Heard of DAC6?

The EU Directive on Administrative Cooperation, also known affectionately as DAC6, requires businesses and intermediaries to report certain cross-border arrangements that contain one or more hallmarks indicating potential tax avoidance or abuse.

Introduced in 2011, this disclosure regime aims to boost transparency on potential cross-border tax avoidance schemes across the EU.

As a central coordinator of global financial flows within multinational groups, corporate treasury functions have an important role to play in ensuring compliance with these complex new reporting rules. DAC6 has major implications for treasuries’ existing intercompany arrangements, group financing structures and cross-border tax planning impacts.

Increased Administrative Burden

Foremost among the challenges is the considerably increased reporting and compliance burden introduced by DAC6. Corporate treasuries will need to thoroughly assess which of their wide range of cross-border arrangements fall into scope of the extensive hallmarks listed under the rules.

These hallmarks cover areas like intragroup loans, cash pooling, captive insurance, payments to entities in blacklisted jurisdictions, aggressive transfer pricing and transactions routed through conduit companies. Any arrangement bearing a hallmark sign of potential tax avoidance or abuse must be disclosed to tax authorities within 30 days, demanding new internal information flows.

Greater Transparency on Tax Structures

The detailed disclosures required around structures, terms, participants and tax treatment provide EU tax administrators a trove of valuable new information on how multinationals arrange their European tax affairs. This supports authorities’ efforts to gauge possible tax risks and artificial planning.

For corporate treasuries accustomed to operating behind the scenes, this transparency spotlight will take some adjustment. Proactive engagement with tax and legal teams can help assess and mitigate potential reputational risks from information shared under DAC6.

Pressure on Complex Setups

In line with its purpose, DAC6 will also ramp up pressures on corporate treasuries to steer clear of highly engineered financing structures primarily geared toward realizing tax advantages. Complex arrangements involving multiple group entities spread across several jurisdictions will face particular scrutiny.

Treasury departments may need to gauge whether they can justify these structures solely based on commercial needs and economic substance, rather than largely on tax technicalities. Those perceived as high-risk may warrant proactive reassessment and potential simplification.

Review of Existing Arrangements

An exhaustive review of all existing intercompany financing arrangements, cash pools, captive insurance setups and other cross-border tax planning instruments will be imperative for most multinationals with EU operations.

Any structures touching EU countries with even hints of DAC6 hallmarks will need to be thoroughly vetted to ascertain reporting obligations, documentation needs and potential risks. Treasuries should take a critical look at whether these existing arrangements fully align with emerging EU tax policy environments.

Adjusting to the New Normal

While still in its infancy, DAC6 is part of a clear trajectory toward a future with radically increased tax transparency across Europe. As key coordinators of internal information flows and cross-border financial arrangements within groups, corporate treasury functions will need to devote significant focus toward compliance with these rules.

Proactively engaging with tax, legal and business units – as well as third party advisors – can aid treasuries in adjusting to this new transparency normal. Revamping documentation practices around potential tax impacts, assessing DAC6 risks early and steering clear of overly engineered structures can help manage the challenges ahead.