Correct Success: Gibson Dunn | DAC 6 Update: UK Narrows Scope of Mandatory Tax Reporting

January 4, 2021

In a shock u-turn, on 31 December 2020, the UK authorities took steps to slender the scope of necessary reporting below DAC 6. Within the UK, solely cross-border preparations falling below the Class D hallmark (broadly, those who (a) have the impact of circumventing the OECD’s Widespread Reporting Normal or (b) obscure helpful possession) shall be reportable. The change will apply to each historic, and future, cross-border preparations.

The modification to the present laws is meant as a short lived step. Within the coming yr, the UK intends to introduce, and seek the advice of on, laws to implement necessary reporting below the OECD Obligatory Disclosure Guidelines (the “MDR”).

These actions will considerably scale back the variety of preparations that must be reported to HMRC. Nonetheless, reporting below DAC 6 is already required in some EU member states (reminiscent of Germany), and shall be required elsewhere in Europe within the coming months. Accordingly, it must be thought of whether or not preparations that may beforehand have been reportable to HMRC below DAC 6 now must be reported to different tax authorities.

EU Council Directive 2011/16 (as amended) (referred to as DAC 6) requires UK intermediaries (or failing which, taxpayers) to report, and HMRC to alternate, data relating to cross-border preparations which meet a number of specified traits (hallmarks) and which concern not less than one EU nation. Rules implementing DAC 6 reporting obligations into UK regulation (the “Rules”) got here into power on 1 July 2020.

On the finish of the Brexit transition interval at 11pm on 31 December 2020, obligations requiring the UK to implement DAC 6 fell away. In the course of the course of final yr, the UK authorities had indicated that DAC 6’s UK implementation can be unaffected by, and that the Rules would stay in power following, the top of the Brexit transition interval. Nonetheless, below the Free Commerce Settlement agreed between the UK and the EU on 24 December 2020, the UK is barely required to make sure any laws it implements on the finish of the transition interval referring to the alternate of data regarding potential cross-border tax planning preparations gives the extent of safety offered for by the “requirements and guidelines which have been agreed within the OECD…”.

Accordingly, on 31 December 2020, the UK authorities printed laws (taking impact on the finish of the transition interval) to slender the scope of the Rules according to the MDR. In consequence, solely cross-border preparations (i.e. these regarding the UK or an EU member state) that fall inside Class D of Half II of DAC 6 will fall inside the scope of UK reporting obligations.[1] Broadly, an association shall be reportable below Class D if the association both: (i) has the impact of undermining reporting obligations below agreements for the automated alternate of data (e.g. the EU Widespread Reporting System, or the OECD’s Widespread Reporting Requirements); or (ii) entails non-transparent authorized or helpful possession chains that:

don’t keep on a substantive financial exercise;
are included, managed, resident, managed or established in any jurisdiction aside from the jurisdiction of residence of a number of of the helpful homeowners of the property held by such individuals, authorized preparations or constructions; and
have unidentifiable helpful homeowners.

Historic preparations

For reportable transactions after 30 June 2020, the primary UK DAC 6 reporting deadline is 30 January 2021, and for transactions on or earlier than 30 June 2020 the place step one in implementation was taken on or after 25 June 2018, it’s 28 February 2021.

The impact of the amending Rules (which has been confirmed by HMRC) is that the narrower reporting obligation won’t solely apply to future preparations, however may even apply to historic preparations for the interval previous to 31 December 2020. Accordingly, solely these preparations which fall inside a trademark below Class D would must be reported to HMRC.

Sensible impression

The amendments to the Rules have lowered the scope of disclosures to HMRC below DAC 6. Nonetheless, a full DAC 6 evaluation and hallmark evaluation will nonetheless be required in respect of EU jurisdictions concerned in a transaction, so as to decide whether or not a DAC 6 submitting obligation arises in these member states. Cross-border transactions that may in any other case have been reportable to HMRC could must be reported to EU tax authorities. It’s anticipated that the exception can be cross-border transactions that had been reportable below hallmarks A, B, C and E of DAC 6 solely on account of a UK nexus. Nonetheless, it stays to be seen whether or not EU member states will replace their home laws implementing DAC 6 to require reporting of preparations that concern solely the UK and a non-EU jurisdiction. Such amendments would seemingly increase various sensible points, together with, for instance, questions as to who ought to bear the reporting obligation the place intermediaries within the related EU jurisdiction have restricted information of the broader preparations.

From a sensible perspective, the UK’s divergence from the DAC 6 normal could create extra administrative burdens for these intermediaries and taxpayers with pan-European operations that had deliberate to coordinate and submit DAC 6 reviews within the UK. Because the UK’s actions weren’t trailed, these companies could, at brief discover, must shift the coordination and submission of reviews to an EU member state concerned within the reportable association. For these companies that had already begun getting ready knowledge for submission utilizing HMRC’s XML schema, extra administrative work could also be wanted to make sure this knowledge could be submitted to different related EU member states’ databases. It stays to be seen whether or not (to reduce such burdens) HMRC could also be prepared to simply accept submissions on a voluntary foundation or whether or not (if HMRC was so prepared) this may be permissible below the legal guidelines of related EU member states.

Going ahead

OECD Obligatory Disclosure Guidelines

We perceive that the UK authorities will seek the advice of on draft laws to implement the MDR in the end. The MDR had been first printed in March 2018, and type a part of the OECD’s suggestions set out within the “Mannequin Obligatory Disclosure Guidelines for CRS Avoidance Preparations and Opaque Offshore Buildings”.[2] They’re designed for jurisdictions desirous to implement disclosure obligations on sure intermediaries concerned in preparations meant to avoid disclosure obligations below the OECD’s Widespread Reporting Normal.[3]

It’s unclear whether or not such laws would, within the instant time period, substantively alter the scope of necessary reporting obligations offered for below the Rules (as amended). Trying ahead, nonetheless, enhanced reporting is quick turning into a well-liked measure, internationally, for tackling tax avoidance, evasion and non-compliance. International locations exterior the EU have launched disclosure necessities that transcend the MDR (with Mexico being the newest nation to implement a disclosure regime modelled on DAC 6). Given this pattern, it’s anticipated that the OECD will additional broaden the scope of the MDR sooner or later. Accordingly, regardless of the lowered scope of the UK’s present reporting regime, wider necessary disclosure obligations could properly grow to be normal observe for taxpayers social gathering to, and intermediaries advising on, cross-border preparations.

Alternate of tax data

Earlier than the top of the transition interval, the UK was required to alternate tax data (together with data referring to tax rulings and advance switch pricing agreements, EU Widespread Reporting Requirements, country-by-country reporting and helpful possession) with EU member states below the varied provisions of Directive 2011/16/EU (the “DAC”). Nonetheless, it isn’t but clear: (i) how reviews referring to Class D cross-border preparations shall be shared between HMRC and different tax authorities below the present DAC 6 alternate framework; (ii) whether or not HMRC can have entry to data referring to cross-border preparations falling inside hallmarks A, B, C or E; and (iii) whether or not HMRC will retain entry to different data at the moment shared below the DAC, on condition that the UK is now not a part of the EU. The FTA, for instance, is silent on such issues.[4]

Exterior of the DAC, there are current worldwide frameworks that permit for the alternate of tax data between tax authorities. Specifically, (a) the OECD offers a platform for the spontaneous alternate of tax rulings and advance switch pricing agreements and (b) most double tax treaties between the UK and EU member states permit for the alternate of data between the treaty events on request, in every case the place the knowledge is foreseeably related to the recipient tax authority. Moreover, the OECD offers an data sharing platform for jurisdictions which have entered into bilateral agreements to alternate data, ought to the UK search to enter into such agreements with EU member states. For the second, nonetheless, it stays to be seen whether or not current frameworks will present ample data sharing rights for HMRC.

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[1] The Category D hallmarks are contained in Annex IV Part II of the EU Council Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32018L0822

[2] OECD (2018), Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures, OECD, Paris. https://www.oecd.org/tax/exchange-of-tax-information/model-mandatory-disclosure-rules-for-crs-avoidance-arrangements-and-opaque-offshore-structures.htm

[3] The CRS was introduced in 2014 as a global reporting standard for the cross-border exchange of financial information.

[4] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22020A1231(01)&from=EN

Gibson Dunn’s legal professionals can be found to help with any questions you could have relating to these developments. For additional data, please contact the Gibson Dunn lawyer with whom you normally work, any member of the Tax Practice Group or the authors:

Sandy Bhogal – London (+44 (0) 20 7071 4266, sbhogal@gibsondunn.com)
Benjamin Fryer – London (+44 (0) 20 7071 4232, bfryer@gibsondunn.com)
Bridget English – London (+44 (0) 20 7071 4228, benglish@gibsondunn.com)
Fareed Muhammed – London (+44 (0) 20 7071 4230, fmuhammed@gibsondunn.com)
Barbara Onuonga – London (+44 (0) 20 7071 4139,bonuonga@gibsondunn.com)
Aoibhin O’ Hare – London (+44 (0) 20 7071 4170, aohare@gibsondunn.com)
Avi Kaye – London (+44 (0) 20 7071 4210, akaye@gibsondunn.com)