What transactions will be affected by the new rules?
The new rules will apply to all EU taxpayers (including individuals) who have engaged or are planning to engage in cross-border transactions to avoid or reduce their tax burden. The use of statutory tax reliefs provided in national tax laws is acceptable, but the situation will be viewed differently if the tax framework of several countries is structured and used in the manner to maximize tax advantages. The aggressive tax planning and cross-border arrangements will be assessed for certain hallmarks and will be subject to reporting to the EU tax administration authorities.
When the reporting start?
The new framework will be introduced as of 1st July 2020. However, it will have a retroactive effect since combating tax structures - created or implemented, at least their first phase – since 25th June 2018 should be reported by 31 August 2020. For this reason, tax advisors, lawyers, accountants, and other subjects of law – professional service providers – should carefully reassess the services and consultations provided to their clients over the last two years.
Thereafter, reportable cross-border arrangements will have to be reported regularly. The State Revenue Service of Latvia (hereinafter – SRS) will have to exchange information with the foreign tax authorities within the next 30 days after the end of the relevant quarter.
What should be reported?
The regulations lay down the criteria under which the relevant cross-border arrangement shall be reported (= the main benefit test + A, B, C, D and E categories of hallmarks under Part 3 of the Cabinet Regulation). These criteria mainly describe the arrangements that are taking place in more than one Member State, or a Member State and a third country, and are designed to provide taxpayers with such tax advantages that otherwise under the national tax laws to them would not be available. One typical example of the reportable arrangement is acquiring a loss-making company to allocate and transfer losses to another country for reducing tax liabilities; or sale of assets on leaseback or sale-back provisions which usually was done within the groups of companies. Other examples relate to converting income into capital, gifts, or other categories being taxed at a lower rate or qualifying for tax exemption.
Who should report?
The obligation to report on the cross-border arrangements will primarily apply to the tax and financial advisors, lawyers, accountants, and other professional service providers, who provide or have provided support for the planning and organizing of cross-border arrangements. In the view of the new regulations, these persons are defined as “intermediaries”.
If the arrangement does not involve an intermediary or the intermediary is subject to the exception (such as Advocacy Law in Latvia), the obligation to provide information on the reportable cross-border arrangement will apply to the relevant taxpayer. Accordingly, the relevant taxpayer will be deemed to be any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement.
Exception
The new regulations also provide an exception when the reporting obligation will not be required. Such a case is where the intermediary is a sworn advocate and the provision of information would violate the professional secrecy. Still, sworn advocates will have to inform another intermediary or if there is no other intermediate, the relevant taxpayer about the reporting obligation.
Reporting system
When your arrangement meets the definition of a cross-border arrangement, fulfills the main benefit test and/or one of the hallmarks (laid down in Part 3 of the Regulation) DAC6 reporting obligation arises. The primary reporting obligation will be due to the intermediaries. However, to avoid the situation when the company orders a tax planning, pays for it to the tax consultant, and then is exposed for reporting the structure to SRS, it is our suggestion to clarify DAC6 compliance of any intended tax order with your tax consultant beforehand.
The reporting deadline is 30 days after the arrangement is made available for implementation; or the arrangement is ready for implementation; or the first step in the implementation of the arrangement is made; or assistance, support, or advice has been provided.
Where several persons are required to report for a cross-border arrangement, the person shall be exempted from this obligation if it proves that the information has already been provided by another reporting person. The proof is carried out within 30 days after another person submitted the relevant report - by submitting the reference number of the arrangement (the number is assigned by each national tax administration) and the justification that the person has no other information relating to the arrangement.
Penalty
Without submitting the report in the prescribed deadline or failing to comply with the procedures for preparing and submitting the report, the SRS will be able to apply a fine up to EUR 3200. Each country has been willing to set the amount of its penalty. Although this penalty may initially seem insignificant in the light of the potential tax advantages, one shall keep in mind that tax avoidance, especially if committed on a large scale (= if at the time of the commission of the offense the total value of the subject of the crime was over 50 of the minimum monthly wages set by the Government at that time), may render a person or group of persons a criminal liability in Latvia. Depending on the objective circumstances of the case, the punishment may be a prison sentence, confiscation of property, or prohibition to engage in commercial activities or to hold certain positions.
Hourly rates of certain lawyers and tax advisers in future due to DAC6 will rise, whereas taxpayers shall remember that biggest exposures and liabilities will always remain on them. For many companies it is therefore a right time to re-assess whether to continue tax optimization policies in future or simply to restructure their business in a rather transparent way.
If you have any questions regarding the reporting obligation or the compliance of your company's business arrangement with DAC6, please contact our specialists – tax partner Anna Vilka, e-mail: anna@bakertilly.lv or sworn advocate Raimonds Plāte, e-mail: raimonds@bakertilly.lv.
Baker Tilly Baltics participate in the DAC6 working group set up by Baker Tilly International for its clients within the EU.
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