"DAC6" is probably not a term that is yet widely known among the European private equity community, but the 6th amendment to the EU's Directive on Administrative Cooperation in the Field of Taxation (DAC6 for short) could yet enter common parlance. The Directive's potentially wide-ranging disclosure regime will require taxpayers and their advisers to report, to EU tax authorities, cross-border arrangements that touch the EU and include certain "hallmarks". It could be very onerous.
The UK will cease to be subject to DAC6 if and when it eventually leaves the EU (and after the end of any transitional period, if one is agreed). But the UK intends to implement it anyway, and the UK tax authority's draft regulations, published in July, have caused some consternation among the private equity community. Earlier this month, the UK's industry association, the BVCA, responded to the consultation setting out key areas of concern and recommended various changes and clarifications, and Debevoise made its own separate submission.
The UK regulations provide for both taxpayers and their "intermediaries" – shorthand for advisers – to report to the UK tax authority, HMRC, information about "cross-border" arrangements involving at least one EU member state that contain one or more prescribed "hallmarks". While several of these hallmarks involve a tax advantage, some do not, so it is possible that commercial transactions without a tax advantage may be reportable. HMRC can share the reported information with other EU tax authorities.
The UK regulations, as drafted, mean that a wider range of transactions will be reportable than are currently disclosable under the UK's existing flagship regime for reporting tax avoidance schemes, and information in relation to such transactions may need to be reported at an earlier stage. In principle, this should give tax authorities more opportunity to counteract such schemes, but it is also likely to significantly increase the volume of information that HMRC must review and increase the compliance burden for taxpayers.
An important concern raised by the BVCA is the significant scope for multiple reporting of essentially the same transaction (and the potential for inconsistent reporting requirements throughout the EU Member States). That is because a typical cross-border fund transaction may involve a number of advisers, such as legal and accounting specialists (and potentially others), all of whom may need to report. Although the UK regulations allow a person not to report where it has evidence that another person has made such a report, the time limits are too restrictive and compliance too burdensome to be entirely effective.
The BVCA, in its submission, recommends that a "lead discloser" is appointed and that a reporting requirement is not triggered if an adviser has written confirmation that a lead discloser intends to file a report in any EU Member State.
Another BVCA concern is the trigger for reporting a cross-border arrangement. Broadly, this is when the reportable cross-border arrangement is "made available for implementation". The term "made available" is unnecessarily broad and can encompass arrangements which are not ultimately implemented. For example, early discussions of potential structuring could need to be disclosed in a report identifying the relevant fund and the cross-border arrangement even though the fund may have no intention of implementing the arrangement.
Furthermore, arrangements could be reportable even where a tax advantage is not a main benefit. In this regard, fund sponsors would have to pay particular attention to any arrangements that involve a deductible payment to a fund partnership that has significant investors who are not 'taxable' – including sovereign wealth funds, public pension plans and other tax-exempt investors.
It remains to be seen whether HMRC will clarify and amend the rules in the final legislation, expected by the end of the year. If they do not, private equity firms and their advisers will have a significantly more burdensome disclosure regime to contend with – and one that would not appear to strike the right balance between curbing tax avoidance and facilitating legitimate transactions.
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