Entering into force on January 25, 2018, EU Directive 2018/882/EU—better known as DAC6—requires EU intermediaries such as accountants, lawyers and tax consultants to disclose to tax authorities all cross-border tax schemes offered to their clients and which possess certain characteristics or “hallmarks” that might make them conducive to aggressive tax planning.
Member States have until December 31, 2019, to adopt DAC6 into their national legislations with reporting then starting on July 1, 2020.
As part of Taxlinked’s inaugural conference held in November 2018, we held a panel titled “The Proposal to Target Intermediaries Selling Aggressive Tax Planning Schemes & Fundamental Freedoms Within the EU,” which specifically tackled DAC6 and its many issues.
Like with everything in the tax world, opinions vary as to DAC6, its effectiveness in combatting aggressive tax planning, and whether or not it is unethical to require intermediaries to reveal this information.
DAC6: An Orwellian Nightmare
John Richardson, a Toronto-based lawyer who works with US expats, presented a firm stance against DAC6 and everything that this directive implies.
“I would have never imagined that I would be actually having a discussion about whether there was some directive that I was supposed to effectively, not only rat out clients for tax evasion, but notify authorities about activity that might diminish the tax revenue that certain countries would get,” John said.
Additionally, John remarked that this directive has very little to do with aggressive tax planning and is instead a way for governments to pressure intermediaries to perform duties that fall outside of the scope of their jobs.
“This has nothing to do with aggressive tax planning. What they are really saying is that, basically, if you’re involved in this thing and you have a cross-border aspect to it, you’re obligated to disclose this to the tax authorities,” John said.
“This is about coopting a group of professionals into a role that they were never intended for.”
John concluded that DAC6 poses “a threat to individual freedom.”
Jimmy Sexton, the CEO of Esquire Group LLC, who was also in attendance at our inaugural conference, concurred with Richardson’s comments on DAC6 on one of Taxlinked’s forum discussions.
Sexton finds “advisors having to report on their clients' activities [to be] morally offensive and, for a lawyer, flat-out unethical.”
“This is a very slippery slope,” Sexton added. “Once you give up a right or benefit, it is just a matter of time before they take another right or benefit away from you.”
“What advisors are required to report will only get worse if nations don't exercise their sovereignty and stand up for themselves; soon advisors will have to report all advice given,” he concluded.
DAC6: Disclosure Rules Are a Fact of Life
Aisling Donohue, a Partner with Andersen Tax in Ireland and one of our conference’s keynote speakers, was a lot more sanguine when it came to her opinion on this specific EU directive.
Donohue discussed her experience as a junior tax lawyer with Deloitte back in the early 2000s at a time when the UK’s Disclosure of Tax Avoidance Schemes (DOTAS) rules where coming into effect.
Following the preliminary shock of DOTAS, Aisling said, “disclosure rules became a fact of life and we just adapted.”
She “appreciates that when you come across these rules for the first time they can be very, very scary, but the profession in the UK and Ireland has adapted; we haven’t gone out of business and the sky hasn't fallen.”
In the UK and Ireland, she said, “some advisors know they advise in the space where they will have disclosure obligations to the tax authorities, while some of us are pretty confident that for the most part the work we do for our clients is not disclosable because our clients do not have the risk profile for the kind of tax structuring that might be disclosable.”
Furthermore, Aisling believes these types of rules have been ultimately beneficial for the international tax industry.
DOTAS “definitely had an impact on the tax profession in the UK, and some people would say for the worse but actually most people would say for the better. If I look back to the work I was doing in 2005 or 2006, I wouldn't be doing those structures now, not because I think they are going to necessarily get beaten in court, not even because I think the press might find out about them, but just that the tax authorities are far more likely to challenge the structure. [Today] they will take you to the Supreme Court even if it takes 15 years, and no client has the appetite for 15 years of litigation. It doesn't matter if you’re ultimately right, no one wants to go there.”
Furthermore, she said, “One very noticeable development in the UK after the DOTAS rules came in, was that there are far fewer cowboys in the market. And that makes the market far easier to navigate for those of us who never had time for cowboys and saw the cowboys selling madly aggressive stuff to our clients and putting our clients at risk. It has generally improved the level of tax advice and there’s no getting away from that.”
Despite her positive outlook on what DAC6 brings to the table, Donohue does believe the directive has some underlying problems.
Particularly, she said, she’s “concerned of elements of DAC6, some of the retroactivity about it, the broadness of some of the provisions, but as a general concept it is okay.”
As for concerns pertaining to attorney-client privilege, Aisling believes these are somewhat exaggerated.
“Attorney-client privilege is for the protection of the client and not for the protection of the attorney. This issue was raised when the UK rules came in originally, and the way they got around it was by increasing the penalties for the clients if the clients themselves did not disclose what they had been told by their lawyers. Attorney-client privilege still stands but it’s not longer to the benefit of the client to rely on that attorney-client privilege.”
DAC6: Interesting Challenge for Tax Advisers
Dr. Luca Cerioni, a Lecturer in Tax Law at the University of Edinburgh School of Law in Scotland, believes DAC6 makes life “more complex and difficult” for tax practitioners, but could also pose a “stimulating” challenge, one in which tax advisers could potentially toy around with schemes so that they do not contain the negative “hallmarks” under the directive.
Cerioni said: “A challenge could be for tax advisers: Can the tax arrangement be designed in another way without the hallmark but still suitable for the needs of the client? A challenge could be to work around the hallmark to see if an arrangement can be designed in an equally satisfactory way without filing the reporting obligations.”
Views on DAC6 from the Taxlinked Forum
As a follow-up to our conference, we asked our members to share some of their thoughts on DAC6 and its ramifications.
Richard Jahoda from Grinex Czech Republic believes there is “still a big question mark as to how this EU Directive will be implemented into Czech Republic legislation.”
“Czech lawyers and tax consultants,” Jagoda writes, “have strict and broad duty of confidentiality in relation to the client, which is recognized and accepted by tax and criminal laws, so it is likely any implementation will be challenged in front of the Constitutional Court.
Philippos Hadjizacharias from PHS Hadjizacharias in Cyprus thinks there’s a lack of clarity when it comes to the DAC6.
“This is something that is going backward and forward all time,” Hadjizacharias writes.
“The rules are not as clear as they should be. Particularly, the rules are focusing on cross-border arrangements with an emphasis on fair and effective taxation. My opinion is that the EU is trying to transfer responsibilities to the tax advisers, which, in my opinion, the tax advisers design and promote tax-planning schemes derived from the actual EU tax legislations.”
What are your thoughts on this highly touchy subject? Let us know below or add a quote to our forum discussion found HERE.