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EU tax advice regulations may limit the disclosures required by DAC6

If and when legislation to regulate tax advice in the EU is ever passed, sources at Netflix, the European Commission, and other organizations take the potential effects into consideration.

Tax experts, including a director from one of the "big four," believe that EU legislation regulating tax advisers, which is scheduled to be passed in the first week of July, will establish a European standard for the type of tax advice that should be offered to consumers and make it easier to comply with the DAC6 reporting framework.

It is just the most recent effort to enhance tax advice and streamline reporting, following the proposal of an EU code of conduct for tax advisers and an ethical quality bar by the Brussels-based association of tax specialists, CFE Tax Advisers Europe.

The director of KPMG's Amsterdam-based EU tax center, Raluca Enache, believes that when reforming the system, the EU must consider the big picture.

"Tax advisers play a valuable role in the proper functioning of tax systems, but this role can be undermined by the promotion of abusive tax arrangements within legal parameters."

However, she adds, "legislators should make sure not to make the tax advisers the problem, though, because they have not invented the tax system."

Political pressure to alter the scope of DAC6 is increasing as relevant cases at the Court of Justice of the EU (CJEU) rise and there are more complaints about the burdensome administrative requirements. This pressure is in addition to new regulations governing tax advice in the European market.

Several CJEU rulings regarding DAC6 reporting requirements are still pending. One of the first national courts to ask for a preliminary ruling on the attorney-client privilege exemptions from disclosing tax arrangements was the Constitutional Court of Belgium in February 2021.

DAC6 is a convoluted legal system that keeps an eye out for advisers pushing aggressive tax schemes. The Commission is already looking into the redundant parts of the framework, and a report is due in Q1 2023.

The feedback from the postponed consultation on the regulation of tax advisors in the EU market will pave the way for a set of regulations that might lessen the DAC6 reporting burden as well. Some DAC6 hallmarks reportable arrangements may be phased out as advisers are required to follow more stringent regulations.

"As advisers, we give advice, but the compliance responsibility is not only in our hands, it is in the hands of the taxpayers too," according to Enache.

In order to continue developing the Business in Europe: Framework for Income Taxation proposal and other measures under the most recent corporate tax roadmap for the EU, the Commission postponed the opening of its public consultation on the regulation of tax advice from May to July.

According to Commission officials, the upcoming proposal to regulate tax advice in the EU will establish guidelines that tax professionals can use as a guide in their work without enacting stringent regulations that would stifle innovation in the advice market.

Similar to this, when giving advice to corporate clients regarding the international tax system, tax advisers should take into account a set of five questions introduced by the CFE's ethical quality bar.

The role of the tax adviser has developed to the point where, according to Philippe Vanclooster, a former partner at PwC in Belgium and a member of the Institute for Tax Advisors and Accountants' board, these guidelines are necessary to adhere to the spirit of EU laws, including the DAC6 disclosure requirements.

According to Vanclooster, "the tax adviser is not only there to find the best solution to avoid taxes and pay minimums, but they are also there to give good quality tax advice."

The draft CFE ethical bar plan gives some indication that both versions will take into account economic purpose tests, artificial arrangements, the legality of schemes in international courts, authority oversight, and the public good. However, the Commission's version of regulating tax advice will not be clear until its proposal is released in July.

Both rules are anticipated to limit the hallmarks of DAC6 by taxpayers. However, many commonplace transactions—even those that qualify for a unilateral safe harbor—are currently reportable under DAC6, which suggests the Commission associates these transactions with tax evasion.

Philippe Arraou, president of the European Tax Adviser Federation, based in Paris, concurs that each member state should establish a binding national framework for professional tax advice with predetermined steps for compliance.

"When designing these new laws for tax advisers, legal certainty will be key," according to Arraou.

One aspect of international tax planning that may have an impact on the volume of disclosures made under the DAC6 framework is the Commission's clarifications on the circumstances in which advisers may advise clients to use safe harbor procedures.

Prior to putting more arrangements into place, reporting is meant to increase transparency, lessen ambiguity regarding beneficial ownership, and deter intermediaries from creating, marketing, and putting into place harmful tax structures. Accountants, tax consultants, banks, attorneys, and wealth managers are a few examples of intermediaries who aid in cross-border transactions.

Some intermediaries delegate to their clients the duty of disclosing aggressive tax arrangements. The reporting process, according to in-house counsel, is a compliance burden, and the framework needs to be revised to lessen the backlog in reporting and administrative tasks.

According to Giammarco Cottani, director of global tax policy at Netflix based in Italy, "it is easier to disclose everything than to try and sift through all the transactions that the business has undertaken with a tax element."

Even so, he continues, "yet the information does not have to be disclosed by companies themselves unless they develop an in-house structure instead of using tax advisers."

The reporting framework asks intermediaries for a lot of transaction-level data and encourages them to report everything rather than look into which transactions are reportable.

Taxpayers submitted about 32,000 reports in the first year of the first reportable arrangements being received by EU authorities, and the high number of submissions is due to reports dating back to 2018.

Tax directors believe that finding "at-risk" transactions is more difficult than actually reporting them. The reporting requirement could result in a compliance risk, according to Melanie Levy, global head of tax at EIG Global Energy Partners in Washington, DC, if advisers are required by their professions to disclose clients' international tax planning.

"It was a huge burden to understand the goals and analyse all the transactions; and while we did not do a lot of reporting, there was a ton of documentation to look over," says Levy.

On June 27, a report by the European Court of Auditors (ECA) on the DAC6 legislation was released. The system for exchanging tax information is well established, but it needs to be better monitored to guarantee consistently high data quality.

It will be challenging to enact regulations to control tax advice that will also simplify DAC6, according to representatives of the European Commission, as any proposal will require agreement in the Parliament and Council, which is unlikely in the near future.

Ben Angel, the Commission's director for direct taxation, who is based in Brussels, advises taxpayers to explore other options because the Council will almost certainly delay any new regulations.

"While I certainly agree that a regulation of the profession across the board would be the best solution," Angel says, "in practice I don’t think it is something within reach."

He continues, "nonetheless we know the pressure is on fixing the legal frameworks in place," referring to the drawbacks of only being able to pass tax legislation with unanimity among EU member states.

By designating the ethics quality bar proposal as an accounting law rather than a tax rule, Article 116 of the Treaty on the Functioning of the European Union provides a legal way to get around the unanimity problem.

Officials from the Commission did, however, add that they would not take advantage of the gap in the law to advance their plans to regulate tax advice by majority vote rather than unanimous consent in the Council.

On June 27, the Subcommittee on Tax Matters (FISC) of the European Parliament held a conference with Paolo Gentiloni, the commissioner for the economy, to discuss a number of EU tax issues, including the regulation of intermediaries in order to ensure fair and user-friendly systems.

"The purpose of Article 116 cannot be used to harmonise tax policy through the back door – this is not our intention – but I think it is time to address some severe distortions in the single market," he said during the conference.

In order to limit the scope of DAC6 disclosures, a bloc-wide regulatory framework is required, according to a comparative analysis of the legal framework for tax intermediaries in the EU from the same FISC conference.

The DAC6 investigation findings from the Commission, which are due in 2023, and its upcoming tax advice regulations are laying the groundwork for the next stage of improvements in EU tax compliance and transparency.

Given that tax advice is subject to greater scrutiny in the European market, the regulations may reduce the number of tax arrangements that must be disclosed to authorities under DAC6.



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