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DAC6: Prepare for Reportable Cross-Border Arrangements in 4 Steps

09 Sep 2021

BEPS, Cross-border, Europe, Tax Planning

Annex IV of the DAC6 Directive, cross-border, cross-border transactions, DAC6, DAC6 Directive, DAC6 hallmarks, EU Mandatory Disclosure Rules, EU Mandatory Disclosure Rules for cross-border arrangements, intermediary, main benefit test, prevent tax penalties, reportable cross-border arrangements, taxpayer, transfer pricing

Doing business in Europe means taking into account the many local rules, EU laws and international regulations. It is not unusual to benefit from various tax benefits or to research the best possible tax solutions. However, tax evasion and aggressive tax schemes are highly unwanted and will be fined. Therefore, it is beneficial to look into the DAC6: The EU Mandatory Disclosure Rules for cross-border arrangements. Let’s check if your company is well-prepared for cross-border arrangements.

What is DAC6?

DAC6 is an EU Council Directive that entered into force on 25 June 2018 and is implemented by EU jurisdictions into EU national law. Furthermore, DAC6 amends the cooperation between the EU Member States by focusing on joint actions and audits.

This directive’s primary goal is to harmonize tax rules in Europe by providing tax authorities an early’ warning system’ that notifies potentially aggressive tax planning schemes. Therefore, intermediaries are obligated to disclose potentially aggressive tax planning schemes on cross-border arrangements, otherwise called ‘reportable cross-border arrangements.

Step 1: Check who is required to disclose reportable cross-border arrangements

Intermediaries, and in certain situations, taxpayers, have an obligation to report cross-border arrangements to the authorities. An intermediary may be relieved from its reporting obligation if they can prove that another intermediary has already reported the relevant arrangement. The image below shows an overview of who is required to disclose these arrangements.

Step 2: Check if the arrangement is cross-border and ‘reportable’

For an arrangement to be cross-border, at least one of the participants must be located in more than one EU Member State. There is no reporting obligation if all participants are tax residents in the same jurisdiction or if there is no connection with any EU Member State. However, even an arrangement between two entities from the same EU Member State may be considered cross-border in some cases. A prime example is an EU entity with foreign shareholders. Below is a short overview of examples of non-cross-border and cross-border transactions.

For an arrangement to be reportable, one or more of the DAC6 Hallmarks must be met as set out in Annex IV of the DAC6 Directive. Therefore, a cross-border arrangement will only be reportable if one or more DAC6 Hallmarks are met. These hallmarks are characteristics or features of a cross-border arrangement that may indicate a potentially aggressive tax planning structure. The five categories of the hallmarks set out by the DAC6 directive are:

Generic hallmarks linked to the main benefit test
Specific hallmarks linked to the main benefit test
Specific transactions related to cross-border transactions
Specific hallmarks concerning automatic exchange of information and beneficial ownership
Specific hallmarks concerning transfer pricing arrangements

The ‘arrangements’ mentioned in the hallmarks represent undefined terms included in the five hallmark categories.

Step 3: Do the Main Benefit Test

The intermediary or taxpayer may benefit from a tax advantage when they fulfill the ‘main benefit test.’ However, this tax advantage may only be considered under generic hallmarks of categories A, B, and (some parts of) C.

However, it is crucial to keep in mind that due to the broad scope of the hallmarks, DAC6 creates a risk of under-reporting and over-reporting. Furthermore, there is no consistent interpretative guidance agreed between the EU Member States.

Step 4: Act on time and prepare for penalties

You should report reportable cross-border arrangements through a special reporting form. Each Member State has its tax authority, so it is recommended to check out your local tax authority website. Generally, you must report a reportable cross-border arrangement within thirty days of the earliest of:

the day after the arrangement is made available for implementation;
the day after the arrangement is ready for implementation; or
when the first step in the implementation of the arrangement has been made.

In case of non-compliance, such as non-reporting, incomplete or inaccurate information, the relevant intermediary and taxpayer may be subject to penalties. These penalties are up to a maximum of €870,000. In some instances, there will be a criminal prosecution. In other words, it is better to prevent penalties altogether. After all, significant sanctions and reputational risks apply to not only the businesses but also the intermediaries!

As mentioned earlier, there are risks in reporting your cross-border arrangements, such as under- and over-reporting. Meanwhile, many companies either miss out on tax benefits or end up overlooking essential hallmarks. We at Global Connect Admin provide tax advice for many European companies and international companies that have activity in the EU. Do you have any questions regarding the DAC6, (reportable) cross-border arrangements or other vital information to do business successfully? Feel free to send us any questions our way; we would love to assist you.

Sources

AKD Benelux Lawyers – EUR-Lex

Transfer Pricing Agenda 2021: Tax Certainty

29 Jan 2021

BEPS, Current news, Europe, Tax Planning, Tax Pricing Agenda

ADS, BEPS, BEPS 2.0, CFB, global tax, KPMG, OECD, Pillar One, Tax digitalisation

Tax security and certainty are the backbones of the world of taxes. The goal of the OECD/G20 BEPS project is to create a consensus-based international tax rule to address base erosion and profit shifting, thereby protecting tax bases. At the same time, this also ensures the provision of more certainty and predictability to the taxpayer.

The development of BEPS 2.0

On the 14^th of October 2020, the OECD, with support of the G20, published the Tax Challenges Arising from Digitalisation report on the BEPS 2.0 Pillar One¹ Blueprint. The deadline for (draft) submissions for the report focusing on Pillar Two² was the 14^th of December 2020, with virtual public consultation meetings on the 14^th and 15^th of January 2021. Reports with a consensus solution and elaboration of technical aspects are expected to be published during this year, with implementation – using MLI – for the relevant agreement by the end of 2021.

¹In Pillar One the profits are redistributed among market countries.

²Pillar Two introduces the global minimum tax rates.

Pillar One

Pillar One aligns tax rights with the involvement of the local market. There is a need for a multination consensus for this to happen; otherwise, the unilateral digital tax measures could increase significantly.

Pillar One is a series of proposals to rethink tax allocation rules in a changing economy. The intent is to attain some of the remaining profits of multinational corporations taxed in the jurisdiction resulting in revenue. Think of residual profit generated by capital, risk management functions, and/or intellectual property. Automated Digital Services (ADS) and Consumer-Facing Businesses (CFB) apply as well. This makes the scope wide enough so that the encompassing companies can benefit from significant and long-lasting interactions with customers and market users. This process links tax rights related to these companies’ income sources, which do not need to depend on physical presence in the jurisdiction.

Amount A:

The new tax law awards high profits based on a formula, which does not necessarily take the business position. Amount A includes winnings earned through online activities of an automated digital nature of goods or services sold to consumers, including the associated IP licenses. Specific inclusions and exclusions are suggested from this. In addition, Amount A has been allocated based on local revenues, determined through procurement rules, with elimination measures for double taxation.

Amount B:

Amount B is the standard business compensation for ‘baseline’ routine marketing and distribution activities. Alternative methods for this Amount can be applied if supported by evidence.

What companies should be aware of

The changes regarding taxation have a multinational set-up. They are also technically complex; the effects and uncertainties will be drastic for many companies. The size of the covered companies is not yet final. However, this is by no means limited to highly digitized business models.

Implementation of the BEPS 2.0 measures is likely to occur soon, although many details are still unclear. The rules do not only apply to classic digital companies. In addition, these rules will shift the installation location in favor of the market states. The technical implementation is demanding; the demands on availability and integrity of data are high. New risks of double taxation are emerging, which can probably only be mitigated by international communication processes.

It is important to stay on top of the news and keep your business as stable as possible. Useful and necessary information on BEPS can be found on the websites of OECD and KPMG. Seeking professional assistance is always helpful to avoid potential issues. We are always here to hear your needs.

Related GCA articles

Tax Pricing Agenda 2021: Tax Innovation

Tax Pricing Agenda 2021: Tax Efficiency

Transfer Pricing Guidance on Financial Transactions by OECD

Certainty in Global Tax Issues Expected to Increase

Base Erosion and Profit Shifting

Sources

OECD – KPMG

Transfer Pricing Agenda 2021: Tax Efficiency

27 Jan 2021

BEPS, Current news, Europe, Tax Planning, Tax Pricing Agenda

BEPS, COVID-19, tax, taxes, Transfer Pricing Model

To perform tax work efficiently, one must be aware of developments in the tax world, as well as the external factors that come into play. According to the OECD, COVID-19 significantly affects the tax world. However, what is the situation during and after the pandemic? How do you efficiently work on the BEPS-analysis, design a TP-model, make the correct situation analysis, and implement an appropriate implementation strategy?

COVID-19

On the 18^th of December 2020, the OECD published their guidance on the transfer pricing implications of the COVID-19 pandemic. The guidance states the need for the analysis of industries and the competitive situation. However, the current situation cannot be compared to the financial crisis of 2008. Therefore, you should pay attention to the differentiated benchmarking, based on the outcome tests and the allocation of extraordinary costs, according to the distribution of functions and risks. ‘Force majeure’ is an exception. State aid is granted according to general TP principles. Besides, always stay alert to changes and assume that you have to make adjustments once the pandemic is over.

BEPS-analysis (Base Erosion and Profit Shifting)

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies of multinational corporations that exploit gaps and discrepancies of tax rules to avoid tax. The BEPS-package provides governments with 15 actions with (inter)national instruments to tackle tax evasion. The tools give businesses greater certainty by reducing disputes over the application of international tax rules and standardizing compliance requirements.

Recognizing the characteristics and risks of tax evasion, as well as safeguarding the assets and other value drivers, is useful for companies. A DEMPE-analysis (Development, Enhancement, Maintenance, Protection & Exploitation) is convenient for intangible assets.

TP-model (Transfer Pricing Model)

The aftermath of COVID-19 has caused changes in TP-models for multinationals. Multinational corporations must evaluate specific steps in their transfer pricing policies for protection and support during the pandemic.

In addition, a suitability analysis – e.g., benchmarking, TNMM and/or profit distribution – can help you with the design of a TP-model. A transaction structure, such as the extraction of permits, can play a significant role in the TP-model format.

The requirements fora n efficient TP-model are:

Be holistic. Take all tax aspects into account and make use of the operational management concept.
Be flexible. Respond flexibly to operational developments and take economic cycles into account.
Be alert. Active management of profit distribution by function and risk distribution is possible, so make sure you keep an eye on this. In addition, ensure sufficient availability and integrity of data.
Be compatible. Always work according to the correct specifications, work globally and consistently and ensure that you sufficiently document and declare.

Tax situation analysis

When analyzing the tax situation, pay attention to the following:

The BP history
The tax attributes, in particular, loss compensation
The tax rulings
The tax incentives
The extra tax aspects

Implementation strategy

Consider the following points in the implementation strategy:

The advance uni- or bilateral price agreements
The rollbacks
Joint audits of tax audits

Crisis-related adjustments to the TP-model concerning compliance and tax efficiency may be necessary. In principle, the situation regarding COVID-19 does not allow for unique TP routes; however, there are planning options. BEPS sets new requirements for the TP-model but also offers the possibility to check the efficiency of this model. The Base Erosion and Profit Shifting often suggest the analysis of margin-based TP-models with central strategy carriers. International mutual agreement procedures can be part of the tax strategy.

If you have any inquiries, feel free to talk to us, so we can work together to see how you can move forward with your company. You can find information about tax matters on the websites of the OECD and KPMG as well.

Related GCA articles:

Transfer Pricing Agenda 2021: Tax Innovation

Transfer Pricing Agenda 2021: Tax Certainty

Transfer Pricing Guidance on Financial Transactions by OECD

More Global Transparency on Assets and Less Tax Havens on the List

Certainty in Global Tax Issues Expected to Increase

Sources

OECD – KPMG – KPMG Germany

Transfer Pricing Agenda 2021: Tax Innovation

25 Jan 2021

Aktuelles, BEPS, Current news, Europe, German SMEs, Germany, Steuerplanung, Tax Planning, Tax Pricing Agenda

ATAD, Europe, European Commission, Germany, KPMG, OECD, tax, Tax CMS, Tax Pricing Agenda, Transfer Pricing Life Cycle, VerSanG

Tax security is a high priority for tax authorities. The most critical influences on investment and location decisions are uncertainties in corporate tax and the VAT system. It is crucial to ensure financial security, which is also the case with digital business models in Germany.

To have Tax Certainty, you need Compliance and Controversy. You have obligations to cooperate with the tax audit, and you need to record your work before and during this audit. Are there tax disputes? Then you can use dispute settlement instruments.

Verwaltungsgrundsätze 2020

The recently applied administrative principles of the tax auditing practice in Germany are:

Increased duty of cooperation, according to Section 90 (2) AO. The relevance of documents and data of foreign persons, such as e-mails, Messenger messages, and electronic media, is necessary. If necessary, you can contractually guarantee the internal group relationship.
Increased obligation to cooperate in accordance with Section 90 (3) AO. You must provide evidence for data or documents as a basis for testing by using different methods.
Suitability documentation. With the introduction of the “Best Method”-rule, you can leverage third-party comparison data for budget calculations and sensitivity analysis for valuation.
Estimates, according to Section 162 (3) and (4) AO. Please refer to this Section if your documentation cannot be used, even if the content differs from the tax authorities’ view.

ATAD implementation law (Anti-Tax Avoidance Directive)

Little change has taken place in ATAD. If you wish to read about this law, the European Commission is consistent in releasing ATAD information.

Tax CMS: Accounting obligations and tax audits in Germany

“For tax evasion of the various forms of intent, conditional intent is already sufficient.” Legal Framework – Decision Implementing Section 143 AO.

If the taxpayer has set up an internal control system (ICS) to meet tax obligations, this may be an indication against intent or recklessness. However, this does not exclude an investigation of the concerned individual case.

Verbandssanktionengesets/Association Sanctions Act (VerSanG):

The basis of the association sanction is a so-called association law. This includes tax evasion. Association acts can be punished with hefty fines; the amount of the fine depends on the company’s size. If there are sufficient factual indications, public prosecutors are obliged to conduct an investigation (principle of legality). It is explicitly stated that (fiscal) CMS measures can have a mitigating effect as part of the sanction.

Transfer Pricing Life Cycle

Even errors down to the smallest details can cause issues. You can use the Transfer Pricing Life Cycle to determine where attention is necessary.

Identification: Provide continuous identification of transfer pricing issues.
Tax Assessment: Provide a tax analysis of the identified transfer pricing issues based on provided calculations.
Contract and Action Instructions: Ensure documented formalization of transfer pricing models in written agreements and instructions.
Methodology and Actual Implementation: Ensure uniform application of transfer pricing methods for comparable transactions.
Data Delivery and Calculation: Provide a consistent calculation of transfer prices according to the defined methodology.
Booking: Provide the accounting mapping of transfer prices in an understandable and uniform form. Monitoring: Provide regular monitoring of compliance with transfer pricing models throughout the year.
Archiving: Provide audit-proof storage of the data in an understandable form.
Process Monitoring and Escalation: Provide monitoring of processes and escalations.
TP Documentation: Secure the documentation content for so-called local files.
Tax audit: Ensure implementation of tax audit findings in subsequent years.

If you need further information, or if you have any questions, feel free to contact us. You can find the necessary information on this topic on the OECD (Organisation for Economic Cooperation and Development), the BMF (Federal Ministry of Finance of Germany), the European Commission, and KPMG Germany websites.

Related GCA articles:

Transfer Pricing Agenda 2021: Tax Efficiency

Transfer Pricing Agenda 2021: Tax Certainty

Transfer Pricing Guidance on Financial Transactions by OECD

Base Erosion and Profit Shifting

Transfer Pricing Focus of International Tax Authorities

Country by Country Reporting

Sources:

Organisation for Economic Cooperation and Development – Federal Ministry of Finance (Germany) – European Commission – KPMG Germany

Base Erosion and Profit Shifting

03 Jul 2018

BEPS, Current news, Share Economy

Base Erosion and Profit Shifting (BEPS)

The tax landscape is changing internationally. As base erosion and profit shifting (BEPS) leads to worldwide revenue losses, governments together with the Organization for Economic Co-operation and Development (OECD) take ongoing efforts to close gaps for BEPS.
BEPS refers to the tax avoidance strategies that exploit gaps in international tax rules. By these, profits can artificially be “shifted” from higher-tax locations to lower-tax locations. Because of the potential for cross-border controlled transactions to distort taxable income, there are now over 100 countries and jurisdictions collaborating to implement the OECD/ G20 Base Erosion and Profit Shifting (BEPS) Package.
To counter BEPS, the OECD recommends e.g. intragroup pricing rules based on the so-called arm’s-length principle (see below).

Transfer Pricing and the arm’s length principle

Transfer pricing are rules and methods for pricing transactions within and between enterprises under common ownership or control.

Source: Pixabay

The arm’s length principle then states that a transfer price should be the same as if two companies involved were indeed two independents and not part of the same corporate structure. The OECD has put together guidelines on how to apply this principle in a bid to avoid BEPS.

Updates from Dutch decree

On the 18th of May 2018 Dutch tax authorities published a new transfer pricing decree which replaces the decree of 14th November 2013. The update provides additional advice on the application of the arm’s length principle and guidance regarding intangible assets and business restructurings.

Please contact us to hear what GCA can do for you and your business in regard to BEPS and Transfer Pricing. GCA makes a continuous effort to inform their clients on the latest developments within the OECD BEPS package and the necessary filing.

Sources (last viewed on 19th June 2018):
OECD.org: About the Inclusive Framework on BEPS

OECD: Background Brief: Inclusive Framework on BEPS

OECDobserver.org: Transfer Pricing: Keeping it at arm’s length

Deloitte: New Dutch transfer pricing decree incorporates BEPS guidance

Transfer Pricing Focus of International Tax Authorities

16 Mar 2017

Current news, BEPS, Tax Planning

Transfer Pricing Once Again the Focus of International Tax Authorities Thanks to BEPS

Discussions on the topic of transfer pricing are again gaining steam given more stringent international guidelines, which can be a sensitive issue for companies. Often within multinational corporations, internal revenues are just as important as revenues generated externally. The OECD is attempting to address the subsequent tax and revenue opportunities for international companies with its action plan to address BEPS (base erosion and profit shifting).

Internal Transactions Account for More than Half of World Trade
International tax authorities are very interested in transfer pricing, which is not surprising when you consider that internal transactions are estimated to represent more than half of the overall world trade. And now, the international tax authorities want to know more details on this half of global trade than was previously the case. BEPS is intended to provide increased transparency, consistency in reporting requirements and tax planning security for all parties involved, for example by breaking down reporting on internal sales into a master file, a local file, and country-by-country reporting.

International Standardization Unfortunately Not Yet a Reality
However, it is precisely this desired consistency and predictability that are lacking so far in the process of implementing the proposed measures. Many countries have been quick to adopt the OECD’s proposal, but the implementation has been anything but consistent. For example, some countries have introduced CbC Reporting but not adapted their local reporting guidelines to it. Other countries, on the other hand, have added the idea of breaking down reporting into a master and local file but have yet to implement the guidelines recommended by the OECD.

A Strategic Approach Is Now Required
At the moment, multinational corporations generally associate the new reporting requirements with significant additional effort and costs while at the same time experiencing uncertainty about the exact requirements. Until now, it was not seldom the case that comprehensive reporting of internal sales was limited to suspected high-risk business units. Now, corporations are structurally compelled to implement strategic planning in order to collect, evaluate, and prepare all necessary data across the entire group, broken down both globally and by country for individual branches.

Potentially Devastating Lack of Compliance
Many companies have neither uniform processes nor professional IT solutions for these complex tasks, and they have not yet clearly defined the responsibilities for each task. Business units that may be involved such as the tax department, accounting and controlling often pass the buck to each other, which can easily lead to accusations of organizational failure in case of a negative tax inspection. Subsequently, management may have to pay back taxes or even worse run the risk of claims for damages due to negligence or intent.

Companies Must Act Now
Companies should therefore implement preventive measures now in order to professionalize and automate their reporting processes as much as possible. A company-wide compliance management system for taxes is an important step that can lead to a more lenient assessment by many tax authorities in the case of back taxes.

OECD Is Also Taking Corrective Action
The OECD has also recognized the need to make improvements when it comes to BEPS. The measures in different countries which can vary widely, inaccurate wording of individual measures and frequent changes have led to a high level of uncertainty on taxes for companies. In a first step, a list of countries for CbC Reporting was recently published with information on the status of implementation of the action plan as well as national regulations to be observed. The affected companies will have no choice but to remain abreast of the current status and adapt their actions accordingly.

Country by Country Reporting

26 Jan 2017

BEPS, Country by Country Reporting, Current news, Netherlands, Tax Planning

New Challenges for Companies Active in International Markets

Country by Country Reporting (in short CbCR) is part of the action plan of the OECD and G20 Member States to reduce base erosion and profit shifting (BEPS) in multinational corporations. The draft aims to counteract multinational companies’ skillful ability to take advantage of different tax systems. In the future, companies should pay their taxes in the countries in which the added value is generated. For this purpose, profits, tax payments, and entrepreneurial activities should be prospectively documented for each country.

Companies with Annual Turnover of € 750 Million and Above

In principle, Country by Country Reporting applies to multinational corporations with an annual turnover of € 750 million and above if a company’s consolidated report includes at least one foreign company or a foreign permanent establishment. All documentation must be drawn up and disclosed on an annual basis. Each national tax authority may then exchange the data with other foreign tax authorities.

Country by Country Reporting as Part of Transfer Pricing Documentation

Country by Country Reporting is included in Action 13 of the OECD’s BEPS initiative, which requires that transfer pricing documentation in the future is conducted based on a three-tiered structure. This means that the requirements for transfer pricing documentation developed almost 20 years ago have been completely revised. In the future, the documentation requirements should be completed based on this three-tiered approach: a master file, company-specific documentation in the local file, as well as country-specific reporting in the form of Country by Country Reporting.

Criticism from Different Viewpoints

While NGOs such as Tax Justice Network, Oxfam or Tax Research UK say the new regulations are not consistent enough, the OECD’s Business and Industry Advisory Committee (BIAC), which represents the interests of the industry, warns of significant administrative overhead and increased costs incurred by companies.

New Compliance Requirements

The guidelines for Country by Country Reporting have already been ratified by most European countries, the United States and Canada. Given these developments, the major accounting firms warn their clients of the risk of double taxation and complex compliance requirements. Therefore, companies should study the new regulations at an early stage and adapt their operations to them.