Simon Gorbutt discusses the EU’s DAC6 and how its implementation impacts cross-border insurance-based planning
What is the issue? DAC6 requires those involved with cross-border tax planning entered into since June 2018 to consider whether to report those arrangements to domestic tax authorities.
What does it mean for me? Although DAC6 ostensibly targets aggressive schemes, advisors may be surprised to find themselves assessing even established planning to determine whether or not it is in scope.
What can I take away? While DAC6 implementation will not be uniform, there are good reasons why straightforward insurance-based planning should not be reportable. However, in identifying the main benefit of an insurance solution, clients and advisors must verify that the advantages advertised by the insurer are genuinely available.
‘It is [...] critical that Member States’ tax authorities obtain comprehensive and relevant information about potentially aggressive [cross-border] tax arrangements. Such information would enable those authorities to react promptly against harmful tax practices and to close loopholes...’1
The objectives behind Directive (EU) 2018/822 (DAC6), including the protection of EU Member State tax revenue from erosion through aggressive tax planning, are noble and neatly aligned with Action 12 of the OECD’s Base Erosion and Profit Shifting (BEPS) Project.2 But where are we now? How closely does the rest of DAC6 and domestic implementing legislation really resemble the recommendations of the BEPS Action 12 Final Report (the Final Report)?3 And how did long-standing planning, such as unit-linked insurance, unwittingly find itself being mentioned in the same breath?
DAC6 requires the disclosure of any ‘reportable cross-border arrangement’. Reporting is to the national tax authority, following which there is a quarterly international exchange of information. Domestic implementing legislation must take effect from 1 July 2020 and, for arrangements entered into between 25 June 2018 and 1 July 2020, reporting must be completed by 31 August 2020.
‘Arrangement’ is undefined in DAC6, and there is no suggestion that one’s intentions matter, despite the fact that arrangements tend to be the result of intentional acts. ‘Arrangement’ could include a transaction, a series of transactions or parts of a transaction. Arrangements can qualify as cross-border solely by virtue of one participant being in a Member State and the other being in a different jurisdiction.
Rather than defining what is considered ‘aggressive’, DAC6 mechanically targets cross-border arrangements containing one or more hallmarks, some of which apply only where the main benefit test (MBT) is met. This approach is not new; the UK’s Disclosure of Tax Avoidance Schemes (DOTAS) rules, introduced in 2004, do the same, albeit the hallmarks and links to the MBT are more tightly defined, in the relevant law and guidance. The MBT is met if the, or a, main benefit one may reasonably expect to derive is the obtaining of a tax advantage.
However, despite its stated objectives, a literal reading of DAC6 could require the reporting of benign planning, such as that involving trusts, investment funds or insurance. The result would be undesirable: the number of schemes reported under DOTAS fell from 205 in 2007/08 to fewer than five by 2014. Being associated with DOTAS-reportable planning via a scheme reference number is usually reason enough to avoid the planning entirely, even more so since the introduction of follower notices in 2014 and given the prospect of needing to pay the disputed tax upfront.
Too broad a reporting requirement can also discourage advisors from advising on certain planning, reduce the range of planning options that clients believe are available to them, and affect the confidence of taxpayers in the transparency initiatives DAC6 is a part of. It can also create unnecessary costs for those required to report, while leaving tax authorities with a deluge of filings (and, indeed, repeat filings in respect of the same transaction) from which to identify the aggressive planning they intend to eradicate.
If, given the sheer breadth of DAC6’s application, investment-linked insurance is potentially in its scope, what should advisors be thinking about? Two hallmarks of potential relevance to this category of insurance are:
- arrangements having substantially standardised documentation and available to more than one relevant taxpayer without needing to be substantially customised (A3); and
- arrangements having the effect of converting income to capital, gifts or other categories of income taxed at a lower level or exempt (B2).4
Neither hallmark appears to be directed at insurance solutions. DOTAS guidance, referred to in the Final Report, describes the UK equivalent of A3 as designed to capture ‘shrink-wrapped’ products often requiring users to enter into a series of standardised off-the-shelf transactions, such as specific loan arrangements and partnerships. B2 seems more relevant to cases where income due to a taxpayer (for example, employment income) is being diverted in some contrived or artificial way that recharacterises it for tax purposes.
If these particular hallmarks are nevertheless considered relevant, they need only be addressed if the MBT is met. While DAC6 does not define the MBT’s ‘tax advantage’, the UK, Cypriot and, to a lesser extent, German implementing legislation, for example, currently goes further by excluding planning that is in line with the policy intentions behind the tax provisions in play from the requirement to report.5 That will be persuasive in some, but not all, jurisdictions, in which case one needs to consider whether any tax advantage is the, or a, main benefit.
In the case of Luxembourg unit-linked insurance, there may be numerous benefits inherent in the planning, including: exposure to an array of traditional and non-traditional investments and their potential returns; access to preferred investment managers; corridor or capital protection life-cover options; access to one of Europe’s strongest asset-protection regimes; control over wealth transfer and succession; and the portability of the contract, should the client or family members change residence.
Thought should be given to the weight of each benefit and, when considering any planning entered into since 25 June 2018 (to which DAC6 could therefore apply), it would be sensible to enquire as to whether those benefits are genuinely available, not only from the issuer jurisdiction in question, but also from the particular insurance company supplying the contract.
There is some welcome comfort here, but ultimately, once implemented, DAC6 will vary to some extent from one Member State to another. Intermediaries who carry primary responsibility for reporting, and who may be involved at numerous points from design and marketing of the planning to advice and implementation, may be present in more than one jurisdiction, requiring each to follow their domestic version of DAC6.
Some countries have gold-plated the regime, extending the implementing legislation to domestic planning and adding further hallmarks (Poland is a good example of this), while others have followed a more faithful transposition of DAC6. At the time of writing, Luxembourg is in the latter, larger group, and its explanatory notes to the legislation strike a helpful balance by drawing a link with the Final Report when it comes to interpreting the hallmarks.
With the deadline for implementation of DAC6 just around the corner, it is time to turn to local legislation, explanatory notes and authority and industry guidance. In the meantime, it is worth remembering that DAC6 is not a tax regime, but a reporting framework. Many clients will be more used to, if not more comfortable with, their details being shared.
What matters is that DAC6 is implemented and interpreted locally in a way that prevents it from falling prey to the breadth of its own drafting and leaves clients confident to pursue their personal, family and business objectives through established planning. A DAC6 that is truly effective in deterring aggressive tax arrangements would be something to applaud, but there is no need to throw out the champagne with the cork.
3.Mandatory Disclosure Rules, Action 12: 2015 Final Report
The hallmarks appear in a new Annex IV to the amended Directive.
The UK, Cypriot and German texts are drafts at the time of writing.
Director Wealth Structuring Solutions
Lombard International Assurance