The draft regulations to implement EU Directive 2018/822 (DAC 6) in the UK have been published alongside a consultation document. HMRC requests responses by 11 October 2019. Legislation must then be introduced by 31 December 2019 and will be accompanied by guidance.
The UK regulations will come into force on 1 July 2020 but (as required by DAC 6) will apply to reportable cross-border arrangements the first step in the implementation of which took place on or after 25 June 2018.
DAC 6 requires the mandatory automatic exchange of information in relation to cross-border arrangements which meet one or more of the hallmarks. The intention is that tax authorities will find out about, and be able to react promptly to tackle, aggressive tax arrangements. A tax advantage is required for some, but not all, of the hallmarks so it is possible that commercial transactions without a tax advantage may still fall within a hallmark.
HMRC is taking a pragmatic approach in the way that certain parts of DAC 6 are interpreted. For example, "tax advantage" is given a scope that is both narrower and wider than in DAC 6. It is narrower because something will not be a tax advantage if the tax consequences of the arrangement are entirely in line with the policy intent of the legislation upon which the arrangement relies. It is also wider because the UK draft regulations define tax more broadly than DAC 6 for the purposes of the tax advantage definition and will apply to tax advantages arising in a non-EU member state.
An arrangement is "cross-border" under DAC 6 if it is "an arrangement concerning more than one Member State or a Member State and a third country". The consultation document helpfully expresses HMRC's view that in order for an arrangement to "concern" multiple jurisdictions, the jurisdictions must be of some material relevance to the arrangement. An arrrangment will not be regarded as cross-border if, for example, a company tax resident in jurisdiction X enters arrangements through its permanent establishment in jurisdiction Y with counterparties also in jurisdiction Y because jurisdiction X is not materially relevant.
The regulations and the draft guidance limit the scope of some of the hallmarks and/or offer more clarity on what is intended to be caught. It is important to give feedback to HMRC on any areas of the draft regulations that still cause concern or require further clarification in guidance.
HMRC has emphasised that these rules will remain in place post-Brexit to tackle international tax avoidance and evasion. So it is worth spending some time now to get workable rules in place by the end of the year.