Germany passes bill on cross-border tax arrangement reporting (DAC 6)
INSIGHT ARTICLE |
On Oct. 09, 2019, the German government passed a draft bill introducing a new reporting obligation for certain cross-border tax arrangements. The new law is based on European Union (EU) Council Directive 2018/822/EU, so called DAC 6, which EU member states must implement into domestic law by Dec. 31, 2019.
The main aim of this directive is to provide tax authorities with an early warning mechanism on new risks of tax avoidance and thereby enable them to carry out audits more effectively. EU member states must introduce new reporting obligations with respect to “cross-border tax arrangements” to comply with DAC 6. The reporting obligation retroactively applies to transactions occurring on or after June 25, 2018.
The first draft of the German bill included a reporting obligation for purely domestic tax arrangements, which extended the original scope of the directive. However, the most recently passed draft bill no longer includes domestic arrangements.
Intermediaries and taxpayers may need to report
Under the new law, reportable information generally must be reported to the German Federal Tax Office within 30 days after the arrangement is "made available" for its implementation. The information reported will be contributed to a central directory accessible by the competent authorities of all EU member states.
The reporting rules apply to “intermediaries” and, under certain circumstances, to the taxpayer. Any person that designs, markets, organizes or makes available for implementation or manages the implementation of a reportable cross-border arrangement qualifies as an “intermediary”. An intermediary can be either an individual or a company. A single transaction may involve many intermediaries. The potential intermediaries involved typically include investment banks, lawyers, accountants, corporate services companies, holding and group treasury companies.
Under certain circumstances, the obligation to report the arrangement shifts to the relevant taxpayer itself; for example, when an intermediary is a non-EU intermediary, when there is no intermediary involved (e.g. an in-house arrangement), or when the intermediary is covered by privilege (as in the case of attorneys).
Reportable cross-border arrangements can include many standard transactions
A reportable cross-border arrangement is identified through “hallmarks” which are viewed as potentially indicative of aggressive tax planning. The hallmark categories either refer to transactions, which aim at obtaining a tax advantage, or include specific hallmarks related to certain types of cross-border transactions and transfer pricing that do not necessarily result in tax advantages. For example, the transfer pricing category specifically targets the use of unilateral safe harbors and the transfer of hard-to-value intangible assets without any showing of a specific tax advantage.
At this time, it appears that the German bill is broader in scope than the EU directive. For example, the German law requires reporting of a cross-border payment made between two or more associated enterprises if the payment is subject to a tax exemption or a preferential tax regime in the recipient’s country of residence. Thus, a cross-border payment may be reportable under the German law even if that payment is not deductible, although deductibility is required for the payment to be reportable under the directive. It is uncertain whether the German legislature inadvertently failed to include the additional requirement, or whether this omission was intended. The current wording of the German law could even require reporting of common cross-border dividend payments that are subject to a participation exemption.
Time to assess the impact
Although the new rules target aggressive tax planning, the way the regulations have been drafted means that they may also apply to common commercial transactions with no particular tax motive. Accordingly, many common transactions, group funding structures or internal reorganizations are potentially reportable and there is no safe harbor for arrangements that have a substantial business purpose.
The new German reporting rules will be effective as of July 1, 2020. However, arrangements that were implemented between June 25, 2018 and June 30, 2020, must be reported. Taxpayers and intermediaries must quickly assess their reporting obligations for this initial period. Since the rules can apply to common business transactions, companies (as opposed to advisors or bankers) may in fact have significant reporting obligations.
Accordingly, multinationals should begin an impact assessment, followed by the development of an implementation plan to ensure efficient and effective compliance. Failing to comply in a timely manner may result in reputational consequences as well as monetary costs. Penalties for noncompliance range up to 25,000 EUR ($25,000 U.S. dollars).