The EU Mandatory Disclosure Directive (MDD/DAC6) obliges intermediaries and taxpayers to report certain tax and TP arrangements to tax authorities. This will increase the compliance burden for companies and tax intermediaries. Certain TP arrangements are even reportable if the arrangement is based on sound business reasons. It is important to start on time with identifying and collecting the reportable arrangements within your organization.
If you would like to know more about the transfer pricing aspects of the mandatory disclosure rules, please register for our webinar on 22 September 2020.
The scope of MDD/DAC6 is marked by cross-border arrangements that meet certain ‘hallmarks’, which define the criteria for reporting potential aggressive tax structures. The MDD includes the following specific TP hallmarks:
- Cross-border arrangements involving the use of unilateral safe harbour rules
- Cross-border arrangements involving the transfer of ‘hard-to-value’ intangibles
- Cross-border arrangements involving the intragroup transfer of functions, risks and/or assets.
These TP specific hallmarks are not subject to the main benefit test. This means that the TP specific hallmarks can be met, regardless whether a tax advantage will be obtained with the arrangement.
Please note that the interpretation and implementation of the various hallmarks may differ among EU member states.
Unilateral safe harbour rules
Examples of unilateral safe harbour rules that would potentially fall under the scope of this hallmark are constructions using domestic safe harbour interest rates on intercompany loans. Safe harbour rules that are based on standards on which international consensus has been reached do however not fall under the scope of this hallmark. This is for example the case for the use of a 5% mark-up on costs for low value adding services in line with the OECD Guidelines.
Transfer of ‘hard-to-value’ intangibles
Arrangements involving the transfer of ‘hard-to-value’ intangibles between associated enterprises as reportable arrangements. Although the OECD Guidelines contain a definition of ‘hard-to-value’ intangibles, it can difficult to distinguish ‘hard-to-value’ intangibles from intangibles that can “easily” be valued.
It should also be noted that the threshold to qualify as associated enterprises for the purpose of MDD/DAC6 is already met when parties are related for more than 25%. This threshold is therefore lower than the threshold that is usually applied from a transfer pricing perspective.
Intragroup transfer of functions, risks and/or assets
In certain cases, a cross-border transfer of functions, risks and/or assets within a group has to be reported. This is the case if the projected annual EBIT of the transferor during the 3-year period after the transfer is less than 50% of the transferor’s projected annual EBIT if the transfer had not been made.
This hallmark is probably the most relevant hallmark from a transfer pricing point of view, as it in principle applies on all intragroup transfers of functions, risks and/or assets, regardless whether the taxpayer obtains a tax benefit. This means that business restructurings that take place for perfectly valid business reasons can also fall within the scope of this hallmark. It should also be noted that intragroup transfers resulting from a merger or liquidation can also fall within the scope.
Companies and their advisors should therefore be wary of any cross-border intercompany transfer of functions, assets or risks and check whether the hallmark applies.
Non TP-specific hallmarks
In addition to the TP specific hallmarks as outlined above, the MDD/DAC6 also includes non-TP specific hallmarks that could be relevant from a transfer pricing point of view. These include the following hallmarks:
- The acquisition of a loss-making company, after which its main activity is discontinued, and its losses are used in order to reduce its tax liability. The main benefit test should be met.
- Circular transactions resulting in the round-tripping of funds. The main benefit test should be met.
- Arrangements involving deductible cross-border intercompany payments to recipients that are located in non-cooperative jurisdictions, or to recipients that are located in a jurisdiction that imposes a CIT of zero or almost zero. Payments that benefit from a tax exemption in the jurisdiction of the recipient or benefit from a preferential regime also fall within the scope of this hallmark, but only if the main benefit test is met.
- A transfer of assets where there is a material difference in the amount being treated as payable for the assets in the jurisdictions involved.
Risk appetite and monitoring
MNEs will have to take the reporting obligations under the MDD/DAC6 into account in defining their risk appetite for tax and TP purposes. It is likely that local tax authorities will use the information they will receive under the MDD reporting obligations as a starting point for tax and TP audits.
For the tax department of an MNE, it is important that they are informed timely on any cross-border intercompany transactions that potentially could fall under the scope of any of the hallmarks. This applies in particular to transactions in which no intermediary is involved, as in those cases the taxpayer itself is obliged to report the arrangement to the tax authorities.
It is therefore recommended that MNEs set up a clear internal reporting system, in order to ensure that the tax department timely avails of the information that is relevant for reporting in the various EU jurisdictions in which the group is active.
The mandatory disclosure rules apply retroactively from 25 June 2018. The reporting deadlines have been postponed with 6 months by several EU member states due to COVID-19. For the Netherlands (and for most other EU member states that adopted EC’s proposal to postpone the reporting deadlines), the deadlines are as follows:
- Reportable cross-border arrangements that have taken place in the period 1 July 2020 – 31 December 2020: report ultimately 31 January 2021.
- Reportable cross-border arrangements that have taken place in the period 25 June 2018 – 30 June 2020: report ultimately 28 February 2021.
Reportable arrangements that take place after 1 January 2021 should be reported within 30 days.
In summary, it can be concluded that MDD/DAC6 has a significant impact on companies’ compliance burden. The scope is not always fully clear and the hallmarks are often broadly defined. The TP related hallmarks may therefore easily be met.
If you would like to know more about the transfer pricing aspects of the mandatory disclosure rules, please feel free to join our webinar on 22 September 2020 or reach out to us directly via email@example.com.
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If you need support in updating your transfer pricing documentation or if you have any other questions, please reach out to your Quantera Global contact person or send an e-mail to firstname.lastname@example.org.