it imposes a penalty of €1,000 plus €100 per day of default, up to €30,000 for failing to comply with a request for information by the Commissioner.  Essentially, this Directive stipulates the obligation to report an arrangement by the taxpayer but this only applies if there is no intermediary or where the intermediary is a non-EU intermediary or where the taxpayer is notified by the intermediary that it has the right to a waiver due to legal professional privilege.

Thus, the Maltese legislation exempts intermediaries from the obligation to report where the reporting of such information would constitute a criminal offence by virtue of disclosing professional secrets confided in him/her by reason of his/her calling, profession or office.  Who are the intermediaries?  These include advocates, notaries, legal procurators, accountants, auditors, employees and officers of financial and credit institutions, trustees, officers of nominee companies or licensed nominees, licensed investment service providers and licensed stockbrokers.

Legislation requires an intermediary who is exempt from reporting to inform within seven working days any other intermediary or if there is no such intermediary, the relevant taxpayer of their reporting obligations in Malta and to provide the Commissioner for Revenue with an annual update containing a list of the said reportable cross-border arrangements in a form which is to be determined by the Commissioner.

Due to a Covid-19 extension, any transactions reportable under DAC6 and which occurred between 25 June 2018 and 1 July 2020 will need to be disclosed by 28 February.  Other transactions reportable between 1 July 2020 and 31 December 2020 to be disclosed by 31 January.  One must appreciate that the directive requires a number of preparations since it is retroactive.  Typically, one notes that there is a big rush to comply with the targets of the legislation by intermediaries, who can be individuals or companies.

DAC6 in fact imposes mandatory disclosure requirements for certain arrangements with an EU cross-border element where the arrangements fall within certain “hallmarks” mentioned in the directive and in certain instances where the main or expected benefit of the arrangement is a tax advantage. There will have to be a mandatory automatic exchange of information on such reportable cross-border schemes via the Common Communication Network, which will be set up by the EU.

These hallmarks invariably include confidentiality agreements regarding tax advantages, intermediary fees contingent on tax benefits or standardised documentation or structures that are tailored to a participant’s individual circumstances.

Examples of other hallmarks that may indicate aggressive tax avoidance include buying of loss-making entities to reduce tax liability, the conversion of income to capital, gifts or other types of revenue taxable at a lower rate, round-trip transactions and deductible cross-border payments involving no- or low-tax jurisdictions or that benefit from other preferential regimes.

The legislation is vast as it also highlights double taxation deductions or relief, transactions that sidestep exchange of information and beneficial ownership reporting obligations and transfer pricing involving hard-to-value intangible assets or transactions that have the effect of lowering taxable profit in the future.  To clarify what needs to be disclosed, one can define an arrangement that includes at least an EU member state and another jurisdiction, where at least one of the following conditions must be met:

• Participant/s, not resident same jurisdiction; or
• Participant/s simultaneously tax resident in two or more jurisdictions; or
• Participant/s has Permanent Establishment (PE) in another jurisdiction where part or whole arrangement takes place; or
• Participant/s carries on business in other jurisdiction where not tax resident and has no PE; or
• Arrangement impacts the identification of UBO or Transfer Pricing.

Ideally, intermediaries make good use of proven technology to speed up what may be a substantial administrative burden. It is understandable that as unpaid gatekeepers, we sympathise with intermediaries who are now faced with the need to seek specialist expertise to track variations in the law from country to country, as well as the potentially large number of retrospective transactions or arrangements that must be reviewed.

We at PKF Malta offer such services, each tailored to the willingness and capacity of our clients to help them comply with DAC6.