Do the new reporting obligations on cross-border arrangements apply to you?

Do the new reporting obligations on cross-border arrangements apply to you?

Despite the UK’s exit from the EU, there is still a requirement to report to HMRC certain cross border arrangements, under rules originally implementing the EU’s mandatory disclosure regime (otherwise known as “DAC 6”).

These rules, as now implemented by the UK, have been simplified, such that disclosure is only required to HMRC where arrangements have been entered into that undermine tax reporting under common reporting standard and transparency rules.

If you have entered into transactions with another country that falls into the above criteria since 25 June 2018, then you may have an obligation to report this, so please read on.

What needs to be disclosed?

An arrangement is considered cross-border under DAC 6 if it is an arrangement which concerns either:

• more than one state (where “state” means the UK or an EU member state); or
• a state and a third country.

And any one of the following conditions is met:

• the participants are resident in different tax jurisdictions;
• any one of the participants is resident in more than one tax jurisdiction simultaneously;
• any one of the participants has business activities in another jurisdiction through a PE there and the arrangement is part or the whole of the business of the PE;
• any one of the participants in the arrangement carries on an activity in another jurisdiction without being resident there for tax purposes;
• the arrangement possibly impacts on the automatic exchange of information or the identification of beneficial ownership.

A cross-border arrangement becomes a reportable cross-border arrangement if it is within Hallmark D of the five categories of DAC 6 (and carried over into the new UK legislation), as explained below.

Hallmarks

Under the EU’s full rules, as originally adopted by the UK, there were five categories of hallmark – Categories A to E. However, the UK will only be adopting Hallmark Category D.

Category D covers arrangements designed to undermine tax reporting under common reporting standard and transparency rules and are split into two types.

1. Arrangements which undermine reporting under international agreements for the “automatic exchange of information”, such as the OECD Common Reporting Standard (“CRS”).

HMRC have indicated that the following features may suggest that the hallmark applies.

• a transaction that is highly structured where the avoidance of CRS reporting is the logical explanation for that;
• a transaction that, other than avoiding CRS, is otherwise uncommercial;
• ownership structures which result in beneficial owners holding assets just below the threshold of reporting; or
• the refusal by a financial account holder to provide an explanation for a transaction or structure.

2. Arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.

This hallmark will apply to arrangements that involve non-transparent legal or beneficial ownership chains which use persons (whether legal or real), legal arrangements or structures:

1. 1. that do not carry on a substantive economic activity (for example an activity that is supported by adequate staff, equipment, assets and premises); and
   2. that are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one of the beneficial owners; and
   3. where the beneficial owners are made unidentifiable.

Examples under Hallmark D2 include where undisclosed nominee shareholders are used, or where control is exercised indirectly.  A further example concerns the use of “offshore” jurisdictions where there is no requirement to keep information on beneficial ownership, or no mechanism to obtain it.

Who needs to report?

In the UK, the primary reporting obligation falls on “UK intermediaries”. This includes:

• a Promoter i.e. a person who markets, organises, implements, designs or simply makes available an arrangement that should be reported
• a Service provider i.e. a person who provides advice, aid or assistance in connection with the reportable activities

In the absence of a relevant intermediary the taxpayers themselves might need to make a report.

Once a report has been made, HMRC will provide a reference number to the arrangements. HMRC have opened a reporting portal, operative from 1 January 2021.

As a separate matter, relevant taxpayers who are resident or taxable in the UK have an obligation to report to HMRC for each tax year and accounting period that they participate in the reportable arrangement, typically in their annual tax return.

Time limits

For cross-border arrangements implemented between 25 June 2018 and 1 July 2020 the deadline for reporting is 28 February 2021.

For arrangements entered into between 1 July 2020 and 31 December 2020, the deadline for reporting is 30 January 2021.

For reportable arrangements that are made available, are ready for implementation or where the first step is implemented after 31 December 2020, a report must be made within 30 days beginning:

• on the day after the reportable arrangement is made available for implementation.
• on the day after the reportable arrangement is ready for implementation; or
• when the first step in implementation of the reportable arrangement has been made, whichever occurs first.

UK relevant taxpayers caught by the rules, also have an annual reporting requirement on or before the company or personal tax return filing date.

Penalties

Failure to meet these requirements can result in significant penalties.

How can we help

Our firm has an internal DAC 6 team which would be happy to identify and capture your cross-border arrangements, assess them and then report it to HMRC as appropriate.

If you are aware of any cross-border arrangements which may fall within these rules, please do not hesitate to contact us or get in touch with your local Azets contact. Our DAC 6 team will review the facts and establish whether a report needs to be made by your company.

DAC 6 team members