The disclosure of cross-border tax planning arrangements under Council Directive (EU) 2018/822 (DAC6) came into force on 1 July 2020 and require reporting of any persons involved in cross-border arrangements, including loan agreements, payments from a resident of one country to a resident of another, or putting funds in an offshore trust, if one of the hallmarks applies.
Negotiations between the UK and the EU on a Free Trade Agreement (FTA) have now concluded and HMRC has confirmed that only arrangements that meet hallmarks under category D of DAC6 will need to be reported in the UK after the end of the transition period in accordance with the OECD’s Mandatory Disclosure Rules (MDR).
The regulations have been amended and laid before Parliament [1] to ensure the rules work correctly after the end of the transition period, including ensuring that references to EU member States refer to the UK or an EU member State after the end of the transition period. The rules will now only apply to two types of arrangements captured within the category D hallmarks:
- Hallmark D1 is any ‘arrangement which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements’.
- Hallmark D2 applies to an arrangement involving a ‘non-transparent legal or beneficial ownership chain’ with the use of persons, legal arrangements or structures:
- that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
- are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures;
- where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.
The replacement of DAC6 will significantly reduce reporting requirements although the disclosure of tax avoidance schemes (DOTAS)[2] will continue to apply in the UK. It is also clear that under the terms of the FTA, the UK must not reduce the level of protection in its legislation below the level of protection afforded by the OECD’s MDR. While the UK has not implemented MDR in its domestic legislation the rules provide a ‘level of protection’ which in certain respects is equivalent to that in the OECD’s MDR, and in other respects goes beyond the MDR.
The government will begin to repeal the legislation implementing DAC 6 in the UK and will implement the OECD’s MDR as soon as practicable, in order to replace DAC6 and transition from European to international standards on tax transparency. HMRC has also confirmed that only arrangements which meet the hallmarks under Category D will now need to be reported, therefore historic reporting (for arrangements up to 31 December 2020) in respect of the other hallmarks will no longer be required.
References
https://www.legislation.gov.uk/uksi/2020/1649/contents/made
https://www.gov.uk/guidance/disclosure-of-tax-avoidance-schemes-overview
[1] https://www.legislation.gov.uk/uksi/2020/1649/contents/made
[2] https://www.gov.uk/guidance/disclosure-of-tax-avoidance-schemes-overview
