Risk Update

New Year, New Risks — DAC6 Mandatory Tax Reporting Disclosures are Coming…

The folks at Intapp were first to put this new risk issue on my radar, which goes into effect later this year, as it carries implications for law firm data capture on the intake/conflicts and compliance when working with clients on relevant matters in affected geographies: “What firm leaders need to know about DAC6” —

  • “DAC6, the European Union directive on administrative cooperation — formally known as Council Directive 2018/822/EU of 25 May 2018 — sets down new regulations for certain cross-border arrangements, and mandates transparent reporting requirements for companies doing business in E.U. member states. Tax advisors, professional services firms, and taxpaying companies alike are grappling with new disclosure rules, which will be fully implemented my mid-2020.”
  • “Under DAC6, companies entering into — or advising on — cross-border arrangements will need to report these arrangements to local authorities, regardless of whether or not the relevant transactions were primarily motivated by tax benefits. As a result, many relatively mundane financial transactions — leasing, reinsurance, corporate funding, and acquisition finance — are now subject to E.U. reporting mandates. And, in some cases, multinational entities with headquarters outside of the E.U. are also subject to DAC6 requirements.”
  • “Notably for professional and financial services firms, DAC6 obligations apply equally to business intermediaries as to the taxpayer. DAC6 requirements are also shared by all intermediaries, so a single business event could trigger reporting requirements for a number of firms — lawyers, accountants, service providers, and private equity managers — in addition to entities that are party to the transaction.”

For those interesting in going deep, Allen & Overy offers quite the excellent analysis on the details and nuances: “DAC6 – Mandatory disclosure tax reporting what does it mean for you?

  • “All intermediaries involved in a transaction individually have an obligation to file. However, an intermediary is exempt from disclosing if it has proof, in accordance with national law, that the same information has been filed in another Member State.”
  • “It will be important to ascertain this information in respect of a transaction at an early stage. In the case of doubt it may be safer for all intermediaries to make a disclosure.”

And this article in LegalFutures does a nice job of connect the dots more explicitly for law firm: “DAC6 compliance – seven timely recommendations” —

  • “1. Review your engagement letter. You need to let clients know about the new requirements and the potential reporting obligation. One way to do this is to include the DAC6 reporting requirements in your client engagement letter. Some firms may decide to rely on legal professional privilege asserting that confidential client information does not need to be divulged to tax authorities. Firms using professional privilege will need to advise clients of their responsibility to report to another intermediary.”
  • “2. Modify matter inception process. Flagging potential transactions that might be caught by DAC6 will help you track details when the reporting requirements are in force. Some firms have added a question on client/matter intake forms to determine whether DAC6 is likely to apply.”
  • “4. Keep a register of all potentially reportable transactions. Not every transaction will be reportable, so tracking those that might be will help firms to decide which arrangements ultimately require reporting. DAC6 compliance requires firms to capture all the details of relevant transactions and later analyse whether they warrant further investigation. An online register will track and record transactions when hallmarks are present, flag those transactions and alert the appropriate staff.”