Towards a deferral of the EU Directive on Administrative Cooperation (DAC 6)...?

When Luxleaks exposed in 2014 how Luxembourg offered "sweetheart" tax rulings to attract corporate investments, most large and small multinational companies knew the blow back from the scandal would be severe – even if they did not benefit from the Luxembourg largess.

 Six years after Luxleaks, companies face a radically reformed tax regulatory landscape. The European Commission's ongoing tax state aid cases are one example. The EU Anti-Tax Avoidance Directives – known as ATAD 1 and ATAD 2 – that have revamped rules on controlled foreign companies, interest deductions and hybrid mismatches etc. are others. The economic impact of this new regulatory environment has been anything but inexpensive but companies were expecting the hit. 

  What taxpaying firms large and small did not anticipate was the cost of the EU tax transparency directive commonly referred to as DAC 6. It was designed to target the "intermediaries" that mastermind complex "aggressive" tax schemes sold to individuals and companies to dodge the tax man. But, as often happens with legislation fuelled by political outrage, there have been unintended consequences. 

  The first irony of the DAC 6 story is that the impact on intermediaries such as accountants, lawyers and others that dispense tax advice has been cumbersome but not necessarily costly. In fact for some it has morphed into a cottage industry, especially for the Big Four. They provide services on how to apply the DAC 6 main beneficiary test and the 18 hallmarks. In other cases they provide in-depth info on how different member states have implemented the DAC 6 law – or gold-plated as is the case with some countries. 

   For many large and small companies the reality of DAC 6 has been much different. They have had to to spend considerable resources to comply whether it be by hiring outside consultants or by bulking up their in-house tax compliance departments. In other cases companies have the responsibility to disclose tax arrangements because tax lawyers benefit from professional legal privilege or if they have an tax intermediary based outside the EU.

   It is the consensus within the taxpaying business community that the European Commission's economic impact assessment completed before it proposed the legislation significantly underestimated the cost of DAC 6 for companies. 

  Along with the economic cost of complying with the evasive broad DAC 6 targets, companies are now facing an unprecedented period of tax uncertainty. They are being forced to hand over reams of data which can potentially lead to open season auditing by national tax enforcement agencies that can lead to an extra set hefty fines on top of the usual penalties and back taxes.

  It is for these reasons and others that groups such as BusinessEurope, the European Banking Federation, Insurance Europe companies, the Association of Financial Markets Europe called for the July implementation of the DAC 6 legislation to be postponed. 

   As is the case with other pending tax legislation such as the EU VAT ecommerce legislation or the OECD Common Reporting Standard, the European Commission initially opposed the delay. But in the face of the Covid-19 crisis the Commission relented and has now proposed a three-month DAC 6 delay for reporting "historic" tax arrangements dating back to 2018. 

  But is three months sufficient? Indeed not, if you consider a wide variety of factors. The first of those revolves around the failure of more than a dozen EU member states to implement the law into their national legislation. Currently the European Commission has legal proceedings against 15 countries for failure to notify implementation into national law. In the countries that have adopted the legislation, the proposed three month extension is not nearly long enough to accommodate the time required to adapt national legislation. As a result, companies will be required to begin implementation by July regardless of the proposed extension. 

   Just as important – if not more so – is the massive company management upheaval triggered by Covid-19. In some cases companies are now scrambling to overhaul their business model. Others, especially those whose revenue has fallen off a cliff, are literally trying to keep the ship afloat.           

    EU finance ministers have taken on board the concerns and now have a tentative agreement to provide a six month implementation deadline. That decision is due to be finalized by the end of June after the European Parliament provides its non-binding recommendations.

   But all things considered, clearly the current situation calls for is an indefinite extension on the DAC 6 implementation date. That would not only ease pressure on already besieged companies but it would also allow for a re-think. Moreover with an indefinite delay the European Commission and EU member states could use the freeze to remove some of the tax uncertainty triggered by DAC 6. They could do so by complimenting DAC 6 with a cooperative tax compliance scheme such has been pioneered by Australia over the past decade and now being piloted in some EU countries including the Netherlands, Belgium, Austria and Poland.

  Earlier in 2020, the European Tax Commissioner Paolo Gentiloni indicated a cooperative compliance scheme was on the drawing boards. Such a proposal would provide an alternative to the adversarial company-tax authority relationship that DAC 6 will exacerbate. It can be argued that such a cooperative tax compliance scheme should have been a component of DAC 6 from the start. The fact that is was not can be blamed on scandals such as Luxleaks and the Panama Papers.

   But the Covid 19 crisis has flipped the script and now is the right time to add a carrot to the stick-only approach of DAC 6.