International Tax Panorama

As a result of Brexit, the UK will no longer be implementing DAC 6 in its entirety after concluding the Free Trade Agreement with the EU. 

As a replacement the UK will consult on and implement the OECD’s Mandatory Disclosure Rules (MDR). As a result only arrangements falling within within Category D of DAC 6 will now need to be reported, in accordance with the OECD’s MDR. The International Tax Enforcement (Disclosable Arrangements) (Amendment) (No. 2) (EU Exit) Regulations, 2020 – laid before the House of Commons on December 30 – state that “(5) For the purposes of these Regulations, the DAC is to be read as if— (h) in Annex IV, Part 1 [the Main Benefit Test] and hallmark categories A, B, C and E in Part II were omitted.”

What is DAC6? 

DAC 6 is an European Union (EU) directive that requires tax intermediaries to report specific cross-border arrangements containing at least one of the hallmarks that are defined in DAC6.

UK had already implemented DAC 6 into domestic law, that required intermediaries with UK connection to disclose arrangements to HMRC if they acted as “promoters” or “service providers”. If the Free Trade Agreement had not concluded then the first disclosures under DAC6 were due to be made by 31 January 2021.

How will the rule under OECD MDR operate? 

Under the OECD MDR only arrangements that need to be reported that fall within Category D of Part II of DAC 6. As a stop gap measure, the UK doemstic law on DAC6 are getting amended so that they are limited to arrangements falling under the category D hallmarks. 

Which arrangments need to be reported in the UK?

Category D comprises of arrangements designed to undermine tax reporting under common reporting standard and transparency rules. They can be broadly categorised into following 2 types:

1. Arrangements undermining reporting obligations – This include those arrangements which underme European Union legislation or any other equivalent agreements by taking advantage of the lack of legislation or agreements in place.

2. Ownership Chains – Arrangements involving non-transparent legal/ beneficial ownership chains.

Impact of the DAC6 repeal

The DAC6 replacement is one of the many changes that comes with Brexit. Thus, it has significantly reduced the arrangements that could have been reported under DAC6. Also it might come as a relief in terms of compliance with the complex DAC6 for many affected intermediaries operating in the UK. 

However UK’s own disclosure of tax avoidance schemes (DOTAS) rules will continue to apply, in addition to new OECD MDR rules. Briefly, the DOTAS regime was originally designed to enable HMRC to keep up to date with what types of tax avoidance schemes are in circulation. By requesting the promoters make a disclosure, HMRC would be given the opportunity to review and, if necessary, amend legislation to block any scheme which the government considers aggressive and unfair.