• Marco Zawar MBA/LLM (Tax)

DAC6 and the impact on Hong Kong based Financial Institutions

In the last decade, we have seen the introduction of several tax transparency and avoidance measures across the world.

Nevertheless, both the Panama and Paradise Papers showed, that investors still try concealing their assets through cross-border arrangements or off-shore accounts.

Inspired by the OECD BEPS Action-12 Mandatory Disclosure Rules and the OECD Mandatory Disclosure Rules on CRS Avoidance Arrangements the EU on 25 May 2018 released the Council Directive (EU) 2018/822 (DAC6) applicable on 1 July 2020.

The Directive is nicknamed “DAC6” as it is the 6th iteration of the EU Directive 2011/16/EU on on administrative cooperation in the field of taxation.

Aim of DAC6

The goal of the DAC 6 AML/KYC due diligence and disclosure rules is the identification of aggressive cross-border tax-planning arrangements (cross-border arrangements) and transactions meant

  • to move taxable income/profits towards more beneficial tax regimes,

  • have the effect to reduce/defer the taxpayers tax obligation,

  • to circumvent the CRS reporting obligations on financial accounts and beneficial ownership

and requires financial intermediaries (such as financial institutions, insurance companies, asset manager), other providers of tax advice and in certain circumstances EU tax residents to report cross-border arrangements to their local tax authorities with a retroactive effect to 25 June 2018.

What is a cross-border tax arrangement?

Cross-border arrangements in Scope of DAC 6 are agreement which involves either

· more than one EU Member State; or

· one EU Member State and a non-EU Member State; and

· meets one or more specific characteristics shown in the picture below (Hallmarks)

· meets one or more specific characteristics listed in the below picture(Hallmarks)

How a Hong Kong based financial intermediary might be affected by DAC6?

Intermediaries means any person that designs, markets, organizes, manages or implement cross-border arrangements and comprises any individual or legal entity that is either

  • a resident in an EU member state;

  • incorporated or governed by the laws of an EU member state;

  • registered with a professional association related to legal, taxation or consultancy services in an EU member state; or

  • providing services through a Permanent Establishment (Branch, Office or Sales Agents) located in an EU member state

Financial service provider resident in Hong Kong will be treated as financial intermediary under DAC6 when they either provide services in scope of DAC6

  • directly to an EU tax resident; or

  • through a (Branch, Office or Sales Agents)

With whom is the reporting obligation under DAC6?

The primary reporting responsibility is with the financial intermediary that designs, markets, organizes, manages or implement a cross-border arrangement.

The reporting obligations is with the Hong Kong based financial intermediary always, when the service is carried out through a branch, office or agent located in an EU Member state.

The disclosure obligation shifts to the EU tax resident, when the Hong Kong based financial intermediary directly provides the services related to a cross-border ass there is no financial intermediary located in the EU involved.

When to report?

Cross-border arrangements shall be disclosed to the relevant tax authorities within 30 days beginning:

a) on the day after the reportable cross-border arrangement is made available for implementation;

b) on the day after the reportable cross-border arrangement is ready for implementation; or

c) when the first step in the implementation of the reportable cross-border arrangement has been made.

The first reporting due date is the 31 July 2020

Summary

Hong Kong based financial intermediary are affected either directly - when providing the service through a branch, office or agent located in the EU or indirectly by offering the service directly out of Hong Kong.

For financial intermediary not considering DAC6 so fare will encounter a tight schedule to ensure compliant processes to meet their potential disclosure obligations

How to navigate Hong Kong based financial intermediaries through DAC6?

DAC6 affects not only the actual AML/KYC and reporting procedures.

It requires also to revisit the organisational structure and to identify whether DAC6 relevant services are provided through a branch.

The product base needs to be analyst against the earlier described Hallmarks and in case one of the Hallmarks is met, whether such a service is provided to an EU Tax resident.

In case the analyse of the organisational structure shows shows, that the service was/is provided in through a branch within the EU all necessary steps needs to be taken to ensure an on-time reporting under the rules and regulations of the jurisdiction the branch is located.

For all cross border arrangements provided through the Hong Kong based financial intermediary the decision needs to be taken, whether the information about the arrangement will be provided to the EU Tax resident supporting his reporting obligations



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©2019 by Marco Zawar