The Irish Finance Act 2019 enacted into Irish law the EU Directive known as "DAC 6". This is a significant new measure requiring certain intermediaries and taxpayers based in or with a connection to Ireland to report information on a broad range of reportable cross-border arrangements to the Irish Revenue authorities.
A “cross-border arrangement” is an arrangement that concerns an EU Member State and any other jurisdiction, where at least one of the following conditions is met:
- not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
- one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
- one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment (“PE”) situated in that jurisdiction and the arrangement forms part or the whole of the business of that PE;
- one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a PE situated in that jurisdiction;
- such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
To come within the definition of a cross-border arrangement one of the participants in the arrangement must have a nexus to an EU Member State and at least one other participant in the arrangement must have a nexus to another jurisdiction (which may be another EU Member State).
The objective of DAC 6 is to enable the tax authorities across the EU to obtain knowledge regarding certain transactions carrying specific hallmarks. The scope of DAC 6 is very wide and can apply to both aggressive tax planning schemes and also certain cross border transactions driven purely by commercial motives where there is no tax advantage. There is no de-minimis threshold set out in the legislation.
Specific Transfer Pricing Hallmarks
When determining whether a cross border arrangement is reportable, it is necessary to consider whether the transaction falls into one of the hallmarks that have been set out in the legislation. There are five categories of Hallmarks, some of which are only reportable where a tax benefit has been obtained as a result of the arrangement. In this note, and in light of our upcoming Transfer Pricing webinar, we are focused on Hallmark E which covers specific transfer pricing hallmarks. Under the legislation, these include:
- The use of unilateral safe harbours,
- An arrangement involving the transfer of hard-to-value intangibles. The term “hard-to-value intangibles” covers intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises:
- no reliable comparables exist; and
- at the time the transaction was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer.
- An arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made.
It is important to note that reporting obligations under Hallmark E can apply regardless of whether or not the arrangement has the obtainment of a tax advantage as a main benefit. This, therefore, can have quite broad application and it is very important that DAC 6 reporting obligations are considered in light of any cross border transactions or business reorganisations that are being considered.
Time-limits / Reporting
For arrangements the first step of which was taken on or after 1 July 2020, returns will be required 30 days after the reporting obligation is triggered. Depending on the circumstances the reporting obligation can fall on the intermediary and/or the taxpayer (i.e. the entity itself and/or its in house tax team) who engages in relevant cross border arrangements. Generally a taxpayer will be responsible for reporting a relevant cross border arrangement where the taxpayer has not waived their right to legal privilege or there is no intermediary involved in the transaction. For a taxpayer the reporting obligation is due for filing with Revenue within 30 days of the arrangement being made available for implementation. As regards an intermediary who assists or advises on the transaction, they are required to file a return of the specified information with Revenue within 30 days of providing, directly or indirectly, the aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement. This obligation can extend to auditors, tax advisors and other advisors.
Penalties can arise for the failure to report a disclosable transaction. Where a conclusion is reached that a transaction does not need to be reported, it is important that the reasoning is noted in writing. Irish Revenue have confirmed that where a decision is taken that an arrangement is not disclosable but it subsequently transpires that the decision was incorrect, “there will not be a failure to comply with a disclosure obligation if it can be established to the satisfaction of Revenue that the decision was arrived at in an objective way, taking into account all relevant facts and circumstances and based on available information”.
Failure to comply with DAC 6 reporting can give rise to significant penalties for intermediaries and for taxpayers. Compliance with DAC 6 reporting obligations is very important and should be incorporated into any business restructuring being considered that has a cross border element. The reporting deadlines are very tight and professional advice is required.
To discuss the above in further detail, please contact our team on (01) 6440100 / (090) 6480600:
- Richard McAufield, Senior Tax Manager
- Ronan McGivern, International Tax & Business Advisory Partner
- Jackie Masterson, Head of Tax, Partner
While every effort has been made to ensure the accuracy of information within this publication is correct at the time of going to print, RBK do not accept any responsibility for any errors, omissions or misinformation whatsoever in this publication and shall have no liability whatsoever. The information contained in this publication is not intended to be an advice on any particular matter. No reader should act on the basis of any matter contained in this publication without appropriate professional advice.