DAC 6 is a Mandatory automatic exchange of information in the field of Taxation in relation to reportable cross-border arrangements.
Exsus Ltd can review a cross-border transaction and advise whether such a transaction is reportable. Exsus Ltd, if necessary, can construct the DAC6 report, validate the report as prescribed by the relevant provisions of DAC6, and submit it on behalf of the client to the relevant competent authorities or return it to the client for submission.
What is the DAC 6 tax?
DAC6 is designed to give EU tax authorities early warning of new cross-border tax schemes. It requires tax authorities to be notified of cross-border tax arrangements satisfying certain ‘hallmarks’. The tax authorities will then automatically exchange the information with other relevant EU tax authorities.
EU Member States find it increasingly difficult to protect their national tax bases from erosion as tax-planning structures have evolved to be particularly sophisticated. Such structures commonly consist of arrangements which are developed across various jurisdictions and move taxable profits towards more beneficial tax regimes or have the effect of reducing the taxpayer’s overall tax bill. As a result, Member States often experience considerable reductions in their tax revenues, which hinders them from applying growth-friendly tax policies. It is therefore critical that Member States’ tax authorities obtain comprehensive and relevant information about potentially aggressive tax arrangements. Such information would enable those authorities to react promptly against harmful tax practices and to close loopholes by enacting legislation or by undertaking adequate risk assessments and carrying out tax audits. However, the fact that tax authorities do not react to a reported arrangement should not imply acceptance of the validity or tax treatment of that arrangement.
For this reason, the Council of the European Union has adopted Directive 2018/822 to amend Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation.
Scope of taxes covered.
The scope of taxes covered under the Law is fully aligned with the Directive and applies to all taxes except value-added tax, customs duties, excise duties and compulsory social security contributions.
On 29 October 2021, the Cypriot Ministry of Finance (MoF) issued guidelines (Guidelines) in the form of a Ministerial decree (Decree N. 438/2021 or the “Decree”) on the Cypriot Mandatory Disclosure Rules (MDR) Law (Law 41(I)/2021 of 31 March 2021, amending Law 205(I)/2012 on Administrative Cooperation in the Field of Taxation of 2012, hereinafter referred to as the Law).
Under the Cypriot MDR Law, an arrangement is reportable if it is cross-border and meets at least one of the hallmarks A-E specified in Annex IV of the Law and the main benefit test (MBT), where applicable.
A1) Confidentiality clauses
A2) Remuneration in relation to a tax advantage.
A3) Standardized documentation and/or structure.
B1) Acquisition of loss-making entities.
B2) Conversion of income into capital, gifts or lower-taxed/tax-exempt income.
B3) Circular transactions.
C1) Deductible cross-border payments between associated enterprises.
C1a) Recipient, not resident for tax purposes in any jurisdiction.
C1bi) Recipient tax resident in a jurisdiction that does not impose corporate tax or that imposes corporate tax at a rate of zero or almost zero.
C1bii) Recipient tax resident in a jurisdiction included in a list of third-country jurisdictions which have been assessed by Member States collectively or within the framework of the OECD as being non-cooperative.
C1c) Recipient tax resident in a jurisdiction where the payment benefits from full exemption from tax.
C1d) Recipient tax resident in a jurisdiction where the payment benefits from a preferential tax regime.
C2) Depreciation is deducted multiple times on the same asset.
C3) Relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction.
C4) Transfer of assets with a material difference in the amount treated as payable.
D1) EU legislation or any equivalent agreements on the automatic exchange of financial account information circumvented.
D2) Non-transparent legal or beneficial ownership chains used.
E1) Use of unilateral safe harbor rules.
E2) Transfer of hard-to-value intangibles between associated enterprises.
E3) Profit shifts following an intragroup cross-border transfer of functions and/or risks and/or assets.
The Guidelines clarify that the term “arrangement” includes all types of arrangements, transactions, payments, schemes, and structures, whether legally enforceable, and includes oral agreements. It is also clarified that the term “arrangement” may include arrangements comprising more than one step or part and provides an example of a case involving the granting of a loan.
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