Come and meet DAC 6!
The abbreviation DAC 6 is not unknown. Sometimes it appears in the news on taxes or in the parliament records . But what does it actually stand for? Does it concern any of us? What does it actually bring about? Today’s newsletter tries to answer these questions.
What is DAC 6?
DAC 6 is the abbreviation formed from the initials of the Directive on Administrative Cooperation and the number 6, referring to the sixth amendment to the original wording of the 2011 directive. The directive is aimed at fighting tax evasion in various forms. In particular, DAC 6 focuses on curbing aggressive tax planning, following up on the OECD’s recommendations in Action 12 of Base erosion and profit shifting (BEPS), which governs mandatory disclosure of potentially optimizing tax arrangements. According to DAC 6, arrangements subject to reporting obligations must be transnational in nature and should concern only direct taxes.
Information on every potentially tax-optimizing scheme should be, in line with national implementation, conveyed to the tax authority in one of the EU member states concerned. Afterwards, the tax authority ensures transmission of this information to the central repository of the European Union institutions. Tax authorities from the other EU member states will also have access to the central repository, and will thereby be able to control and assess the possible impact of aggressive tax planning on their tax systems. The data in the database shall be deleted after the relevant arrangement is no longer in place.
When is DAC 6 expected to be introduced in Czech legislation?
EU member states were required to implement DAC 6 no later than 1 January 2020, with it coming into effect from 1 July 2020. In the light of events over recent months, the European Union institutions recommended that it be postponed by 6 months, to 1 January 2021.
In the Czech Republic, DAC 6 shall be transposed into national law through the amendment of Act No. 164/2013 Coll., on international cooperation in tax administration and on the amendment of other related laws. The act is about halfway through the legislative process, and is ready to be discussed at the next meeting of the Senate.
According to the information available to us, revisions of the act are no longer possible. It is therefore assumed that the act will come into force with retroactive effect from 1 July 2020. However, the Czech government is considering ways of postponing its entry into force to a later date, i.e. 1 January 2021, as proposed by the European Commission.
Does DAC 6 introduce new terminology?
Unfortunately, yes. The basic terms used in the act include:
- Arrangement (in Czech “uspořádání”) = cross-border arrangement containing specific characteristics;
- Hallmarks (in Czech “charakteristické znaky”) = specific characteristics or features laid down in the Annex to the Directive and in the Annex to the Czech Act that indicate the potential risks of tax avoidance;
- Intermediary (in Czech “zprostředkovatel”) = any person that designs, markets or makes an arrangement available for implementation (tax advisor, lawyer, banker, financial intermediary, accountant, …);
- User (in Czech “uživatel”) = any person who uses and implements an arrangement;
- Notification (in Czech “oznámení”) = information on the cross-border arrangement, structured as laid down by the Ministry of Finance of the Czech Republic in XML format.
Who is required to report?
The primary reporting obligation lies with the main or secondary intermediary. However, where the intermediary is not able to fulfil the reporting obligation (e.g. by virtue of their obligation to professional secrecy), they are obliged to communicate this fact to the user, to whom the reporting obligation shall then pass. If a user uses no intermediary services, designing and implementing an arrangement themselves, they are obliged to submit the relevant notification by themself.
When is it necessary to fulfil the reporting obligation?
DAC 6 came into effect on 25 June 2018. The period from this date to the required date of entry into force in the member states, i.e. by 1 July 2020, is referred to as the transition period. According to the original schedule, all arrangements implemented by a user in the transition period had to be reported within 2 months of the act entering into force, i.e. no later than 31 August 2020. Any new arrangement should be reported no later than 30 days from its implementation.
However, after postponing the date of the act entering into force by six months, the schedule will change. At the moment the act comes into effect, it will be necessary to distinguish the following cases :
- Cross-border arrangements, the first step of which was implemented between 25 June 2018 and 30 June 2020 (inclusive), must be reported by 28 February 2021.
- Cross-border arrangements that were made available or ready to implement or the first step of which was implemented between 1 July 2020 and 31 December 2020 (inclusive) must be reported by 30 January 2021.
- From 1 January 2021 cross-border arrangements that were made available or ready to implement or the first step of which was implemented must be reported within 30 days of the operative event.
Is it really that easy?
Not at all. DAC 6 causes many interpretation difficulties as not only the text of the act itself but also of the annex that contains definitions of the hallmarks is couched in very general terms. The European Union institutions have intentionally provided no guidance, on the grounds that it is appropriate that each member state provides an interpretation according to their own needs.
Currently, there are no interpretations of the act in the Czech Republic and, according to our information, no interpretations are expected to be issued in the future. The only source of more specific information is the website of the Ministry of Finance of the Czech Republic, where FAQs regarding the transposition of DAC 6 into Czech law shall be published.
What shall we do now?
Since there are still several months left until the act enters into force, it is appropriate to use this time to analyze the events which occurred during the transmission period (25 June 2018 to 31 December 2020) as well as to identify any potentially reportable cross-border arrangements implemented during this period of time. Furthermore, implementation of an internal control system is recommended to ensure continuous monitoring of cross-border transactions and planned cross-border arrangements that should be reported.
If you need our assistance in fulfilling the new reporting obligation arising from DAC 6, please feel free to contact us, our advisors are ready to support you.