Extract taken from the original article by Cristian Angeloni, initially published on International Adviser.
Read full article here.
What does the newly-implemented EU directive mean for intermediaries?
Financial advisers working in the cross-border space should be familiar with the Directive on Administrative Cooperation 6 (also known as Dac6).
It was introduced by the European Commission in 2017 to tackle tax avoidance and evasion across the continent.
Legislation was supposed to be passed by all member states no later than 1 January 2020, so that Dac6 could come into force by 1 July 2020.
But not all of them have drafted or passed domestic regulation to meet the deadline.
There is some leeway, but those that are lagging behind must ensure the legislation is implemented by July.
So, what does it mean for intermediaries?
A matter of definitions
Dac6 applies to all cross-border intermediaries and mandates that they report any such transaction or arrangement intended to achieve a tax benefit.
Intermediaries are defined as those who design and market cross-border arrangements and those who provide aid, assistance or advice in respect of such arrangements, according to Catherine Robins and Jason Collins, partners at law firm Pinsent Masons.
Under the rules, any transaction designed to gain a tax advantage and involving at least one member state has to be reported.
Arrangements should only be reported once and to a single EU tax authority, no duplication is required.
Problems are already arising, however, as the directive is “extremely complex” and “not detailed at all”, Vincent Derudder, honorary chairman at the European Federation of Financial Advisers and Intermediaries (Fecif) told International Adviser.
Vague is en vogue
“Definitions in Dac6 leave much room for interpretation,” Valérie Mariatte-Wood, regulatory affairs director at Lombard International Assurance, told IA.
“Thinking that it is only relevant for entities which manufacture or distribute cross-border ‘aggressive’ tax planning instruments is a misconception – intermediaries must ‘get with the lingo’.
“For example, the term ‘arrangement’ can cover a number of financial instruments, including life insurance and banking products.
“However, this does not mean that such arrangements are reportable en masse simply because they are cross-border,” she added.
This has caused some confusion among member states, which had to clarify the concept of a ‘tax advantage’ to transpose the directive’s instructions.
According to Mariatte-Wood, a tax advantage has to be determined based on “whether a particular tax outcome is or isn’t fully in line with the policy intent of the legislation upon which it relies”.
But what makes this problematic is that member states will have different interpretations and, as a result, different versions of the same directive.
This could potentially lead to some transactions being subject to reporting obligations in one country and not in another, she added.
The Italian case
Some banks in Italy have already reached out to tax and compliance professionals to understand what Dac6 will mean, in practice, to them, Fulvia Astolfi, partner and head of tax at Hogan Lovells, told IA.
She said there are three circumstances where intermediaries might be excluded from reporting to Italian taxman the Agenzia delle Entrate:
Helping the taxpayer
The reporting burden would then fall on the taxpayer if any of the above exemptions are triggered, or if an intermediary is not involved.
So, firms are engaging with their clients on this.
Fecif’s Derudder said it will “make [intermediaries’] lives a bit more difficult, because of the extremely difficult combination of Mifid; [the Insurance Distribution Directive (IDD)]; [the Packaged Retail and Insurance-based Investment Products (Priips)] and the rest”.
He believes this is going to cause tensions between intermediaries and their clients due to the increasing amount of admin and bureaucracy they will go through.
Comply or pay, a lot
And intermediaries face hefty financial penalties for non-compliance.
Derudder said that, depending on the member state, fines can be as high as €250,000 (£210,722, $275,569).
Politics over tax?
Derudder also accused Dac6 of being “very politically motivated”.
“Our parliaments are badly in need of money and they would do anything they could to try and get some cash,” he said.
He claimed the directive is problematic because it is very vague, as opposed to the “too detailed” Priips and Mifid II.
“Dac6 means more reporting and more cost because you need people to handle the information; you need a new IT system, and this means that if [Dac6] has to be implemented by 31 August 2020, companies will only have six months to have the right software and recruit people.
“It’s a nightmare.”
He added that, over the last decade, about 200,000 to 250,000 intermediaries EU-wide, “have been pushed out of their jobs because of regulations”.
Lombard International’s Mariatte-Wood believes there could be a political aspect to the directive.
“Dac6 is drafted so as to have a dissuasive effect. The experience of the [Disclosure of tax avoidance schemes (Dotas)] regime in the UK is that advisers may think twice before promoting arrangements which are deemed reportable,” she added.