7.5.2020

EU Increases Tax Regulation– New DAC6 Reporting Obligation for Cross-Border Transactions

In a globalised world, business often extends beyond the country where a company has its headquarters. Countries of operation want to know how the business decisions made by companies will impact their tax incomes.

With this in mind, countries have begun monitoring tax streams more carefully over the past few years. This has also led to quite fast-paced regulatory measures in the EU and to an ever-expanding exchange of information between member states.

DAC6 Introduces New Reporting Obligation

A new reporting obligation relating to tax streams was introduced for Finnish Companies at the start of 2020, when the Act on Reporting Tax Arrangements entered into force.

The act is based on the EU Directive on cross-border tax arrangements, called DAC6. Under the new act, a company’s planned or implemented cross-border arrangements that could involve characteristics of tax avoidance must be reported to the Finnish Tax Administration or other EU member state tax authority.

Dispersed Reporting Obligation

The reporting obligation applies to service providers participating in the arrangement as advisors, such as investment banks, audit firms and attorneys. Numerous parties may have to report the same arrangement in multiple states. Each party subject to the obligation must ensure that all of the information required by the act is reported.

The company itself may in certain circumstances have the reporting obligation. This is the case when the arrangement does not involve a service provider that has a reporting obligation, or the service provider has been exempted from the obligation. For example, legal professional privilege generally prevents attorneys from reporting arrangements.

Failing to comply with the reporting obligation could lead to a penalty payment. The amount of the penalty varies from country to country: in Finland, it is at most 15,000 euros, but in Poland for example, it can reach several million euros.

IPR Licencing and Intra-Group Transfers in Focus

Not all cross-border arrangements need to be reported; there are certain hallmarks (provided for in sections 12–22 of the act) that arrangements have to meet to require reporting. In some cases, the hallmarks for reporting expressly mention that the main purpose of the arrangement is to obtain a tax benefit.

Companies should pay particular attention to the transfer (such as sale or licensing) of immaterial goods that are difficult to value and to the transfer of intra-group operations, risks or assets. These common business arrangements can easily trigger the reporting obligation even if their main purpose is not to gain a tax benefit.

The Finnish Tax Administration is currently working on extensive reporting guidelines, which should be ready in April.

Partially Retroactive Reporting Obligation – Does Your Company Already Have Arrangements to Report?

The first reports must be filed on arrangements that start on or after 1 July 2020. Arrangement have to be disclosed within 30 days of when:

The act also requires that certain already implemented arrangements be reported. Arrangements implemented between 25 June 2018 and 30 June 2020 must be reported to the Finnish Tax Administration no later than on 31 August 2020.

It is important that companies and their advisors begin identifying retroactively reportable arrangements immediately.