DAC6 – which disclosure obligations do you have to meet?

The policy that lies behind this legislative proposal is to ensure that the fiscal authorities are made aware of the implementation of any potentially aggressive – but still legal – cross-border tax arrangements at an early stage. This government bill came barely a fortnight after the draft bill published by the Federal Ministry of Finance (BMF) on 26 September 2019. This was to allow for implementation of the directive, which had to be completed by 31 December 2019.

Key remarks concerning the draft ministerial bill

Compared to the initial and unpublished draft discussion bill of 30 January 2019 – and as per the draft ministerial bill – the government bill no longer contains the much criticised obligation to report domestic tax arrangements. Instead, only certain cross-border tax arrangements are subject to reporting. Primarily, it is those known as “intermediaries” who are required to provide information. Overall, the content of the government bill has been kept very similar to that of the previously published draft ministerial bill. Consequently, it remains a very wide-reaching regulation and one that is already affecting a multitude of taxpayers and consultants.

In the rationale for the government bill, the number of reports expected annually is estimated to run into five figures “due to the broadly defined reporting obligations”. It is also important to note the retroactive nature of the reporting obligation, which means that future cross-border tax arrangements are not the only ones affected; rather, cross-border tax arrangements that were implemented after 25 June 2018 also have to be reported retrospectively.

Details of cross-border tax arrangements and the reporting obligation

What constitutes a cross-border tax arrangement for the purpose of the government bill?

For the time being, the reporting obligation applies to arrangements that involve a tax type covered by the EU Mutual Assistance Act (“EUAHiG”), which is the piece of legislation transposing Directive 2011/16/EU into German law. The affected types include, in particular, income tax, corporation tax, trade tax, and inheritance and gift tax. VAT is exempt. In addition, the tax arrangements have to incorporate a cross-border aspect, i.e. multiple countries have to be involved, including at least one EU Member State. This cross-border criterion is to be understood in very broad terms. It is deemed to be met, for example, if two parties involved in a cross-border payment are resident in different countries, and even applies in the case of dual residency or for matters concerning business premises in general. As regards the time frame, any cross-border tax arrangements whose first implementation step occurred after 25 June 2018 (retroactive effect) are affected.

Which cross-border tax arrangements are reportable?

A cross-border tax arrangement is classed as “reportable” if it exhibits at least one of the hallmarks specified in Section 138e (1) and (2) AO (German Fiscal Code). If the hallmarks specified in Section 138e (1) AO are identifiable, the main benefit test must also be applied. This test is met if “after taking account of all the substantial facts and circumstances, a rational third party can reasonably expect the main benefit or one of the main benefits” of the cross-border tax arrangement to consist of gaining a tax advantage. As regards the remaining hallmarks, their mere existence is sufficient to render a cross-border tax arrangement reportable. Although the hallmarks are intended to signal tax avoidance, they do sometimes affect everyday transactions such as cross-border payments within a corporate group, revenue conversion (e.g. the conversion of taxable earnings into tax-free dividends) or the use of safe harbour rules in the area of transfer pricing. The list of hallmarks in the government bill closely follows the wording of the directive and, according to reports, is still being adapted in certain places. For instance, the government bill sometimes focuses more generally on “cross-border payments”, whereas the directive refers only to deductible payments.

Who has an obligation to report?

In principle, it is those known as “intermediaries” who are required to do the reporting. An intermediary can be anyone involved in designing and/or implementing a cross-border tax arrangement in an advisory capacity, whereby they market the arrangement, design or organise the arrangement for a third party, make it available for use by a third party, or manage its implementation by a third party. The term “intermediary” is not restricted to a specific occupational group; rather, in Germany, it includes certified accountants, tax consultants, lawyers, business consultants and representatives of the financial and insurance sector. Where the intermediary is legally obliged to maintain confidentiality, certain parts of the reporting obligation may be transferred to the user of the cross-border tax arrangement. However, according to the German draft bill, the intermediary always has an obligation to disclose general information about the cross-border tax arrangement as part of an “initial report”, with the actual user being required to initiate the disclosure of user-specific information subsequently in the form of a “second report”. However, the user must be given the option of releasing the intermediary from their confidentiality obligation so that the intermediary is able to report all the data. In cases where the user implements a reportable cross-border tax arrangement without the involvement of intermediaries (in-house arrangement), this user is responsible for reporting the information in full.

One of the basic principles provided for in the new regulations is that the data pertaining to a reportable cross-border tax arrangement should only be transmitted once. The aim of this is to prevent multiple reports being filed when multiple intermediaries are involved in a single cross-border tax arrangement.

To whom must the report be sent?

The report is to be sent to the German Federal Central Tax Office. The data must be transmitted using an officially prescribed data record type via an officially defined interface.

When must the report be sent?

In principle, the report has to be sent within 30 days of the deadline-triggering event specified in Section 138f (2) AO. If an intermediary is involved, the deadline-triggering event is usually the point at which an arrangement is made available or, if the arrangements are designed and implemented by users themselves, the point at which the arrangements become ready for implementation. The reporting deadline described above applies to all cases whose first implementation step occurs on or after 1 July 2020. In cases where implementation began at any point between 25 June 2018 and 1 July 2020, the information must be reported by 31 August 2020.

As well as promptly reporting the cross-border tax arrangement, the user is also required to include the tax arrangement as part of their tax declaration by quoting the registration and disclosure numbers issued. Only one registration number will ever be issued in relation to the same cross-border tax arrangement; by contrast, the number of disclosure numbers may vary according to how many reports are filed in total.

What happens in the event of a culpable breach of the reporting obligation?

If the reporting obligation is breached deliberately or through carelessness, an administrative fine of up to €25,000 can be imposed within Germany. This also applies if the affected user fails to refer in their tax declaration to the implementation of a cross-border tax arrangement that has already been reported.

Conclusion and outlook

The new law on the compulsory reporting of cross-border tax arrangements will affect a large number of intermediaries and users, because even everyday cross-border transactions are capable of triggering a reporting obligation. Intermediaries and taxpayers need to keep a very close eye on the legislative procedure while at the same time making preparations in advance, firstly by undertaking an impact analysis and secondly by aligning their internal processes – and, in turn, their associated compliance obligations – with the law.

Here at Mazars, we have developed a tool to help you manage your legal obligations. If you are interested in finding out more about this tool or wish to arrange a consultation, please complete the form below.