A few months ago, an amendment to the Act on International Cooperation in Tax Administration arrived in the Chamber of Deputies. It seeks to implement the DAC Directive 6, through which the tax administrator should be informed about cross-border tax savings schemes (we can only hope it will stay only with cross-border). The reporting duty itself should be fulfilled by an advisor who is not bound by confidentiality. Tax advisors, attorneys, notaries or auditors will usually have confidentiality, but not for example accountants. However, if there is no such advisor, the notification duty will fall on the client himself, who will of course not be prevented from hiring a tax advisor for the actual processing of the notification. Sanctions resulting from this regulation may be up to CZK 500,000.
This amendment places some minimum requirements on the Directive and, with the exception of VAT, duties and compulsory social insurance, applies to the entire tax system. It should be effective as of 1 July 2020. However, the reporting obligation will be valid already for the period from 25 August 2018, when the DAC Directive 6 came into force. The first reporting obligation for this period will end on 31 August 2020. Generally, these arrangements will need to be reported within 30 days of being made available, ready to be implemented or taking the first step to implement it, whichever comes first.
What must be notified? The obligation to notify relates to two groups of cases:
- fulfilment of standardised features together with the main benefit test
- fulfilment of standardised features even if the main benefit test is not met
Where the main benefit or one of the main benefits that result from a particular arrangement is to obtain a tax advantage, all without any minimum limit.
The first group will include, for example:
- When a taxpayer or a participant in a relevant arrangement undertakes to comply with the so-called confidentiality condition, which may require it not to provide information to other intermediaries or tax authorities on how a particular arrangement could provide a tax advantage.
- An arrangement in which a participant takes artificial actions that consist of acquiring a loss-making company.
- Obtaining a tax benefit.
- Circular transactions - the movement of assets in a circle, mainly through the involvement of embedded entities without any other primary commercial function.
- The recipient of the payment benefits from the full tax exemption or preferential tax regime and other situations specified by law.
The second group will include, for example:
- Arrangements involving a non-transparent legal chain or a non-transparent chain of beneficial owners using persons, legal arrangements or structures showing certain features such as not carrying out significant economic activity evidenced by adequate staffing, equipment, activities and space.
- Transfer pricing arrangements including:
- Using "safe harbour rules"
- Transfer of intangible assets that are difficult to value
- An intra-group cross-border transfer of functions, risks or assets, if, within three years after the transfer, the expected earnings before interest and taxation (EBIT) for the transferor or transferors is less than 50% of the expected annual EBIT that would have been achieved if that transfer had not occurred.
- And other situations mentioned in the law.
Despite the obvious strict measures, we can thank the representatives of the Chamber of Tax Advisors, who during the legislative process have so far managed to recommend the implementation of individual measures so as to have the slightest impact on clients and advisors (confidentiality, the amount of sanctions, etc.). Therefore, it appears that this arrangement could be far more benign to the taxpayer, for example compared with Poland or Slovakia. Surely time will tell how this directive will work in real life. However, we can already breathe a sigh of relief today about where the world is headed and what a DAC with a higher serial number will look like. Will every taxpayer be implanted with a monitoring device when registering with the tax administrator and be monitored continuously in this or another way?