Banks feel the strain of getting ready for DAC6

Author: Josh White

Financial institutions are feeling the pressure of laying the groundwork for the reporting requirements of the EU’s mandatory disclosure rules (DAC6) as they take on a more vital role in tax planning and transparency.

DAC6 was designed to insulate the common reporting standard (CRS) against new avoidance schemes designed to get around its requirements. The rollout of mandatory disclosure rules (MDRs) across the EU member states means financial institutions will have to compile a two-year backlog of transactional data in time for the first reports on July 1 2020.

One tax director at a UK-based multinational bank stressed the onus this places on the financial sector. “It’s very diplomatic to say retrospective reporting is potentially challenging,” the tax director said. “It’s absurd.”

“You need to have a list of transactions now that you’ll be ready to report in a year,” they said at a banking taxation seminar held by Hansuke Consulting. “DAC6 was drafted without any clarity at the national level and we’re going to see 28 countries go ahead with this.”

Tax advisors, accountants and lawyers must disclose potentially aggressive schemes to the tax authorities under the rules. These intermediaries, as well as financial institutions, have to make the disclosure within 30 days of providing, directly or by means of other persons, aid, assistance or advice.

“Your conduct could get you into trouble if you don’t understand these rules,” the director warned. “Your clients might be trying to get around this stuff, even while you’re trying to comply.”

EU member states will then be required to exchange the information they receive through a centralised database every three months. Every EU government has to transpose the rules into national law by December 31 2019, but documents dated as far back as June 25 2018 have to be reported. Those affected are trying to ensure they have the required information for the past six months prepared and have a structure in place to collate data from now on.

Fortunately, the impact on banks classed as intermediaries will be much less significant than advisory firms because tax advice is just one area of financial services. Banks will only have to supply governments with transactional information that falls within scope.

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Open to interpretation

The problem is that the rules are supposed to restrict ‘aggressive tax planning’, yet the rules don’t apply a strict definition and instead rely on very broad hallmarks, such as an effective tax rate of zero or near 0%. This leaves a lot open to interpretation.

One accountant at a European bank suggested DAC6 repeats old mistakes. “People outside the tax world conflate tax avoidance with tax evasion and aggressive tax planning,” they said.

Separating everyday tax reliefs from more questionable practices may be crucial for developing a serious anti-avoidance framework. A lack of clarity over these distinctions creates problems for tax authorities, as well as taxpayers.

“Sometimes politicians do it deliberately because they want to make out that it’s all on the same spectrum. But it’s just not,” the accountant said.

“We have zero tolerance for tax evasion,” they stressed. “That means we want zero risk from clients on our books and zero risk from our people helping them.”

“Governments have done themselves no favours by making tax regimes so complex,” the tax director said. “Simplicity should be the cornerstone of any tax regime.”

The hallmarks make it an almost catch-all approach to tax planning and cross-border transactions. The subjectivity of what counts as ‘aggressive tax planning’ means a lot of ordinary arrangements may come under scrutiny. This could drive a series of changes to how businesses operate.

“It’s not that we don’t want to cooperate and it’s not that we don’t understand this agenda,” the accountant said. “But it conflates a huge amount of issues and puts a huge onus on us.”

“There’s this idea that banks know everything,” they said. “EU politicians make this claim all the time and I’m not so optimistic we won’t see more problems across Europe.”

The fine details of DAC6 are just one part of a shift going back several years. Tax professionals are facing more questions about the future of tax policy. The only certainty left is that there is more change to come.

The changing face of accounting

There are no signs of the pressure easing up any time in the near future. A part of this is due to the public perception of corporate tax avoidance and the role of banks in the 2008 economic crash. As a result, it’s much easier for politicians to raise the pressure on bankers and tax advisors.

One head of tax at a US bank described uncertainty as “the biggest challenge” for financial services and singled out DAC6 as a major factor driving uncertainty. Many US banks have operations across the EU and may have to grapple with these changes too.

“We continue to see countries implementing new legislation on cross-border investments, as well as new legislation against tax avoidance and evasion,” the head of tax said.

On the other hand, the pressure is partly because of shifts in tax advice and financial planning, as well as the rise of new technologies. Financial services are the most technologically advanced areas of the global economy, second only to the high-tech sector itself.

This may mean the two sectors will increasingly challenge the dominance of traditional accounting and law firms on tax advice. Some policy experts are predicting a “sea change” in the way businesses approach tax.

“I would predict that within the next 10 years we will see banks taking the place of many chartered accountants, alongside software houses,” one UK tax policy specialist said. “Banks are where all the money flows and where a lot of the business of tax and tax education can come from.”

“Banks have always given HMRC [the UK tax authority] interest details, the details on interest payments from individual accounts,” they added. “We’re going to see a much more direct relationship between banks and HMRC on tax accounts.”

As much as it may aggravate bankers and tax professionals, DAC6 will be a part of the new normal as the financial industry becomes more important in tax planning. An interconnected world means more transparency, and with it, more risk exposure.

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