EU tax harmonisation – why are the 27 Member States still uncompliant after 10 years
What is DAC?
EU member states have now been working under the Directive of Administrative Cooperation (DAC) for a decade which provides for spontaneous, automatic and ‘on request’ exchange of information. There have been six addendums to DAC, each one extending the scope of information to be reported. DAC6, which has been in force since 25 June 2018 and mandated full compliance since 1 July 2020, requires that intermediaries and taxpayers report all cross-border transactions which involve at least one EU27 state. Failure to comply with DAC6 could impose significant fines and increase reputational risk for businesses, individuals and intermediaries.
The full DAC (1-6) scope includes automatic exchange of:
• Non-financial and financial accounting information,
• Advance cross-border tax rulings and advance pricing agreements
• Country-by-country reporting
• Anti-money laundering information.
DAC defines intermediaries as ‘promoters’ and ‘service providers’. Promoters are those who design, market and implement tax planning strategies such as tax advisors and legal advisors. Service providers are those who aid or advise taxpayers in relation to cross-border transactions and might include accountants, financial advisors, audit firms, banks, asset managers, investment advisors and portfolio managers.
Why was DAC6 necessary?
DAC6 was deemed necessary due to reducing tax revenues for EU member states driven by increased mobility of people and capital. The scandal of the Panama Papers – c.11.5million leaked confidential financial documents and other notable leaks such as the recent Pandora Papers, uncovered evidence of huge tax fraud and tax avoidance schemes.
What has happened since DAC came into force?
EU member states have so far struggled to implement automatic exchange of cross-border transactions due to the vast quantity of data to be reported. Although data is available, member states have insufficient capacity to process and automatically report on it. The European Parliament has not been granted access to the documents necessary to properly assess the implementation of DAC legislation.
What are the implications of DAC for individuals?
As a result of the inability of member states to meet their stated automatic information exchange obligations, high net worth individuals who may have significant cross-border transactions may find themselves facing additional tax investigations which could significant curtail their cross-border activities. In addition, there may be an increased risk of tax fraud allegations where what has occurred is genuine and legal tax planning and mitigation activities.
Penalties under DAC
The DAC states that in order to improve the prospects for its effectiveness, Member States should impose penalties on individuals and intermediaries for non-compliance which should proportionate and dissuasive. The penalty amount as well as the exact conditions for penalties to be imposed are at the discretion of the Member States. Research by Deloitte in March 2020 indicated that fines might range from EUR5,000 to EUR5.8million.
What’s next for DAC?
The European Parliament’s report on the Implementation of the EU requirements for exchange of tax information: progress, lessons learnt and obstacles to overcome, published on 3 June 2021, concludes that member states’ refusal to give access to enforcement documents “must be contested” and urges the Commission to implement a comprehensive review of the DAC framework as soon as possible. In addition, more must be done to ensure Member States comply with existing legislation and enforce sanctions where there is non-compliance.
Financial advice from Blacktower Financial Management
Tax reporting is rarely straightforward and investors engaging in cross-border transactions must be clear about their reporting obligations under DAC. Blacktower Financial Management wealth advisors can assess your situation, helping you to identify qualifying transactions and comply to all relevant tax legislation. We’ll work in partnership with you and any other service providers to ensure you understand and fulfil your reporting obligations. Your dedicated advisor can assist you with tax planning, investment strategy, retirement planning and discretionary fund management. We will regularly review your position to help you minimise your tax liabilities. Contact one of the representatives at our Lisbon office today for your free no-obligation discussion.