2020 brings about new challenges on the tax arena in light of the current pandemic situation, and the new type of reporting for taxpayers and intermediaries all over the EU is not an exception.
The European Directive on Administrative Co-operation in the field of taxation (“DAC 6”) entered into force across the European Union as of 1 July 2020. Nevertheless, in light of the COVID-19 pandemic the European Council allowed for a 6 months deferral for filing obligations and exchange of information under the reporting framework(1). The objective pursued at Union level with the introduction of the reporting obligation is to tackle tax abuse and ensure fairer taxation. It aims to provide the tax authorities of EU member states with additional information to enable them to react more quickly to potentially aggressive tax planning arrangements, close perceived loopholes in tax legislation, and prevent harmful tax practices.
At a local level, Bulgaria has implemented DAC 6 into the Tax and Social Insurance Procedure Code on 31 December 2019 and it entered into force on 1 July 2020. In light of the provided deferral on 4th of August Bulgaria amended the Tax and Social Security Procedure Code by extending the deadlines for DAC 6 reporting frameworks as follows:
|Reporting time framework||Deadline|
|Mainstream reporting (30-day period to report new cross-border arrangements)||The period starts as of 1 January 2021 (previously 1 July 2020)|
|Historical reporting (reportable arrangements from 25 June 2018 to 30 June 2020)||28 February 2021 (previously 31 August 2020)|
|First reporting of marketable arrangements (reportable arrangements between 1 July 2020 and 31 December 2020)||The first reporting should be done by 30 April 2021 (currently, the law requires recurrent reporting after every 3 months)|
Source: State Gazette, issue 69
Notwithstanding the above deferrals, taxpayers will likely be facing obstacles when it comes to reporting content as no guidance has been issued by any local authority.
1. Taxes covered:
DAC 6 covers concretely direct taxation whereas indirect taxes such as VAT, customs and excise and mandatory social security do not fall within the ambit of the Directive.
2. Persons under the scope of DAC 6:
The new rules impact business operating across EU Member States. Intermediaries (i.e. tax advisers, consultants, accountants, lawyers) should report to the competent authorities cross-border arrangements which are defined as ‘tax aggressive’. To be subject to reporting, an arrangement should contain a least one of the particularities provided by the DAC 6, so-called ‘hallmarks’.
Should the case be that there is no intermediary involved or it is based outside of EU, or the intermediary is covered by legal professional privilege, then the obligation to report the arrangement falls on the EU taxpayer.
3. What is a Cross-border tax scheme:
Under domestic legislation a cross-border tax scheme may include an arrangement, an agreement, a deal, a consent, an opinion, a scheme, a plan, a transaction or a series thereof. The tax scheme may be comprised of several parts or several stages of execution. To qualify as a cross-border tax scheme, the scheme must affect more than one Member State or a Member State and a third country, when at least one of the conditions under the Tax and Social Insurance Code occurs. These conditions include inter alia, situations where the participants of the scheme are tax residents of different jurisdictions or cases where the scheme may affect the identification of the beneficial owner.
4. Cross-border tax schemes under the scope of DAC 6:
The mere existence of a cross-border scheme is not a sufficient ground to trigger reporting obligations. A reportable tax scheme must bear at least one of the hallmarks designated by the legislator. These hallmarks are split into several areas and relate to the following:
- Transfer pricing;
- Cross-border transactions;
- Generic transactions… etc.
Yet, in some cases the mere existence of a given hallmark is not sufficient to trigger reporting obligations. In these cases, the tax scheme would be reportable should it meet “the main benefit test”. This would require case-by-case assessment on the facts and circumstances to determine whether the main benefit or one of the main benefits derived through the cross-border arrangement is obtaining of a tax advantage.
5. Deadlines and penalties:
Intermediaries (consultants, accountants, tax advisers, lawyers… etc.) and should the case be - taxable persons, must report the cross-border arrangement(s) to the revenue authorities within 30 days as of the date on which the arrangement was made available for implementation, or was ready to be implemented, or the first step of its implementation has been taken.
Infringements of the reporting obligations would result in up to BGN 5000 for individuals and BGN 10 000 for legal persons and sole proprietors, for a single infringement.
6. How to prepare:
► Review of all transactions that took place since 25th July 2018:
This would help you identify which of those arrangements must be reported, so that reasonable compliance procedures can be employed to mitigate potential risk and avoid penalties.
► Develop an internal algorithm for scanning through all of the arrangements to identifying the ones that should be reported
As this compliance obligation is rather new for the tax world with the time certain repetitive characteristics and tasks would be identified. Once determined, an automation process could be developed to ease your task.
► Designate a concrete person/body within your organization to be responsible for the DAC 6 reporting obligations:
This would provide for some certainty and clarity on the reporting obligations within your organization. The tasks of such a person/body could include inter alia the monitoring of the reportable arrangements as well as the draft of the necessary documentation to be submitted to the National Revenue Authority.