Do you ask yourself what your company’s obligations are according to DAC6 newly implemented provisions in Romania? Do you know that 31 August 2020 was the first deadline for reporting certain cross-border transactions in the European Union (EU), as per DAC6 provisions?
Or have you even heard of DAC6? Well, just to make sure that everyone knows what this is, DAC6 is the short term referring to the European Directive that requires taxpayers or any intermediaries (companies or individuals) to report certain cross-border transactions for tax purposes.
More precisely, it is the EU Council Directive 2011/16 which regulates certain cross-border tax arrangements within the EU. It is known also by the short name DAC6, and is in force as of 25 June 2018. In short, the main purpose of DAC6 is to secure transparency and fairness in taxation across the European Union member states through the reporting of certain types of cross-border transactions by EU taxpayers.
“DAC” stands for Directive on Administrative Cooperation. And because it is the sixth time the Directive was amended, the new reporting regime is commonly referred to as “DAC6”.
Although the first reporting deadline was postponed by six months in most of the EU countries in the context of the COVID-19 pandemic, including Romania, the deadline for reporting “historic” transactions that took place between June 25, 2018 and June 30, 2020 remained 31 August 2020 in countries such as Austria, Germany, Finland and, in some cases, Poland. Some of these are jurisdictions that host important economic and trading partners of Romanian companies. This means that transactions involving also Romanian companies have started to be reported to the tax authorities of various EU Member States as of 31 August 2020.
Let’s see what this means in practice, what is the impact on Romanian companies, and what are the obligations according to DAC6.
The impact of DAC6 on Romanian companies
At the level of the EU member states the automatic exchange of information in the field of taxation is already in place. At least on paper. This exchange of information is essential in ensuring fair taxation of companies and individuals across the entire EU territory. More exactly, this mechanism aims to ensure in practice that tax is paid correctly on profits in the jurisdictions where the economic value from the activities is generated. For example, if a Romanian company is generating revenues from services it provides to a Hungarian client and the activities are carried out on the Hungarian territory, then taxes may have to be paid to the Hungarian state on the respective revenue.
However, although the automatic exchange of information has already been in place for several years now (in bank reporting on interest income, through Country-by-Country reporting for intra-group transactions, etc.), DAC6 extends the exchange of information to cross-border transactions with high tax risk. Thus, the obligations of taxpayers acquire other dimensions in terms of content and reporting.
For Romanian companies the implications can be multiple. One can consist in the fact that additional resources (time and people) will have to be allocated by businesses for the purpose of ensuring the correct compliance with the new Directive’s provisions. This is not only a matter of fulfilling the reporting obligations, but it is first a matter of proper assessment for each type of transaction that the business carries out.
Also, as result of reporting the international transactions according to DAC6, the tax risk profile of the respective company will increase. This means that, as part of a tax audit, the transaction in question will be verified with priority by the tax authorities.
In this context, one of the major challenges in implementing DAC6 is avoiding excessive (and unnecessary) reporting, for prudential reasons. This would require, first of all, a correct assessment on the impact of the reporting. So, you may want to analyze your current and planned activities, so that you clearly understand the impact the Directive may have on your reporting obligations.
Given the subjective nature of the assessment of distinctive signs for each type of transaction, one may be tempted, where there are doubts as to the reportability of a transaction, to report it, thus avoiding a fine for non-compliance. However, in such case, prudence can have adverse effects for your company, because it may create the presumption that the reported transaction does present a tax risk in the eyes of the tax authority.
Which may prove difficult to invalidate later, in the case of a tax audit on the company. This may have undesirable consequences, such as: non-application of double taxation conventions, impossibility to benefit from tax neutrality in reorganizations, potential non-deductibility of certain expenses, etc.
Therefore, thorough analysis would be advisable in correctly identifying reportable transactions because, on the one hand, over-reporting may expose your company to risks of investigation and tax adjustments by the authorities. On the other hand, not identifying and not reporting them in time can attract fines of up to 100,000 lei per transaction (is one of the largest fines as per the Romanian Tax Procedure Code).
Who is responsible for reporting according to DAC6?
Reporting according to DAC6 must be carried out mainly by EU intermediaries (lawyers, banks, tax consultants, financial investment services companies, etc.). However, if the intermediaries are not able to do so, the relevant taxpayer takes over this obligation.
At the same time, it is worth mentioning that some types of intermediaries who are obliged to maintain professional secrecy (lawyers, tax consultants, banks, etc.) can report a cross-border arrangement that he or she is aware of only if written consent of the relevant taxpayer is obtained.
Thus, even if it is expected intermediaries to be the most affected in terms of reporting and procedures for implementing DAC6 – collecting information, obtaining approvals, training staff who are involved in cross-border arrangements – the reporting obligation of taxpayers relevant should not be underestimated, as they themselves have the obligation to report whenever there is no intermediary or no reporting obligation.
In fact, it is expected that intermediaries who, out of prudence, will want to report transactions, will try to obtain the taxpayer’s consent for this purpose, but will not obtain it. In such situations, the reporting obligation remains with the taxpayer.
What are the difficulties that may arise in establishing DAC6 compliance obligations?
The main challenge is to carry out a self-assessment of a transaction in the light of the five categories of distinctive signs provided for in the Directive. This is mainly because the distinctive signs are only generally described, which makes them difficult to interpret. In addition, certain transactions must also pass the main benefit test, which must conclude whether or not the purpose of the transaction is to avoid taxes. This test is abstract and mostly subjective, but it depends on whether the arrangement is reported or not.
In some countries, such as the UK or Germany, there are clarifications regarding the interpretation of these distinctive signs, but in Romania the DAC6 guidance is still pending.
Thus, at the moment, although we are only a few months away from the first reporting period in Romania, there are still many unclear issues. These include the interpretation of the “tax advantage” in the main benefit test, the specific list of jurisdictions with preferential tax regime, inconsistencies between national law and the text of the Directive with regard to certain distinctive signs, etc.
Added to all this is the size of the analysis and the time pressure, as according to DAC6 the obligation applies to “historic” cross-border arrangements between 25 June 2018 and 30 June 2020 (with a reporting deadline of 28 February 2021), with DAC6 reporting joining other recurring tax reporting obligations. For transactions conducted after 1 July 2020, reporting is done within 30 days, which will run from 1 January 2021. Thus, it is appropriate to perform analyzes and implement DAC6 procedures by the end of 2020 at the latest, the first potential reporting being at end of January 2021.
In conclusion, the EU’s strategy to achieve a fair taxation system is under continuous development, perhaps even more intense now, as efforts are made to provide the necessary funding for recovering from pandemic. In this context, implementing the DAC6 procedures should become a priority for any company conducting significant international transactions, as the analysis and compliance process can take significant time and efforts.