What firm leaders need to know about DAC6
DAC6, the European Union directive on administrative cooperation — formally known as Council Directive 2018/822/EU of 25 May 2018 — sets down new regulations for certain cross-border arrangements, and mandates transparent reporting requirements for companies doing business in E.U. member states. Tax advisors, professional services firms, and taxpaying companies alike are grappling with new disclosure rules, which will be fully implemented my mid-2020.
What DAC6 requires
Under DAC6, companies entering into — or advising on — cross-border arrangements will need to report these arrangements to local authorities, regardless of whether or not the relevant transactions were primarily motivated by tax benefits. As a result, many relatively mundane financial transactions — leasing, reinsurance, corporate funding, and acquisition finance — are now subject to E.U. reporting mandates. And, in some cases, multinational entities with headquarters outside of the E.U. are also subject to DAC6 requirements.
How DAC6 relates to professional and financial services
Notably for professional and financial services firms, DAC6 obligations apply equally to business intermediaries as to the taxpayer. DAC6 requirements are also shared by all intermediaries, so a single business event could trigger reporting requirements for a number of firms — lawyers, accountants, service providers, and private equity managers — in addition to entities that are party to the transaction.
Although DAC6 first came into effect in June 2016, and portions of the directive are already in force, DAC6 regulations become fully applicable on July 1, 2020. On this date, both taxpayers and their intermediaries must begin filing reports with their local tax authority within 30 days of triggering events (such as when a company implements the first step of a cross-border arrangement, or when its intermediary first provided advice) as well as quarterly reports thereafter for ongoing concerns. DAC6 also requires companies to submit reports retroactively for any arrangements with triggering events dating back to June 2018.
What’s at stake?
Entities that fail to comply with DAC6 — including both companies and individuals — face significant penalties under local laws. Firms and their clients could also face significant reputational risks as the result of government sanctions. Local authorities will share DAC6 reports with one another, even with E.U. member countries that had no direct involvement with the reported arrangements; the resulting exposure of this data could have unanticipated repercussions.
Because DAC6 sanctions will be implemented by member countries’ national regulators, they will vary regionally. However, experts predict that most countries’ penalties will be substantial. For example, under the U.K. government’s Disclosure of Tax Avoidance Schemes (DOTAS) guidelines, the starting point for failure-to-report penalties — including failures to notify of reliance on legal privilege — is up to £600 per day, and the country’s First-Tier Tribunal is empowered to levy fines of up to £1 million. The U.K. also imposes penalties of up to £5,000 for other DAC6 lapses, including failure to report an arrangement reference number, or to make required returns regarding marketable arrangements.
Although the government has acknowledged that U.K. taxpayers face a unique quandary in the absence of any detailed DAC6 guidance — which E.U. member countries are obligated to publish prior to December 31, 2019 — it has offered no express assurance of leniency even for transactions entered into prior to that date. Taxpayers and intermediaries, therefore, must approach such gray areas with caution, proactively monitoring potentially reportable arrangements and maintaining all relevant records.
How Intapp can help firms affected by DAC6
If your professional services firm is involved in cross-border transactions on behalf of clients, your staff must be well aware of DAC6 data-capture and reporting requirements. Firm systems and processes should be optimized to identify relevant arrangements and streamline necessary reports to help prevent financial sanctions and reputation damage.
One Place for Risk helps firms capture necessary DAC6 data during their conflicts-management and compliance processes. And by integrating OnePlace for Risk with VinciWorks’ Omnitrack — a third-party tool to track and manage online registers — firms can intelligently manage the capture and reporting of their DAC6-mandated data.
Intapp Strategic Consulting can review your business activities so that you understand the impact the directive has on your reporting obligations. We can also assist in defining a governance framework for data governance, ownership, and reporting.
To learn more about how Intapp can help your firm deploy intelligent technology to enable efficient DAC6 compliance, send us a message at www.intapp.com/contact-us/.
Daragh McLaughlin is the EMEA Risk and Compliance Practice Group Leader at Intapp, where he helps professional services firms align software solutions with real business objectives to create measurable outcomes.