Cross-Border Arrangements with EU Tax Benefits
As you may recall from one of our International Tax Updates in Summer 2020, the EU’s cross-border tax arrangement rules – known as the DAC6 directive – reached the initial one-off reporting deadline on Aug. 31, 2020 for arrangements entered into during the range of June 25, 2018 through June 2020. While several EU member countries at that time decided to extend this August 31 deadline for six months, at least one member – Germany – announced it would not extend it.
Reportable Cross-Border Arrangements
These rules require companies based in the EU – as well as tax advisors and other intermediaries – to disclose any Reportable Cross-Border Arrangements (RCBAs). U.S.-based multinationals are required to comply with these provisions for any of their EU-based entities.
Any RCBA entered into after July 1, 2020, also must be reported to the EU home country on a rolling basis no later than 30 days after its inception.
Several factors can contribute to determining whether an activity where a material tax benefit is realized qualifies as an RCBA, including:
- Confidentiality
- Fees related to the tax advantages of the arrangement
- Standardized documentation
- Using a company’s losses to offset tax liability
- Taxable revenue converted into lesser or tax-exempt revenue
- Asset exchange resulting in a circular transaction
- Deductible payments where the tax rate is approximately zero
Other distinguishing factors of an RCBA by themselves trigger reporting requirements, such as claiming depreciation in multiple jurisdictions or entering into transfer pricing arrangements between related parties.
Further Developments
As a result of the severe disruption caused by the COVID-19 pandemic, the EU allowed Member States to defer the DAC6 reporting deadlines by up to six months. Most EU Member States opted for a six-month deferral, with the notable exceptions of Austria (three-month extension), Finland and Germany (no deferral). However, these extension dates have now passed. In addition, as of the end of January 2021 two EU Member States – Cyprus and Spain, had neither completed DAC6 transposition into national law nor published regulations for compliance with DAC6 obligations.
In connection with completion on Dec. 31, 2020 of the United Kingdom’s Brexit transition, U.K. RPBAs have been restricted generally to arrangements that either obscure beneficial ownership of a legal arrangement or structure or undermine reporting obligations under the Common Reporting Standard. More significantly, U.K. tax authorities plan to repeal DAC6 in 2021 and replace it with the OECD’s mandatory disclosure rules.
Enforcement and Implications of the Rules
Strict sanctions are be levied on those involved in RCBAs that fail to comply with the rules – whether EU-based companies or tax advisors or other intermediaries. A private survey in 2020 found that monetary penalties of a specific country may exceed Euros 5-million.
These reporting changes may have larger implications for U.S. and other non-EU companies that have enjoyed easy access to European markets via local residents – now, companies may be encouraged to move operations in order to capitalize on tax benefits which otherwise will be under greater scrutiny.
For More Information
If you have questions, please feel free to contact John Forry, Managing Director and Leader of the CBIZ West Coast International Tax Practice or Donald Reiser, Managing Director and National Leader of the CBIZ International Tax Practice. John can be reached at JForry@cbiz.com or (646) 345-0586 and Donald can be reached at DReiser@cbiz.com or (212) 790-5724.
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