UK and International Tax news
DAC 6 Reporting Update
Thursday 7th January 2021
HMRC has announced that with the EU Directive DAC 6 no longer applying to the UK from 1 January 2021, reporting under DAC 6 is to be replaced with reporting requirements under the OECD’s Mandatory Disclosure Rules.
DAC 6 [formerly EU Council Directive 2011/16] applies to cross-border tax arrangements, which meet one or more specified characteristics (hallmarks), and which concern either more than one EU country or an EU country and a non-EU country. It mandates a reporting obligation for these tax arrangements if in scope no matter whether the arrangement is justified according to national law.
HMRC’s recent letter to professional bodies and other stakeholders confirms that reporting under DAC 6 to HMRC will still be required for a limited time, but only for arrangements within a hallmark under category D, in line with the UK’s obligations under the FTA. Category D hallmarks include arrangements which attempt to circumvent the OECD’s CRS and automatic exchange of information, and those which attempt to obscure beneficial ownership and involve the use of offshore entities with no real substance.
The UK will consult on and implement the OECD’s MDR as soon as practicable, to replace DAC 6 and transition from European to international rules.
The FTA states that “A Party shall not weaken or reduce the level of protection provided for in its legislation at the end of the transition period below the level provided for by the standards and rules which have been agreed in the OECD at the end of the transition period, in relation to (a) the exchange of information… concerning… potential cross-border tax planning arrangements”.
The reference to OECD rules on exchange of information on cross-border arrangements is a reference to the OECD’s model MDR. 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.
Whilst the UK has not implemented MDR in its domestic legislation as at the end of the transition period, the rules in SI 2020/25 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. SI 2020/25 was drafted to transpose the later EU Council Directive 2018/822 [DAC 6] which ceased to apply to the UK at the end of the transition period, as at that point, the UK was no longer obliged to implement DAC 6.
The Government has decided to legislate for changes to SI 2020/2, to restrict reporting only to those arrangements which would be reportable under the OECD’s MDR after the end of the transition period. The Government has also amended the regulations 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 regulations have now been laid before Parliament under SI 2020/1649 and these maintain the effect of the rules as they were during the transition period, but narrow the scope of what has to be reported.
The Government plans to repeal the legislation implementing DAC 6 in the UK and implement the OECD’s MDR as soon as practicable, in order to transition to international, rather than EU standards on tax transparency. The Government will consult on draft legislation to introduce MDR in due course.
HMRC will be updating the reporting guidance at IEIM600000 et seq to reflect the changes to the legislation.
If you would like to discuss the above in more detail, please contact Keith Rushen on 0207 486 2378.