Tick tock … 31 August 2020 will be here soon. Do you know what to report?
By the end of summer, intermediaries, such as banks, asset managers, insurance companies and other professionals active in the financial sector will have to report tax arrangements they have assisted with since 25 June 2018. Tax arrangements that occurred after 1 July 2020 must be reported within 30 days.
To meet these new reporting requirements, intermediaries are currently assessing their individual business models to determine their involvement in arrangements and assess the reportable character of identified arrangements.
Here, a key word is involvement, i.e. the business’ role within the value chain of an arrangement. It is an important point to understand when intervening in an arrangement and if you qualify as primary or secondary intermediary, which might affect your reporting obligations.
For example, a bank that merely opens a bank account is likely to qualify as a secondary intermediary whereas a fund manager actively managing investments is likely to qualify as a primary intermediary.
The accurate determination of status and value chain role is particularly important for multinational financial groups offering an extensive set of services – from routine banking to life insurance policies and fund management solutions. An incomplete understanding of the business model could potentially lead to reporting the same arrangement multiple times with different data due to varying levels of involvement and understanding. This would result in significant administrative burden and cost.
Once a complete picture of the business model is achieved in terms of status and value chain, intermediaries face the challenge of determining the reportable character of an arrangement, which depends on various elements, e.g. cross-border criteria, the interpretation of the hallmarks or the application of the main benefit test. In the absence of clear definitions and specific guidance, it seems that intermediaries tend to adopt strategic interpretations.
For example, intermediaries are likely to consider an arrangement to be cross-border when its active, rather than passive, participants are cross-border. Thus, when two banks residing in the same jurisdiction enter into an operation over foreign assets, which are freely available on the market, the operation would not trigger the cross-border criteria, excluding it from the scope of DAC 6.
On the other hand, when an insurance company reinsures its risk exposure through a reinsurance company located in a low tax jurisdiction, this would be considered a cross-border arrangement likely to trigger hallmark C.
Another concrete illustration is the interpretation of the main benefit test in which the genuine commercial objective of a transaction should be considered, combined with applicable tax law and legislative intent. In this context, the issuance of accumulating fund units to investors provides for a deferral and potential tax advantage upon share redemption. This could meet one of the hallmarks but should not meet the main benefit test because the potential tax advantage is clearly provided by relevant tax law rather than artificial structuring. Thus, it will likely be considered in compliance with the legislative intent of tax provisions.
In addition to the aforementioned, intermediaries subject to FATCA/CRS reporting should review and adapt their current due diligence and reporting procedures in order to incorporate hallmark D obligations set out by DAC 6. These obligations complete the existing CRS reporting framework by further increasing transparency on the automatic exchange of financial information.
The above is far from exhaustive but gives a glimpse into the practical questions DAC 6 raises for the financial sector and how they can be tackled.
In a nutshell, financial institutions should assess their business models and determine their individual intermediary status before deciding on strategic interpretations with respect to DAC 6.
Also, properly documenting assessments performed is recommended in order to ensure an accurate audit trial for statutory audit purposes and in order to have it available in the case of challenges from authorities. The recently published bill n°7527 insists on written FATCA/CRS due diligence procedures, reporting processes and related non-compliance fines. So, intermediaries should be particularly careful to abide.
Finally, don’t forget to review your potential reportable character as a taxpayer and your corresponding reporting obligations – from which your advisers might be exempt due to legal privilege.
Deadlines are approaching fast, so don’t hesitate to reach out to us.