Stavros Karamitros
Manager
International Tax and Transaction Services (ITTS)
EY Cyprus
The Directive on Administration Cooperation (''DAC'')[1] has been amended multiple times since 2011 to allow for the automatic exchange of information across multiple fields of taxation.
The Council of the European Union (''the Council''), on 16 May 2023, held an Economic and Financial Affairs Council (''ECOFIN'') meeting where the European Union (''EU'') finance ministers reached political agreement (general approach) on a compromise text for the Directive on administrative cooperation implementing the Organisation for Economic Co-operation and Development's (''OECD'') rules on reporting for crypto assets and amendments to the Common Reporting Standard (''CRS'').
On 24 October 2023, the EU Official Journal published Council Directive (EU) 2023/2226 of 17 October 2023 amending Directive 2011/16/EU on administrative cooperation in the field of taxation (''the Directive'' or ''DAC8''). It will enter into force on 13 November 2023. EU Member States shall transpose the Directive by 31 December 2025 and shall be applicable from 1 January 2026 with certain exceptions.
According to the preamble of the Directive, the reinforcement of the provisions of DAC regarding the information to be reported or exchanged was crucial to adapt to new developments of different markets and thus effectively tackle tax fraud, tax avoidance and tax evasion schemes identified. Another main reason for the “birth” of DAC8 was the need for the information communicated under DAC to be effectively used by the competent authorities of the EU Member States for the assessment, administration and enforcement of taxes covered under its scope, through the implementation of an effective mechanism to ensure the use of such information for risk assessments, tax audits and other tax-related enforcement measures.
It is worth noting that specific emphasis is given to the need for the aforementioned mechanism of the EU Member States to include or maintain the following enforcement measures:
a) the requirement for the EU Member States to continue keeping records of the information exchanged for a minimum retention period not shorter than 5 years.
In Cyprus, this also includes/extends to the obligation for intermediaries and relevant taxpayers to keep proper books and records as a proof of compliance with their reporting obligations under DAC6[2] (the minimum retention period is 6 years from the end of the year to which the reportable cross-border arrangement relates) [3]; and
b) the requirement for all EU Member States to lay down specific sanctions/penalties for the proper enforcement of the national rules implementing the Directive on mandatory automatic exchange of information reported by reporting crypto assets service providers and to ensure that such penalties are effectively implemented.
DAC8 introduces not only reporting obligations regarding crypto assets but also amendments to the overall DAC framework. That being said, and as part of the reinforcement of the provisions of DAC to adapt to the new era of digital economy and crypto assets, it is important to recognise the interrelation of DAC8 with all previous parts of the DAC chain and especially DAC6.
This becomes obvious through the following amendments that DAC8 introduces to the DAC6 framework:
- DAC8 extends the use of information received by automatic exchange beyond the taxes covered by DAC6, i.e., direct taxes, to value added tax (VAT), indirect taxes, custom duties, and non-tax purposes when it concerns anti-money laundering and countering terrorism financing.
- A Tax Identification Number (TIN) reporting obligation is introduced by DAC8 to governments for DAC6, among other DAC Directives, for taxable periods starting from 1 January 2028. As such, the TIN of individuals and entities, previously being an optional piece of information in DAC6 reports[4], should now be included in the exchange of information on reportable cross-border arrangements.
The disclosure of TIN will increase the access of the competent authorities of the Member States to such data and thus assist in the effective application of enforcement measures at a national level. On this respect, an EU TIN verification tool will be developed by the EU Commission to enable automated, electronic verification of the TIN provided by a reporting entity or taxpayer by the EU Member States for the purpose of automatic exchange of information.
- Following the European Court of Justice judgement in Case C-694/20[5], the notification obligation of lawyers/law firms which are bound by the Legal Professional Privilege (LPP) of their clients and are thus exempt from the obligation to disclose a reportable cross-border arrangement to the tax authorities, should now only refer to the relevant taxpayer/client and not to other intermediaries other than their own client. This is because the obligation of LPP-exempt lawyers/law firms to notify any other intermediary infringes the right to respect for communications between lawyers and their clients provided for in the European Charter of Fundamental Rights[6].
This may have the following implications for Cypriot lawyers/law firms who are actively exercising the law profession in Cyprus and are thus covered by the LPP of their clients being therefore exempt from the obligation to disclose reportable cross-border arrangements to the Cypriot tax authorities:
1. First of all, it has now become even clearer, as explicitly mentioned in the preamble of the Directive, that EU Member State lawyers/law firms can be considered as intermediaries (primary or secondary), thus having an obligation not only to notify the relevant taxpayer/the client about their reporting obligations in a timely manner, but also to report an arrangement to the tax authorities, if the relevant taxpayer/client elects to waive the LPP.
2. In those cases where the Cypriot LPP-exempt lawyer/law firm will not be the only external intermediary of the relevant taxpayer/client, i.e., other qualifying intermediaries will also be involved in the arrangement and will thus have an obligation to disclose the arrangement in Cyprus depending on their role and knowledge threshold, this will relieve LPP-exempt lawyers/law firms from the requirement to notify anyone else than their own client.
This will effectively decrease the administrative burden of identifying other intermediaries involved in the arrangement and the risk of incurring a penalty for no or delayed notification (which amounts up to EUR 20,000).
3. On the contrary, where the Cypriot LPP-exempt lawyer/law firm will be the only external intermediary of the relevant taxpayer/client, this may give rise to additional administrative burden, as lawyers/law firms may typically be expected to proceed with the analysis and notification of their clients.
Lawyers/law firms in Cyprus may now be the only reference of the relevant taxpayer/client in terms of DAC6 advisory, in those cases where no other external intermediaries are involved in the arrangement, meaning that they should be sufficiently educated and “equipped” on DAC6 matters to satisfy the needs of their clients.
It remains to be seen whether the proposed amendments to the DAC6, among other DAC Directives, through the adoption of DAC8, will achieve the primary objectives of the European Commission. In the meantime, what should intermediaries and relevant taxpayers give particular attention to, is to be well prepared in view of potential audits or information requests of the tax authorities in the future, as the enforcement of the DAC Directives in the form of sanctions/penalties should be expected.
[1] Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC.
[2] Interpretative Circular 55 – Administrative Cooperation in the field of Taxation/DAC6, 10 November 2011, par. 1(d).
[3] Section 30(2), Assessment and Collection of Taxes Law N. 4/1978, as amended.
[4] XSD User Guide, DAC6 Central Directory, 02/04/2021, Version 4.04 EN, page 25.
[5] Case C-694/20, Orde van Vlaamse Balies and Others, 08/12/2022.
[6] Article 7, Charter of Fundamental Rights of the European Union, 2012.
