The EU is introducing an additional level of transparency in order to enhance the means tax authorities can use to detect potentially aggressive tax arrangements. In this light, EU Directive 2018/822/EU (hereinafter the “DAC 6”) imposes mandatory reporting of cross-border arrangements, affecting at least one EU Member State, that fall within one of a number of “hallmarks”. The reporting obligations fall on “intermediaries” or, in some circumstances, the taxpayer itself.
In Cyprus, the deadline for comments by the public on the Draft Bill implementing the DAC 6 passed on 12 November 2019. As it appears from the Draft bill, Cyprus follows DAC 6 without any remarkable deviations but, given that the DAC 6 sets only the minimum standards that need to be implemented by the Member States, amendments may be implemented during the legislative process in Cyprus the details thereof remain to be seen.
Who needs to report:
Under DAC 6, the primary disclosure requirement lies with the intermediary, being a person with EU-nexus. The term “intermediaries” is defined broadly as any person (either an individual or a company) that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement, or anyone who helps with reportable activities and knows or could reasonably be expected to know that they are doing so. This includes, but not limited to accountants, tax advisors, consultants, lawyers and bankers.
Except where national legislation gives the right to a waiver from filing information due to a legal professional privilege, all of those intermediaries are required to file information that is within their knowledge, possession or control, to the tax authorities. In such case, however, intermediaries who are covered by legal professional privilege should instead notify, without delay, any other intermediary of their reporting obligations to file such information to the Cyprus Tax Authorities (hereinafter the “CTA”). Only where no (reporting) intermediary is involved the disclosure requirement is shifted to the relevant taxpayer. Furthermore, an intermediary may be exempt from its reporting obligations if it has proof that another intermediary has reported the arrangement.
What is a reportable arrangement?
Arrangements are reportable if they fall within one of a number of hallmarks, as listed in Annex IV of the DAC 6. The hallmarks are broad categories setting out particular characteristics or feature of a cross-border arrangement that presents an indication of a potential risk of avoidance. Following Annex IV, and the five Hallmark categories listed therein, some arrangement will only be reportable if they are also captured by the so-called “main benefit test”. This test is satisfied where one of the main benefits expected from the arrangement is a tax advantage.
Other arrangements (i.e. arrangements which undermine tax reporting/transparency or some arrangements that involve deductible cross-border payments between associated enterprises or arrangements concerning transfer pricing), may need to be reported even in situations where no tax advantage is obtained and/or where there is no discussion of tax during the implementation of the arrangements.
Timeline – Penalties:
Although DAC 6 directive has not yet been implemented into Cyprus’ domestic law, it is expected to be enacted into law before the end of 2019 with an effective date as from 1 July 2020 and with retrospective effect from June 25, 2018. This means that as from 1 July 2020, the arrangements that fall within the scope of application of the DAC 6 and of which the fist implementation step takes place between 25 June 2018 and 30 June 2020 should be reported within 30 days to the CTA.
Non-compliance by either intermediaries or taxpayers will attract penalties the amount of which will depend upon the nature of the violation. According to the Draft Bill, the amount will be up to EUR 20,000 per violation.
It prima facie appears that domestic arrangements as well as arrangements which concern value added tax and other indirect taxes and excise duties are outside the scope of the directive. Still, the scope of DAC 6 is considered to be extremely broad – especially with regards to the hallmarks and intermediary definition.
Although the purpose of the DAC 6 is to provide the Member States with information on potentially aggressive cross-border tax-planning arrangements, the way DAC 6 has been drafted may potentially capture ordinary transactions with no particular tax motive. Furthermore, the intermediary definition is much broader from the one adopted in the Commission proposal, as it also captures persons performing supporting activities and/or persons that have no relation to the tax aspects of the arrangement.”