Directive on Administrative Co-operation in the field of Taxation (2011/16)

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Directive 2011/16
European Union directive
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TitleDirective on Administrative Co-operation in the field of Taxation
Made underArticles 113 and 115 TFEU
Journal referenceOJ L 64, 11.3.2011, p. 1–12
History
Council VoteUnanimous
Date made15 February 2011
Other legislation
ReplacesDirective 77/799/EEC
Amended byCouncil Directives 2014/107, 2015/2376, 2016/881, 2016/2258, 2018/822, 2021/514 and pending amendment by Procedure File 2022/0413

The Directive on Administrative Co-operation in the field of taxation (commonly referred to as 'the DAC') is a Directive (European Union) which sets rules for the Automatic Exchange of Information (AEOI) which apply to members of the European Union (EU).

Contents

The DAC's primary purpose is to tackle tax evasion and avoidance through the sharing of information on individuals and entities within the EU. [1]

Overview

The Directive has been amended 7 times to expand the scope of AEOI within the EU, reflecting both global initiatives in this area undertaken by the OECD as well as the EU's own initiatives. In addition, an amendment to the Regulation on administrative cooperation and combating fraud in the field of value added tax adds an additional AEOI reporting requirement in respect of payments.

AmendmentAmending DirectiveInformation ReportedOECD equivalent measureEffective from
DAC Council Directive 2011/16
  • Employment Income
  • Capital Gains
  • Director's Fees
  • Pensions
-2012
DAC2 Council Directive 2014/107 Financial accounts Common Reporting Standard 2014
DAC3 Council Directive 2015/2376 Tax rulings BEPS Action 52012
DAC4 Council Directive 2016/881 Country-by-country tax reporting for multinationals BEPS Action 132016
DAC5 Council Directive 2016/2258 Beneficial ownership of entities-2017
DAC6 Council Directive 2018/822 Cross-border arrangements which meet a hallmark of (potential) tax avoidance BEPS Action 122018
DAC7 Council Directive 2021/514 Sellers using digital platforms to:
  1. Rent property
  2. Rent transportation
  3. Sell goods
  4. Provide personal services
Digital Platforms Information Reporting (DPI)2023
DAC8 Council Directive 2023/2226 Transactions involving the buying, selling, exchange or other acquisitions and disposals of cryptocurrency and other digital assets Crypto-Assets Reporting Framework (CARF)2026
CESOP Council Regulation (EU) 2020/283 Cross-border payment transactions where the payer/sender is in the EU, including bank transfers, direct debits, credit and debit card transactions.-2024

History

The original Directive (Council Directive 2011/16 [2] ) entered into force in 2011 and established a framework for co-operation between Member states of the European Union in direct tax matters. The Directive excludes from its scope value-added tax matters, although a separate regulation (Council Regulation No. 904/2010) establishes similar principles [3]

The first Directive established 2 key principles:

  1. Spontaneous Exchange of Information - for tax authorities to inform each other where there may be loss of tax, tax avoidance or profit shifting
  2. Automatic Exchange of Information - for information in the possession of tax authorities related to residents on another EU Member State, such as employment income, director's income or pensions.

Common Reporting Standard / DAC2

In 2014, the OECD agreed the principles of Automatic Exchange of Information for financial accounts, under the Common Reporting Standard.

In order to implement these rules with the EU, the DAC was amended by Directive 2014/107 [4] to include the exchange of information on financial accounts. This change required banks, asset managers and certain insurance companies in the EU to gather information on the tax residence of customers and to provide reports to their domestic tax authority every year for onward exchange with other EU Member States. [5]

As a result, an EU resident who holds a bank account, investment account or other investment in another EU country will have details of that account reported to their domestic tax authority. A report by the European Parliament on the implementation of DAC2 indicated that more than 8 million accounts held by EU residents in other countries were reported in 2018. [6]

A 2019 report into the effectiveness of the Common Reporting Standard noted that it was "substantially dif�ferent from any initiative in the field of information exchange launched so far, including its role model FATCA". [7]

Exchange of Information on Tax Rulings / DAC3

In 2015, the Directive was amended to add the exchange of information on tax rulings, [8] which requires tax authorities to exchange information where they grant a tax ruling to a resident of another EU Member State. This gave effect to Action 5 of the OECD's Base erosion and profit shifting initiative (BEPS) which required the same exchange of information between all BEPS adopters.

This amendment is the only rule under the DAC which does not impose any obligations on companies to provide additional information to their tax authority.

Country-by-country reporting / DAC4

In 2016, the Directive was amended [9] to add the exchange of Country-by-Country Reporting by companies operating in the EU. This gave effect to Action 13 of the OECD's BEPS initiative in the EU.

All multinational companies with revenues greater than €750 million are required to submit reports annually to their tax authority, including groups which are parented outside of the EU but operate in the EU.

In 2021, the EU agreed Directive 2021/2101 which requires public country-by-country reporting to be published by the same companies from 2026 and available on the company's website or on a central register. [10] The requirement under DAC4 remains in place, as more information is required under DAC4 than under the public disclosure rules.

Exchange of beneficial ownership information / DAC5

The Directive was amended again [11] in 2016 to provide access to beneficial ownership registers which were established under Anti Money Laundering Directives. In particular, Council Directive 2015/849, the EU's 4th Anti-Money Laundering Directive created a requirement for the registration of information on beneficial ownership in a central register.

Mandatory Disclosure Rules / DAC6

The Directive was amended [12] in 2018 to include exchange of information on 'cross-border arrangements', which are transactions which meet one or more hallmarks of (potential)Tax avoidance and which involve residents of EU Member States, or otherwise concern member states. [13]

The Directive defines 15 hallmarks of potential tax avoidance [14] which include secrecy requirements, conversion of income to capital, double deductions for expenses, and cross-border movements of assets or business.

Those rules also gave effect to the OECD's Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures [15] which require reporting on transactions which seek to avoid reporting under DAC2.

Due to the COVID-19 pandemic, the EU Council subsequently amended the Directive to allow 6-months of additional time for implementation.

Digital Platforms Information reporting / DAC7

In 2020, the Directive was amended [16] to include rules which require digital platforms to report information on sellers who use the platform to: [17]

  1. Rent property
  2. Rent transportation
  3. Sell goods
  4. Provide personal services

The rules mirror the OECD's Digital Platforms Information package and implement the rules in the EU.

DAC7 has two notable differences from previous amendments to the Directive:

Crypto-Assets Reporting Framework / DAC8

In 2023, the EU agreed an amendment [19] to the Directive to implement the OECD's Crypto-Assets Reporting Framework for all member states. That adoption was closely tied to the EU's adoption of Markets in Crypto-Assets (MiCA) regulations, with the two regimes intended to work together. [20] These rules require Crypto-Asset Service Providers to report on all transactions which involve the acquisition, disposal or exchange of cryptocurrency and other digital assets. [21]

Like DAC7, the scope of DAC8 is extraterritorial - for example, requiring cryptocurrency exchanges based in the US to report on EU resident customers.

The DAC8 establishes new amendments to the developed set of rules on administrative cooperation in the field of taxation. [22]

The rules are due to go into effect from 1 January 2026.

Central Electronic System of Payments (CESOP)

In addition to the amendments to the DAC, an additional AEOI reporting requirement was added in 2020 in respect of VAT. This was added through amendments to the VAT Directive and the Regulation on administrative cooperation and combating fraud in the field of value added tax as the DAC only applies to direct tax matters.

Those amendments create a reporting obligation known as CESOP, which requires Payment Service Providers in the EU to report on payments made by EU residents.

Mechanism for information gathering and exchange

With the exception of the original DAC and DAC3, all other amendments to the Directive require information to be provided by private companies to their domestic tax authorities, who then exchange information with EU Member States through the Common Communication Network. In the case of DAC2, DAC3, DAC4, DAC7 and DAC8, EU Member States will also exchange the information collected with non-EU countries operating under the rules established by the OECD's Global Forum on Transparency and Exchange of Information for tax purposes. This also applies to a sub-set of information exchanged under DAC6.

As a result of the DAC, a wide range of companies are required to establish procedures to identify EU residents and report information on their activities to their domestic tax authority. These companies are commonly referred to as 'intermediaries' in the text of the DACs.

Intermediaries with obligations under the DAC

DACIn scope intermediariesInformation reported
DAC2Banks, asset managers, trust companies, wealth managers and other investment vehiclesBalance and income on financial accounts held outside country of residence.
DAC5Trust companies, company secretariesBeneficial owners of certain vehicles
DAC6Lawyers, accountants, tax advisors and other who provide tax advice as an ancillary serviceInformation on transactions which meet one of 15 hallmarks of tax avoidance
DAC7Digital platforms who connect buyers and sellers engaged in the sale of goods, rental of accommodation, rental of transport or provision of personal servicesQuarterly breakdown of income received from activities, fees paid to the platform and any taxes withheld
DAC8Cryptocurrency exchanges, fintechs, other digital assets protocols other than fully decentralized finance Full transaction details on the acquisition and disposal of cryptocurrencies and other digital assets, whether for fiat money or other digital assets.
CESOPPayment Service Providers under the Payment Services Directive (PSD2)Full transaction details on cross-border payments at a transaction level, including identifying information for the recipient.

Impact on individuals resident in the EU

Individuals resident in the EU are likely to be asked to provide certain information by intermediaries who are within the scope of the DAC. Typically an EU resident opening a bank account, investment account or establishing themselves as a seller on a digital platform should be asked to provide details of their tax residency and their Tax Identification Number. From 2026, this will also apply to EU citizens establishing relationships with cryptocurrency exchanges and other digital assets providers.

Individuals may be asked to provide additional information where they provide more complex information - for example, a tax residency in one country but an address in another country. The precise rules to be followed vary for each of the DACs.

There have been legal challenges raised in relation to the scope of the DAC and the perceived risk to data security. For example, an Italian individual challenged the exchange of information by the UK's tax authority HM Revenue and Customs under the Common Reporting Standard/DAC2. [23] In 2022, the European Court of Justice concluded that the rules under DAC6 which required law firms to report on client activities would breach Legal professional privilege requirements. [24]

Further reading

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References

  1. ↑ "EU webpage - Administrative cooperation in (direct) taxation in the EU".
  2. ↑ "Administrative cooperation in the field of taxation".
  3. ↑ "Administrative cooperation in the field of VAT".
  4. ↑ "Council Directive 2014/107, Exchange of Financial Account Information / "DAC2"".
  5. ↑ Palim, Adam. "The taxman cometh: What the common reporting standard will mean for families' planning set-ups". Financial Times .
  6. ↑ "REPORT on the implementation of the EU requirements for exchange of tax information".
  7. ↑ Casi-Eberhard, Elisa; Spengel, Christoph; Stage, Barbara (20 July 2019). "Cross-Border Tax Evasion after the Common Reporting Standard: Game Over?". Centre for European Economic Research . 18 (036). SSRN   3245144.
  8. ↑ "Council Directive 2015/2376, Exchange of Tax Rulings / "DAC3"".
  9. ↑ "Council Directive 2016/881 - Country-by-Country Reporting / "DAC4"".
  10. ↑ Khan, Mehreen. "EU seals pact on forcing multinationals to report profits and tax". Financial Times .
  11. ↑ "Council Directive 2016/2258 - Exchange of Beneficial Ownership / "DAC5"".
  12. ↑ "Council Directive 2018/822 - Exchange of information in relation to reportable cross-border arrangements / "DAC6"".
  13. ↑ "DAC6: EU's New Mandatory Disclosure Regime". Bloomberg Tax .
  14. ↑ "Annex IV of the DAC".
  15. ↑ "Model Mandatory Disclosure Rules".
  16. ↑ "Council Directive 2021/514, Digital Platforms Information / "DAC7"".
  17. ↑ Albertins, Janis (2024-01-31). "DAC7 – the new type of registration for online marketplaces". Lovat Compliance. Retrieved 2024-02-05.
  18. ↑ "Transparency in the sharing economy". ICAEW .
  19. ↑ "Procedure File 2022/0413(CNS), Crypto-Assets Reporting Framework / "DAC8"".
  20. ↑ "The wide-ranging rules of the new EU crypto regulation". The Banker .
  21. ↑ "DAC 8: reporting and exchange of information on crypto-assets and cross-border rulings to certain individuals agreed by the Council". KPMG.
  22. ↑ Baert, Pieter (September 2023). "Tax transparency rules for crypto-asset transactions (DAC8)" (PDF). European Parliament. Retrieved 16 April 2024.
  23. ↑ Khalaf, Roula (1 August 2018). "EU national challenges HMRC over new data sharing rules: EU national challenges HMRC over new data sharing rules". Financial Times .
  24. ↑ "The European Court of Justice delimits the scope of legal professional privilege under EU law". Norton Rose Fulbright . 1 February 2023.
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