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International tax

Mandatory reporting obligation for cross-border tax arrangements (MDR/DAC6)

Menno van Werkhoven
By:
As of January 1, 2021, intermediaries and/or taxpayers must report potentially aggressive cross-border tax arrangements to the tax authorities. Also as a CFO or controller, you may have to deal with this. Incorrect information can result in a substantial fine. We will be happy to explain how this works and give you a helping hand to make the reporting process easier.
Contents

European Directive DAC6: what does that mean?

It concerns tax arrangements involving residents of different countries and which may be used to avoid tax. The obligation to report is the result of the Dutch introduction of the European Directive Mandatory Disclosure Rules (MDR)/DAC6. The directive applies retroactively from 25 June 2018. Negligence, incompleteness or incorrect information will result in a fine of up to €870,000. In other countries this even amounts to millions of euros.

How does DAC6 affect your business?

In principle, the accountant, tax adviser, civil-law notary or other adviser who supports you is the party who must report potential tax arrangements. However, your company may also be indirectly or even directly affected by this obligation. In these two situations the duty to report lies with you as a taxpayer:

  • If no intermediary can be designated in the case of a reportable arrangement (e.g. the structure has been conceived and implemented entirely in-house).
  • If an intermediary can invoke a (legal) right to secrecy.

But this is only one side of the coin. Regardless of who provided the information, the various tax authorities carry out their audits. They use the collected data to ask specific questions. It is therefore important to properly record the details of a construction internally, along with all additional documentation, in order to be 'in control'.

In order to comply with the DAC6 rules, you as a taxpayer must be well aware of potential reportable tax arrangements and the reporting deadlines.

Deadlines

DAC6 is effective from June 25, 2018. Originally, the obligation to report and exchange with other European countries would take effect on 1 July 2020. Due to the Corona crisis, countries were allowed to suspend this until early 2021. Germany and Finland, among others, did not do so, but the Netherlands opted for postponement. At the end of February, the reportable tax arrangements between June 25, 2018 and July 1, 2020 must be sent to the Dutch Tax Authorities. The Dutch Tax Authorities share the list of companies with the other European countries on a quarterly basis. For reportable arrangements implemented from 1 July 2020, the standard period of 30 days will run from 1 January 2021. These must therefore be reported no later than 31 January 2021.

Review of constructions

The construction is tested on the basis of 15 so-called hallmarks. These hallmarks are broadly defined, so many situations fall under them. For a number of hallmarks, an assessment must be made whether the specific arrangement has been set up primarily to create a tax saving ('main benefit test'). If this is not the case, there is no reporting obligation. Arrangements that have a hallmark without a main benefit test must always be reported. The Dutch Tax Authorities have indicated that they will actively audit for the correct application of the main benefit test. The correct capturing and storing of supporting data is therefore important, for a period of up to twelve years..

Assistance with reporting

The Dutch Tax Authrities will open a portal on 1 January 2021 where a taxpayer can enter data manually. Especially when reporting multiple structures it is easier to use the possibility to upload a previously prepared XML file. The data on the reportable arrangement must be stored for 12 years, even if no actual reporting took place. For example when an arrangement does not meet the main benefit test. If another intermediary or taxpayer reports, it is important to record the international reference number of the arrangement and the reason why it has not been reported.

This all seems quite a challenge. And it actually is, certainly when it comes to multiple arrangements in different countries. Thanks to its extensive experience in the field of international tax advice and correct application of DAC6, Grant Thornton can offer support in several areas. For example, we can help you assess the content of potentially reportable arrangements on the basis of their essential characteristics. We have a great deal of experience in evaluating the aforementioned hallmarks. For support of our customers and their reporting processing we use the software tool DAC6pro.

Service for non-customers

Even if you are currently not a client, we are happy to assist you. Your company license on DAC6pro and we can help you with the implementation of this tool and the incorporation of the reporting process within your company. Using DAC6Pro offers you the following advantages:

  • Tax arrangements are stored in a simple and logical way in one centralized spot, including all relevant documents and attachments.
  • Effective integrated knowledge base helping with the hallmark evaluation
  • Automatic conversion to the correct IT technical format to support reporting arrangements in 28 countries.
  • Simple and unambiguous collaboration with intermediaries in different countries around (potentially) reportable structures. DAC6pro is not bound to one single intermediary like competing offerings.
  • Highly cost-effective compared to other, unnecessarily complex solutions.
  • Effective optional 'DAC6 Enforcer' module available to give insight into internal compliance.
  • Accessible in the Microsoft cloud from any device.