Guidance on the cross-border tax arrangements reporting (DAC6)
In order to ensure the effective implementation of the Act on Administrative Cooperation in the field of Taxes (hereinafter the “Act”), the Tax Authorities have issued an Instruction on cross-border tax arrangements which includes detailed explanations of legal requirements along with practical examples.
1. Cross-border arrangement
An arrangement includes a transaction, action, activity, scheme, plan, or proposal as well as an agreement, arrangement, understanding, promise, or liability that has been performed or intend to be performed. Furthermore, an arrangement will be considered cross-border if, for example, not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction or when one or more of the participants in the arrangement is resident for tax purposes in more than one jurisdiction.
However, arrangements must also contain at least one of the hallmarks which imply potential risk of tax avoidance.
2. Who has to report?
In general, intermediaries should report on the cross-border arrangement.
The Tax Authorities in the Instruction clarified that the legal definition includes two types of intermediaries:
1) Promoters - any person that carries the responsibility vis-à-vis the taxpayer for designing, marketing, organising or managing the implementation of a reportable cross-border arrangement;
2) Service providers - any person that undertakes to provide, directly or by means of other persons to which it is related, material aid, assistance or advice with respect to designing, marketing, organising or managing of a reportable cross-border arrangement.
The reporting obligation for promoters and service providers is practically the same, but the important difference is that a service provider can prove that he is not an intermediary if such person did not know or could not reasonably be expected to know that was involved in a reportable cross-border arrangement.
Additionally, the Tax Authorities state that the definition of an intermediary does not include a service provider which obtains knowledge on the arrangement only afterwards. For instance, auditor which during the audit of the financial statements discovers a transaction that falls into the category of a reportable cross-border arrangements. Also, this includes service providers involved in preparation of transfer pricing studies for previous tax periods and as such will not have reporting obligation since they were not involved in the planning and implementation of transaction (i.e. their engagement relates exclusively to the collection of historical data of transactions after they have already been implemented and carried out).
Reporting obligation when there is more than one intermediary or more than one relevant tax payer
When there is more than one intermediary involved all of them have a reporting obligation, (the primary obligation for reporting is with the relevant intermediary that agreed the reportable cross-border arrangement with the relevant taxpayer). Intermediary shall only be exempt from reporting if it has proof, that the same information has already been filed by another intermediary.
The intermediary which reported cross-border arrangement to the Tax Authorities will provide an evidence, i.e. the number of the cross-border arrangement assigned by the Tax Authorities to all other intermediaries and relevant taxpayers. Apart from the number of the arrangement, it is necessary to have proof that the information has already been submitted to the Tax Authorities or the competent authority of another Member state, which the intermediary is obliged to keep in its records. In Croatia, the intermediary will be exempt from the obligation to submit a report, if it submits the assigned number of the cross-border arrangement to the Tax Authorities through the „ePorezna“ system.
Exceptionally, intermediaries do not have obligation to disclose information which is subject to legal professional privilege (applicable for lawyers and authorized tax advisors). If legal professional privilege is applicable, lawyers and authorized tax advisors are obliged to inform other intermediaries and relevant taxpayers, within 3 days.
2.2. Relevant tax payers
The relevant taxpayer has a reporting obligation, instead of an intermediary, in the following three cases:
- Intermediaries are not required to report information due to legal professional privilege;
- There is no intermediary involved in the arrangement (the arrangement is designed and implemented in-house with no external help);
- Intermediaries involved in the arrangement do not have an EU nexus, and therefore have no reporting obligations.
3. Information to be reported
The Tax Authorities delivers following information to the competent authorities of other Member States:
- The identification of intermediaries and relevant taxpayers, and where appropriate, the persons that are related enterprises to the relevant taxpayer;
- Details of the hallmarks;
- A summary of the content of the reportable cross-border arrangement,
- The date on which the first step in implementing the reportable cross-border arrangement has been made or will be made
- Details of the national provisions that form the basis of the reportable cross-border arrangement;
- The value of the reportable cross-border arrangement;
- Details of the national provisions that form the basis of the reportable cross-border arrangement
- The identification of any other person in a Member State likely to be affected by the reportable cross-border arrangement, indicating to which Member States such person is linked*
*The term “persons that are likely to be affected by the reportable cross-border arrangement” means persons which may be financially affected by the arrangement (tax effect) and not persons which may be generally affected by the arrangement in a more general way.
4. Deadlines and reporting requirements
Deadline of reporting obligation
Intermediaries (exceptionally relevant taxpayers) will have to report about the cross-border arrangement to the Tax Authorities within 30 days after:
- the reportable cross-border arrangement is made available for implementation;
- the reportable cross-border arrangement is ready for implementation;
- the first step in the implementation of the reportable cross-border arrangement has been made; and
- Intermediary provide aid, assistance or advice (only when intermediary is included).
Making arrangement available for implementation or willingness to implement is a sufficient reason for reporting.
The Instruction states that an arrangement can be made available in many ways, for example, a relevant taxpayer approaches an intermediary and requests advice or a solution, and the intermediary makes the arrangement available as a response to a request. Furthermore, the arrangement can be made available while performing some work for the client, if the intermediary recognizes the potential need of the client and offers the arrangement as a solution.
In addition to basic reporting, intermediaries are required to a periodically submit report (every three months) with updated information on a reportable cross-border arrangements (in the case of marketable arrangements), which became available after the last report and submit it to the Tax Authorities.
Also, the relevant taxpayer is obliged to submit to the Tax Authorities information on the use of the arrangement for each year in which he concluded any transaction that is or constitutes a cross-border arrangement that has to be reported or has obtained or seek to obtain tax advantage from the cross-border arrangement.
The look-back period reporting deadline
- An arrangement where the first step was implemented prior to 25th June 2018
If the first step was taken before 25 June 2018, the reporting obligation will depend on the type of modification/amendment. If significant changes have been made after that date, the same could be considered as a new arrangement and be subject of the reporting obligation, and if only minor updates have been made to the arrangement or if the arrangement has not been changed, then there is no obligation to report about arrangement.
- Arrangements where the first step was implemented between 25th June 2018 and 30th June 2020 – „the look-back period“
Intermediaries and relevant taxpayers that are obligated to report about cross-border arrangements in which first step has been made in the look-back period have to report until 28th February 2021.
- Arrangements made available for implementation after 30th June 2020
After look-back period, relevant information for cross-border arrangements must be delivered within 30 days of:
- the day after the cross-border arrangement has been made available for implementation;
- The day after cross-border arrangement is ready for implementation;
- When the first step in the implementation of the reportable cross-border arrangement has been made depending on which occurs earlier
- The day after Service providers, directly or through other persons, provided aid, assistance or advice.
The abovementioned deadline of 30 days for the submission of information for cross-border arrangement shall begin on 1 January 2021 for arrangements made available, ready for implementation or whose step was taken from 1 July to 31 December 2020 or related to arrangements for which intermediaries provide aid, assistance or advice in the same period.
5. Hallmarks of reportable cross-border arrangements
The Instruction explain in more detail the hallmarks that a cross-border arrangement must meet, which are divided into five categories and include the characteristics or features most commonly found in aggressive tax planning arrangements.
The presence of any of these hallmarks will not necessarily mean that there is an obligation to report on a cross-border arrangement. Some of the prescribed hallmarks can only be considered if they satisfy the main benefit test.
The main benefit test will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
According to the Instruction, tax advantage may include relief or increased relief from tax, repayment or increased repayment of tax, avoidance or reduction of a charge to tax or an assessment to tax, avoidance of a possible assessment to tax, deferral of a payment of tax or advancement of a repayment of tax, and avoidance of an obligation to deduct or account for tax.
Below is a brief overview on the given explanations of hallmarks classified by category.
1. A hallmark is considered fulfilled if the main purposes of arrangement is to obtain a tax advantage)
Ø Generic Hallmarks linked to the main benefit test
An intermediary may want to keep certain details of the operation of the arrangements (or a part of the arrangements) confidential from Tax Authorities in order to reduce the risk of challenge or enquiry, or to prevent Tax Authorities from taking legislative or other steps to prevent the arrangements from working. Also, an intermediary may wish to keep details of the arrangements secret from other intermediaries to protect their competitive advantage and similar.
Remuneration related to tax advantage
The hallmark is deliberately broad in nature, to ensure all types of fees and other financial arrangements including interest, remuneration and other charges are captured.
Standardised documentation and structures
This hallmark captures an arrangement “that has substantially standardised documentation and/or structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation.”
Ø Specific hallmarks linked to the main benefit test
This hallmark applies to any arrangement whereby a participant in the arrangement takes contrived steps which consist in acquiring a loss-making company, discontinuing the main activity of such company and using its losses in order to reduce its tax liability, including through a transfer of those losses to another jurisdiction or by the acceleration of the use of those losses.
Conversion of income into capital
This hallmark will capture arrangements which have the effect of converting income into capital, gifts or other categories of revenue which are taxed at a lower level or exempt from tax.
For this hallmark to be applicable, firstly, there must be circular transactions resulting in the round tripping of funds.
This hallmark will commonly apply to arrangements whereby funds are routed via an offshore jurisdiction, despite having a domestic origin, in order to benefit from preferential tax treaty terms or other similar benefits.
Ø Specific hallmarks related to the cross-border transactions
This hallmark captures arrangements where there is a deductible cross-border payment made between two related parties where any of the following conditions is met:
- the recipient is resident for tax purposes in a jurisdiction that does not impose any corporate tax or imposes corporate tax at the rate of zero or almost zero;
- The payment benefits from a full exemption from tax in the jurisdiction where the recipient is resident for tax purposes;
- The payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes.
2. Hallmarks that do not require main benefit test
Ø Specific hallmarks related to the cross-border transaction
Other arrangements where there is a deductible cross-border payment made between two related parties are not subject to main benefit test.
Accordingly, following hallmarks are not subject to the main benefit test:
- deductions for the same depreciation on the asset are claimed in more than one jurisdiction,
- relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction,
- arrangements which include transfers of assets and where there is a material difference in the amount being treated as payable in consideration for the assets in those jurisdictions involved.
Ø Specific hallmarks concerning automatic exchange of information and beneficial ownership
An arrangement which may have the effect of undermining the reporting obligation under the laws on the automatic exchange of Financial Account information or which takes advantage of the absence of such legislation or agreements.
An arrangement involving a non-transparent legal or beneficial ownership chain which use persons, legal arrangements or structures.
Ø Specific hallmarks concerning transfer pricing
Unilateral Safe Harbours
In general, unilateral safe harbour rule constitute a rule applicable in a specific jurisdiction in which the Tax Authorities will accept the „price“ that taxpayer set in relations with related parties and proclaim it as being “at arm’s length”. In that context, Advance Pricing Agreement related to transfer prices between the taxpayer, Tax Authorities, related parties and tax Authorities from other Member States in which related parties are residents shouldn't be treated as unilateral harbour rule.
Furthermore, interest rate between related parties prescribed by the Croatian Minister of Finance is considered as unilateral harbour rule and therefore when that interest rate is applied on granted and received loans to/from related parties, there is an obligation to report. Arrangement, which includes loans between related parties arranged without application of interest rate prescribed by the Minister of Finance, and where corporate income tax base is increased by the difference between interest rate used and the interest rate prescribed by the Minister of Finance are not subject to reporting. Furthermore, company that does not apply the prescribed interest rate, but applies the arm's length interest rate (determined with transfer pricing study) is not subject to reporting as well.
This hallmark only applies where there is a transfer of an intangible assets or rights in intangibles between related parties.
Cross border transfers
This hallmark applies to arrangements involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 % of the projected annual EBIT of such transferor or transferors if the transfer had not been made.
In addition, we would like to bring to attention potential penalties prescribed by the Act in case of misdemeanour concerning the reporting obligation.
A penalty for misdemeanour in the amount of HRK 2,000.00 to HRK 200,000.00 shall be imposed on a taxable person obliged to report if:
- If the intermediary / relevant taxpayer does not submit the fully prescribed report or does not submit it within the deadline;
- If the intermediary does not submit a full periodic report or fails to submit it within the deadline;
- If the relevant taxpayer does not submit information on the arrangement in each year in which it used the arrangement and if he does not notify the use of the arrangement within three months after the end of the year in which the arrangement was used;
- If the intermediary who invoke legal professional privilege does not inform all other intermediaries within three days, or if there are no such intermediaries, the relevant taxpayer of the reporting obligation.
For these misdemeanours, the responsible person in the legal entity will be fined in the amount of HRK 2,000 to 20,000, while the individual will be fined in the amount of HRK 1,000 to 100,000.