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Thursday, November 14, 2019

DAC6 raises corporate governance questions for banks

Financial institutions are facing significant questions about corporate governance as the deadline for implementing DAC6 approaches

Transparency has become a key issue for the financial services (FS) industry. As such, it was inevitable that the EU directive on cross-border tax arrangements, known as DAC6, would be one of the most pressing issues at the Hansuke FS Tax Conference 2019 in London.

This directive is not just another layer of compliance for tax departments. It may mean banks have to change their existing governance structures, but the difficulty is that DAC6 is so broad many companies are left guessing how to meet its standard.

“We’re relying heavily on internal management,” said John Billige, European tax director at State Street. “Our traders have a desk policy that if they see something that is out of the norm. They have a list of things to look for in such cases.”

“We may not be able to see a problem with a transaction that’s out of the norm, but we have to consider that there might be a problem,” he explained.

Companies like State Street are in the awkward position of offering financial products and advice that clients could use for cross-border tax planning. This is despite the fact that the bank may not have designed its products to be used for such planning.

“We know what our products are for, but we don’t know what people will do with our products,” said Billige. “We’re now in a position where something mundane might be an aggressive tax structure.”

“Clients will ask us how to do something and we might ask them why they want to do it like that,” he continued. “I’ve seen things over the years that are frankly offensive from a tax point of view.”

State Street has brought in special training for traders to spot transactions, as well as new policies to help the front office manage their side of the reporting. It may be a case of ‘unknown knowns’ and even ‘unknown unknowns’ for banks. Reporting may be the easy part – it’s identifying the transactions which is difficult.

“We can only see transactions with our clients,” said Billige. “We can’t see if they are engaged in wider transactions. We’re just involved in one part of what our clients are doing.”

The risk of not reporting the right transactions could even lead to mass-reporting of the most banal transactions. “The directive is far too vague. However, everything I’ve heard suggests that this was deliberate,” said one tax analyst at a UK-based bank. “The lack of clarity means the scope is massively increased.”

“Poland was the first country to move on it and took a very aggressive stance, whereas the German government is taking the directive and extending it to domestic arrangements,” said the analyst. “This is going to get very messy as every country is taking a different approach.”

Meanwhile, the UK is lagging behind on DAC6 for political reasons, whereas, in the past, the country was able to take the lead on the common reporting standard (CRS). Nevertheless, businesses are confident the UK will catch up.

Playing catch up

The FS industry has to run a gauntlet of different reporting standards, such as the UK disclosure of tax avoidance schemes (DOTAS) and the US Foreign Account Tax Compliance Act (FATCA). All are a matter of internal management.

“The UK will continue to be at the forefront of tackling tax evasion and avoidance irrespective of what happens with Brexit,” said Billige. “We already have DOTAS, BEPS, CRS and FATCA. Each apply different reporting regimes to tax planning arrangements.”

What makes DAC6 different is the breadth of the hallmarks. An international bank could have 50 million transactions to sift through and report on. There is no white list of ‘clean’ transactions because the authorities want to catch out taxpayers involved in dubious schemes.

“DAC6 doesn’t talk about dividend arbitrage, for example, but its hallmarks might capture dividend arbitrage with a tax motivation,” said Billige. “There is no clear definition of what tax advantage means here.”

The side effect is that the authorities will end up with a large amount of data on normal transactions, everyday advice and above board products. This goes further than country-by-country reporting (CbCR), where banks could easily fit the reporting system into their existing IT infrastructure.

Some taxpayers have taken a cynical approach to reporting in the past. This could take the form of flooding authorities with information. There are even cases where companies decide its best to provide incomprehensible data to keep the authorities busy.

“A lot of people have had the perception that the businesses are tech-savvy and can get ahead of the tax authorities,” said Sheena Tay-Schyma, vice president of fintech at BlackRock. “So some companies assume it’s best to just flood the authorities with reams of information.”

“We’re starting to realise that this is not the case,” she stressed. “We have to be more careful with what we report and how we report it.”

The quality and presentation of the information is more important than ever before. Businesses are playing with fire if they try to overwhelm the tax authorities with low-quality data and little in the way of an explanation to give facts and figures a strong narrative.

“The more information you get, the more you have to think about quality,” said Tay-Schyma. “If you get good information, you might have so much information you can’t even process it all. Likewise, if you get bad information, you won’t achieve your ends.”

“The format of the information is important. It’s down to the authorities putting the picture together,” she said. “If it’s a multijurisdictional transaction, you have one authority making their interpretation on the information and another authority making its own conclusion.”

In an ideal world, the banking sector would be able to fall back on the tax authorities to filter the transactions and isolate abusive activity. However, the world is far away from such a trusting relationship between businesses and revenue services.

“The moral position has shifted over time,” said Tay-Schyma. “There is a lack of trust to allow people to make a determination of what is fair and moral.”

“Tax authorities have not felt they’ve been in that conversation,” she added. “That is difficult for both sides.”

The above article was published on on November 14 2019 and has been republished with the approval of the Publisher.


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