What is it?
On 20 December 2019, the European Directive (EU 2018/822) that provides for mandatory automatic exchange of information in relation to cross-border tax arrangements (the so-called ‘DAC6 Directive’) was transposed into Belgian law. With DAC6, the European Commission aims to promote international tax transparency and combat undesirable tax practices.
In view of its entry into force in 2021, this complex (and still largely unclear) mandatory disclosure is discussed specifically below. On the basis of this publication, an attempt will be made to provide an unambiguous answer to crucial questions such as (i) what precisely should be reported, (ii) who should report, (iii) how should reporting take place and finally (iv) when should reporting take place (strict deadlines).
When and what to disclose?
In general, an ‘arrangement’ is covered by mandatory disclosure if all of the following conditions are met:
- It involves an arrangement (very broad – any kind of advice can qualify);
- This arrangement is of a cross-border nature; AND
- The arrangement has at least one of the ‘hallmarks’ listed in the Directive. These hallmarks indicate a potential risk of tax avoidance.
Any cross-border arrangement that has at least one hallmark is therefore subject to mandatory disclosure.
Hallmarks
Broadly speaking, 5 categories of hallmarks can be extrapolated (not exhaustive). Below, each of these hallmarks are briefly discussed to provide a clearer picture of which structures/transactions can and should (possibly) be covered by mandatory disclosure.
Please note, cross-border transactions which comply with hallmarks/categories A, B and some of C (see below) must, moreover, also comply with the so-called main benefit test. In those cases, there is mandatory disclosure only if it can be additionally demonstrated that obtaining a tax benefit was an important motive for drawing up the respective arrangement.
Category A: general hallmarks linked to the main benefit test
- Duty of confidentiality;
- Intermediary fee determined in whole or in part on the basis of (no cure no pay) – inter alia, success fee; and
- Standardised documentation and/or standardised structure which is made available for more than one relevant taxpayer without the need for substantial adjustments (i.e. market-ready arrangement).
Category B: specific hallmarks linked to the main benefit test
- Acquiring loss-making companies (e.g. ceasing activities, takeover, etc);
- Circular transactions (i.e. circulating funds with the assistance of certain interposed entities without any other primary trade objective or of transactions which offset or nullify each other or have other similar characteristics); and
- Income converted into assets, gifts or other income categories which are taxed at a lower rate or are exempt from tax.
Category C: specific hallmarks related to cross-border transactions
- Deductible cross-border payments between two or more related parties, in which at least one of the following conditions must be met:
- Recipient is not a tax resident in a tax jurisdiction;
- Recipient is resident in a tax jurisdiction;
- No corporate tax or almost none (between 0% and 1%) (main benefit test to be fulfilled);
- List of non-cooperative countries;
- Payment with exemption in recipient’s country (main benefit test to be fulfilled);
- Payment with preferential regime in recipient’s country (main benefit test to be fulfilled)
- Double depreciation of assets in multiple jurisdictions;
- Make use of double taxation prevention twice; and
- Fee mismatch for asset transfers between jurisdictions.
Category D: specific hallmarks related to automatic exchange of information and beneficial ownership
- Undermining of financial account reporting (CRS); and
- Non-transparent legal or beneficial ownership (i.e. no substantive economic activity, established in another jurisdiction and UBO unidentifiable).
Category E: specific hallmarks related to transfer pricing, more specifically:
- Transfer of hard-to-value intangibles (cf. Chapter 6 of the OESO Transfer Pricing Guidelines on Hard to Value Intangibles);
- Unilateral Safe harbours (i.e. rules that apply to a particular group/category of taxpayers or transactions and which exempt the taxpayers from the general transfer pricing in force in that country); and
- Transfers within the group of certain functions (impact more than 50% of EBIT over the following 3 years).
Who is subject to disclosure?
There are 2 types of party subject to mandatory disclosure (“intermediaries” – very broad term).
1st category: Any natural or legal person who devises, offers, sets up, makes available a reportable cross-border arrangement for implementation or manages the implementation thereof (= promoter).
2nd category: Any person who knows or could reasonably have known that they have committed, directly or via other people, to provide help, assistance or advice with regard to devising, offering, setting up, making available for implementation or managing the implementation of a reportable cross-border arrangement (= service provider).
As a rule, the taxpayer themself is only subject to disclosure in exceptional circumstances.
More specifically, this is the case in the following situations:
- If there is no intermediary (e.g. arrangement set up by own tax department);
- If the intermediary is established outside the EU (e.g. Belgian subsidiary of a Japanese company for which the tax arrangement was recommended by the Japanese parent company and its advisers); and
- If all relevant intermediaries can invoke professional secrecy and the taxpayer does not give permission for the necessary disclosure. The latter, in particular, is the subject of much discussion among the respective protected professions (see also below). In the event of being covered by professional secrecy, this must be reported to the other intermediary (in writing and with reasons), or to the relevant taxpayer (also in writing and with reasons) and in addition all information required for the fulfilment of mandatory disclosure must be reported.
Relevant intermediaries include tax advisers, lawyers, accountants, notaries and auditors (see section ‘current state of affairs’ for suspension appeal submitted in view of incompatibility with professional secrecy).
How and when to make a disclosure?
Since 4 January 2021, it has been possible to report information about arrangements within the framework of DAC6 via the MyMinfin DAC 6 portal of FPS Finance. In this context, on 23 November 2020 a corresponding manual and validation rules were published by the administration. On 23 December 2020, an XML tool was finally made available, allowing a reporting party to create a completed electronic format so that those subject to mandatory disclosure could prepare themselves for reporting.
As a rule, any cross-border arrangement subject to mandatory disclosure of which there is knowledge, possession or control must be reported to the competent Belgian authority within 30 calendar days from the event mentioned below which takes place first.
The “old arrangements”, namely the arrangements for which the first step was taken between 25 June 2018 and 30 June 2020, must be reported no later than 28 February 2021;
With regard to the “new arrangements”, namely the arrangements for which the first step was taken as of 1 July 2020, the 30-day period starts from 1 January 2021 (thus as a rule, first declaration by 1 February 2021). However, due to potential difficulties in communication between those subject to mandatory disclosure and the relevant taxpayers during this initial phase (due to the current health crisis), the administration has just announced the application of an administrative tolerance by granting an extension until 28 February 2021.
Finally, note that a first quarterly periodic report about a “market-ready arrangement” (i.e. a previously devised arrangement which is offered by intermediaries without the need for substantive/essential changes in terms of implementation) must be submitted by 30 April 2021 at the latest.
Fines
Furthermore, severe penalties will be imposed depending on whether disclosure is incomplete or late (progressive scale is provided by de Koning). There is also no distinction between a type 1 intermediary, a type 2 intermediary or relevant taxpayer.
In the event of incomplete disclosure, fines of between EUR 1,250 and EUR 12,500 can be imposed. In the event of fraudulent intent or intent to harm, fines of EUR 2,500 to EUR 25,000 are payable.
In the event of late disclosure, a fine of EUR 5,000 to EUR 50,000 can be imposed. If there is fraudulent intent or intent to harm, then fines of EUR 12,500 to EUR 100,000 are foreseen.
Current position
In view of the incompatibility with professional secrecy of such mandatory disclosure (because the law does not take sufficient account of professional secrecy), several professional organisations (including the Orde van Vlaamse balies) have now filed an action for annulment and an application for suspension with the Constitutional Court. On 17 December 2020, the Constitutional Court granted the application for suspension requested by the lawyers on condition that the rule of professional secrecy can and may only be waived if this can be justified for a compelling reason in the public interest and if the lifting of secrecy is strictly proportionate. Please note, professional secrecy cannot be invoked for a market-ready arrangement.
The accredited tax consultants, accountants and other relevant intermediaries remain subject to the general regulations for the time being. In this context, the ITAA has likewise filed an action for annulment with the Constitutional Court against the aforementioned legal provision and all related articles within the law of 20 December 2019, but as long as no decision is taken in this regard, the rules of the aforementioned legislation are applicable (after all, an action for annulment has no suspensive effect).
Pending a decision by the Constitutional Court, first and foremost being transparent vis-à-vis the client with regard to these regulations is therefore always recommended. According to the ITAA, it is also important to routinely inform respective customers about the existence of the DAC6 legislation by way of the engagement letter, or possibly to do so in a separate engagement letter as soon as assistance is required in a cross-border arrangement.
Finally, the ITAA not only considers that the professional secrecy of members prevents spontaneous disclosure to the authorities, but the Institute also advocates that professional secrecy should be safeguarded as far as possible when this law requires its members to disclose information to others than the customer themself.
How this will all play out therefore remains be seen in the coming weeks and months. We have not heard the last of it yet.
If you have any further questions about this scheme, please do not hesitate to contact us.