DAC-6: the new frontier of controls on transactional operations

DAC-6: characteristics, obligations and consequences

Complex corporate structures represent the mirror behind which suspicious identities and activities are hidden. Through the use of trust companies, aggressive tax planning phenomena can be created, that is, operations and procedures put in place with the aim of shifting taxable matters between several states. These structures can also be used in order to compromise the functioning of the automatic exchange of information on financial accounts or the identification of natural persons who are beneficial owners of assets and income shielded by opaque structures.

Such cases are also known as cross-border mechanisms. With these, a person can set up a company for the exclusive purpose of concealing the movement of funds by carrying out a fictitious commercial activity. The distribution of funds in this structure can be done in two ways:

1. With the loan system, through which the subject establishes an offshore company – simulating a loan of funds to a third company, since the identification of the ownership of these organizations is complicated to define – to which he disburses a loan, thus depositing the earnings misdemeanors and receiving them back in the form of loan repayments;
2. . With the double invoicing system, which is represented by the use of accounting books or invoices issued on the basis of operations not actually carried out. Funds can be transferred by overcharging or selling goods and services below their normal market value.

The DAC 6 legislation intervenes in the context of anti-money laundering activities on these mechanisms. The goal is to ensure maximum tax transparency on transnational transactions, which, by their nature, have characteristics that are considered to be at risk. To this end, the role of the intermediaries involved in this type of transaction is fundamental. By intermediaries, we mean: lawyers, tax consultants, chartered accountants, banks and other service providers who develop, market, organize or make the cross-border mechanism available to the taxpayer or manage its entire implementation independently. However, these may carry out assistance or advice, directly or indirectly, regarding the processing, marketing, and the availability to the cross-border mechanism.

In order to avoid aggressive tax planning by companies operating internationally when a cross-border mechanism is implemented, the participants in the revenue agency are obliged to report if there is one or more distinctive elements likely to determine a reduction in tax.

By tax reduction, we mean the tax advantage that can be expected as a logical consequence of the facts and circumstances of the case, comparing the possible tax effects in the presence of the mechanism – including those deriving from the application of tax incentives, with the effects that would occur in its absence.

At least one of the following conditions occurs:

• not all participants in the mechanism reside, for tax purposes, in Italy;
• one or more participants in the scheme, agreement or project are simultaneously resident for tax purposes in Italy and in one or more foreign jurisdictions;
• one or more participants carry out their business in a foreign jurisdiction through a permanent establishment in the foreign country and the scheme, agreement or project concerns at least part of the activity carried out by the permanent establishment;
• one or more participants, without being resident for tax purposes or having a permanent establishment in a foreign jurisdiction, carry out a specific activity in that jurisdiction;
• the scheme, agreement or project may alter the correct application of the procedures on the automatic exchange of information or on the identification of the beneficial owner.

It is therefore necessary to converge the conditions: the tax reduction and one (at least one) of the aforementioned conditions.

From a subjective point of view, it is specified that the participants in the mechanism are the intermediary or the taxpayer.

The functional description contained in the legislation makes it possible to identify two distinct figures within the category of intermediary, namely:

• the promoter (promoter), that is the person who is responsible for the elaboration, marketing, organization or making available for the purpose of implementing a cross-border mechanism to be communicated, or who independently manages the entire implementation;
• the service provider (service provider), that is the person who directly or through other subjects, carries out assistance or advice regarding the processing, marketing, making available for the purpose of implementing or managing the implementation of the cross-border mechanism.

The service provider carries out assistance and consultancy activities, which consist of support activities for the promoter.

One of the peculiarities that distinguishes the service provider from the promoter and the taxpayer is the fact that for the former the obligation to communicate is subject to a defined standard of knowledge. This standard is embodied in the fact that the service provider, taking into account the information available and the skills necessary to carry out this activity, knows or has a reasonable reason to conclude that the same mechanism is relevant.

The provision attributes the qualification of taxpayer, in the first place, to the person who sets up the cross-border mechanism or who has knowledge of its constituent elements.

This obligation is placed on the intermediaries and, only in the occurrence of at least one of the following circumstances, this obligation is transferred to the taxpayer:

• the intermediary is exempted from the obligation to communicate;
• absence of the intermediary;
• if the intermediary has not provided him with the documentation certifying that the same information has already been communicated.

The communication must contain information that makes it possible to identify the intermediaries and taxpayers involved in the preparation and implementation of the cross-border mechanism, as well as the entities that constitute companies associated with taxpayers. Specific elements must be provided such as the name, date and place of birth or company name or company name, address, residence for tax purposes and tax identification number (NIF).

The disclosure must also facilitate the identification of the tax residence jurisdictions of the taxpayers concerned, as well as any other jurisdictions potentially affected by the cross-border mechanism, and the identification of any other person potentially affected by the cross-border mechanism, as well as the jurisdictions to which such person is traceable.

Obligations and consequences

The DAC 6 directive introduced the obligation for EU states to automatically exchange information on cross-border mechanisms subject to notification by intermediaries and taxpayers. An objective of transparency is pursued such as to allow the Administration, on the one hand, to promptly acquire information on potentially irregular transactions from a fiscal point of view, and on the other, to dissuade subjects who, for various reasons, structure, promote or favor potentially irregular transactions. The cross-border mechanism is subject to the disclosure obligation if at least one of the distinctive elements exists. These are tax avoidance or evasion risk indices that identify the mechanisms subject to the notification obligation.

The automatic exchange of information takes place within one month from the end of the quarter in which the information was communicated to the financial administration.

The first automatic exchange will take place by April 30 2021 and concerns the information relating to the cross-border mechanisms subject to the notification obligation communicated in the first quarter of 2021, as well as those implemented between July 1 2020 and December 31 2020 and communicated by January 30 2021.

The communication should contain a summary of the content of the cross-border mechanism to be communicated, written in Italian and accompanied by a short report in English, as well as the national provisions establishing the obligation to communicate the cross-border mechanism.

The summary of the content of the cross-border mechanism to be communicated contains the reference to the name by which said mechanism is commonly known and a description in abstract terms of the relevant economic activities or mechanisms, without disclosing confidential information (a commercial, industrial or professional secret, a commercial process or information whose disclosure is contrary to public policy).

The start date of the implementation of the cross-border mechanism corresponds to the moment in which the taxpayer carries out the first act having legal effects or the first financial transaction for implementing the mechanism. The value of the cross-border mechanism represents an additional mandatory information required; it is not possible to omit the information about the amount, however it is possible to indicate the value “0”, if it is not possible to determine the value of the cross-border mechanism.

The Agenzia delle Entrate, at the time of communication, issues a reference number of the cross-border mechanism to be used in any subsequent communication relating to the same mechanism and in the periodic report. Taxpayers who implement the cross-border mechanism are also required to indicate the reference number in the relevant tax returns for all tax periods in which the cross-border mechanism is used.

It is therefore a declaration obligation that applies exclusively to taxpayers required to submit the relevant tax returns in Italy, which must be reiterated in relation to each tax period in which the cross-border mechanism produces its tax effects.

Two distinct sanctions are envisaged:

• in the event of failure to communicate information, an administrative sanction is applied;
• or incomplete or incorrect communication of information.

The basic administrative fine provides for an amount between € 2,000 and € 21,000.

Di seguito sono riportate le sanzioni in relazione alle tipologie di violazioni:

                                  Violation                                                                              Sanction

The following observations are also reported:

• in the case of companies or entities with legal personality, the sanctions are exclusively borne by the legal person;
• for subjects without legal personality, the sanction is referable to the natural person who has committed or contributed to committing the violation;
• the institute of active repentance applies;
• the aforementioned penalties are not applied for all communications sent by February 28, 2021, even if the ordinary term expires before that date.