TaxLegi 1.11.2023
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DAC6 revisited through the prism of DAC8
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.
By: Stavros Karamitros, Manager, International Tax
[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.
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EU Emissions Trading System
In January 2024, maritime activities will be included in the EU Emissions Trading System, or ETS. This effectively means shipping companies will need to pay for at least a portion of greenhouse gas emissions generated during voyages to and from the EU.
In addition to underlying costs related to effective compliance with the EU ETS, new policies and procedures may need to be implemented, in addition to a dedicated carbon management function.
If the shipping industry were a country, it would be the world’s sixth-largest greenhouse gas emitter. However, when it comes to existing national and subnational carbon pricing regimes, very few address emissions from maritime operations. Where emissions are addressed, it’s in connection with inland voyages. Domestic compliance carbon markets are unlikely to mirror the EU ETS and require maritime operations to bear the associated cost of emissions.
Instead, carbon pricing for the maritime industry is set to be regulated at a global level under the framework being developed by the International Maritime Organization.
Predicting Carbon Pricing Measures
In July, during the 80th session of the Marine Environment Protection Committee, the IMO confirmed its intention to implement global carbon pricing for the shipping industry. The policy is expected to be finalized in spring 2024, adopted in autumn 2025, and take effect in 2027.
Several countries, market participants, and international organizations have developed and submitted policy proposals to the IMO. Proposals range from a global shipping cap-and-trade system (advocated by Norway), to a carbon tax-like mechanism proposed by three different interest groups (Japan, Marshall Islands and Solomon Islands, and the International Chamber of Shipping).
All these proposals involve part of the funding going directly toward rewarding low or zero-emissions ships and voyages. There are significant differences in the level of detail between the proposals, the design and complexity of the schemes, and suggested (if any) amount of the levy.
The IMO can implement one or a combination of these measures. It also could formulate a different design that might not even involve emissions trading or a carbon tax, such as mandatory energy efficiency standards enforced by tradeable certificates, as proposed by the US.
Aviation’s Head Start
When considering what the maritime industry might do, it’s worth looking again at the aviation industry. A global carbon pricing regime has existed for the aviation sector since 2016, namely the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA. Participation in the scheme will become mandatory for flights, with very few exceptions, starting in 2027.
This system doesn’t put a price on carbon per se, but instead requires airlines to offset their emissions through the purchase of credits. One credit represents one metric ton of reduced or removed carbon dioxide or other greenhouse gas equivalent, and the underlying activity can take place outside of the aviation value chain.
CORSIA maintains a list of the types of credits that it will recognize per compliance period in relation to their issuing body, which can be either a public or private entity: for example, a national government such as China’s GHG Voluntary Emission Reduction Program, or a private standard such as the gold standard and Verra.
As long as credits are considered eligible, the price at which they were acquired isn’t relevant. This provides regulated entities with a significant level of control over the ultimate compliance costs, but in parallel, compels them to enter and operate in a new marketplace dedicated to carbon offsets.
Unlike the EU ETS, this market has a global reach with little or no regulatory oversight. However, this is expected to change. More countries are starting to make policy interventions, and a global carbon market framework is emerging under the Paris Agreement. It remains to be seen whether the IMO will follow the lead of CORSIA and include offsetting in its carbon pricing design.
How Much Is at Stake
The three carbon pricing design options outlined above—cap-and-trade, tax, and offsetting—can lead to vastly different levels of financial exposure. If the IMO opts for a carbon tax or levy, levels can be set as desired, and some proposals are reaching new heights ($637 per metric ton by 2040 in Japan).
For emissions trading schemes, authorities have some influence over the price and can introduce corrective measures, such as with price floors and ceilings. But the marketplace essentially determines the price, and as of September 2023, the EU ETS price is approximately $90. In voluntary carbon markets, the cost of an offset is the result of its attributes, including geography where the project was developed, type of technology, and standard that issued the offset.In a recent report, the World Bank indicated that carbon pricing in international shipping could raise between $1 trillion and $3.7 trillion by 2050, and that this revenue should support shipping decarbonization, enhancing maritime transport infrastructure and broader climate aims.
Regardless of the route chosen by the IMO, it’s essential for shipping companies to understand the role of carbon markets—especially the role they can play in reducing the emissions footprint of voyages as “companies want to buy decarbonized shipping now.”
Trading in carbon offsets requires careful consideration and understanding of their complex legal, tax, and accounting nature, how policy trends impact their monetary value, public perception of offsets, and the potential related mandatory and voluntary claims.
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Cyprus enacts law implementing tax transparency rules for digital platforms (DAC7)
- On 3 November 2023, the law requiring the automatic and mandatory exchange of information reported by platform operators comes into force, with the first reports to be filed with the Cypriot Tax Department no later than 31 January 2024.
- The law also introduces certain changes to the existing legislation on administrative cooperation in tax matters and amends the common reporting standard (CRS/DAC2) and DAC6 laws to comply with data protection requirements.
Executive summary
On 3 November the "Law amending the Administrative Cooperation in the Field of Taxation Laws" (Law) was published in the Official Gazette of the Republic of Cyprus.
The Law implements Council Directive (EU) 2021/514 of 22 March 2021 (DAC 7), amending Directive 2011/16/EU on administrative cooperation in the field of taxation, and introduces new obligations for Platform Operators.
In addition to adding new rules, the Law amends a number of other provisions of the Law on the Administrative Cooperation in the Field of Taxation, with regard to the provisions of CRS/DAC2and DAC6.
Detailed discussion
Obligations for platform operators
The Law provides for an automatic exchange of information on certain data to be reported by platform operators. However, platform operators should only need to collect data on certain types of sales (so-called relevant activities). Specifically, the following activities are covered: (1) renting immovable property; (2) providing personal services; (3) selling goods; and (4) renting any mode of transport.
Platform Operators, as defined in the Law, must:
- Register with the Cypriot Tax Department (CTD) or notify the CTD if they are already registered in another European Union (EU) Member State
- Carry out specific due diligence procedures and report to the CTD certain determined information on the sellers as required in the Law
Failure to perform the prescribed due diligence and reporting obligations may result in monetary penalties and reputational damage.
It should be mentioned that Platform Operators that may prove to the CTD that as per their business model no reportable sellers perform any relevant activities through the platforms, should be considered as excluded platform operators.
Data protection — changes to CRS/DAC2 and DAC6 laws
In addition to introducing new rules, the Law makes changes to existing laws.
Amendments made in the CRS Law help ensure that personal data is protected as per Regulation (EU) 2016/679 of the European Parliament and European Council of 27 April 2016 (on the protection of natural persons with regard to the processing of personal data and the free movement of such data and repealing Directive 95/46/EC (General Data Protection Regulation, GDPR)). Specifically, the Law clarifies that a Cyprus reporting financial institution must (i) inform each individual concerned that information relating to that individual will be collected and transferred in accordance with the Law and (ii) transmit to each individual concerned all the information that the individual is entitled to receive from the data controller, providing sufficient time for the individual to exercise his/her data protection rights and, in any event, transmitting the information before it is communicated to the CTD.
A similar obligation for the reporting intermediary is now also established in the MDR Law, for Cyprus-based intermediaries.
Administrative cooperation in the field of taxation
Exchange of information upon request
To ensure that information is effectively exchanged upon request and to prevent requests from being unnecessarily refused, the Law furthermore delineates and codifies the internationally agreed standard of "foreseeable relevance." The Law also clarifies the legal framework of requests for information concerning groups of taxpayers that cannot be identified individually. In such cases, the foreseeable relevance of the requested information must be described based on a common set of characteristics.
Automatic exchange of information on the ownership of real estate
Furthermore, for taxable periods starting on or after 1 January 2025, the Law extends the mandatory automatic exchange of information to information on Cypriot real estate owned by individuals and entities resident in another EU Member State.
Joint audits
The Law also introduces joint audits as a new tool for administrative cooperation and clarifies the framework and principles that apply to a joint audit. A joint audit is an administrative inquiry conducted jointly by the competent authorities of Luxembourg and one or more additional EU Member States and relating to one or more persons of common or complementary interest to these competent authorities.
What is coming next?
Except for certain rules relating to joint audits, the Law takes effect from 1 June 2023.
The form and operating details of the registration and DAC7 report will crystalize in the coming weeks.
Reporting platform operators will have to register with the Cypriot Tax Department by 31 December 2023, at the latest. A Reporting Platform Operator commencing its activity after 31 December 2023 must register no later than the date it begins its activity.
The first DAC 7 reporting deadline is 31 January 2024.
Implications
Affected companies should determine what changes to their processes and systems might be needed to enable reporting of the type prescribed in the Law.
Similarly, taxpayers should closely assess the other expansions of administrative cooperation within the EU.
Financial institutions and intermediaries should also assess what changes are needed in their procedures and communications to cater for the newly introduced need to inform individuals of potential reporting DAC2/CRS and DAC6.
For additional information with respect to this Alert, please contact the following:
Petros Krasaris
Partner | Head of International Tax and Transaction Services
Phone: +357 22 209 790
Panayiotis Tziongouros
Partner | International Tax and Transaction Services
Phone: +357 22 209 740
Panayiotis.Tziongouros@cy.ey.com
Drosoula Manouchou
Manager | International Tax and Transaction Services
Phone: +357 22 209 756
Stavros Karamitros
Manager | International Tax and Transaction Services
Phone: +357 22 209 781
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2nd Instalment of temporary tax for the year 2023
31st of December 2023 is the last date for the submission of a revised Temporary Tax return for the year 2023:
Upwards revision of the Temporary Tax return for the year 2023:- In case the Taxpayer will proceed with the upward revision of the initial Temporary Tax submitted for the year 2023, such revision can be created through the Tax Portal by the 31st of December 2023.
- It is noted that any excess amount (difference) between the initial and the revised 1st instalment can be paid either through Internet Banking to the Tax Authorities or via wire transfer before the 31st of December 2023 in order to avoid the imposition of additional interest and penalties for the month of December 2023.
- Upon revision, the deadline for the payment of the revised upward 2nd instalment is by 31st of December 2023 and can be paid either through the tax portal, Internet Banking or wire transfer. However, if the payment will be made before the 31st of January 2024, no interest and penalties will be imposed.
Downwards revision of the Temporary Tax return for the year 2023:
- In case the Taxpayer will proceed with the downward revision of the initial Temporary Tax submitted for the year 2023, such revision can be created through the Tax Portal by the 31st of December 2023.
- The downward revision cannot be less than the amount already paid in the 1st instalment (i.e. Total provisional tax will be the amount of the 1st instalment)
- The deadline for the payment (if applicable) of the 2nd instalment is by 31st December 2023 and can be made through the tax portal, Internet Banking or via wire transfer. However, if the payment will be made before the 31st of January 2024, no interest and penalties will be imposed.
No revision of the Temporary Tax return for the year 2023:
- The deadline for the payment of the 2nd instalment is by 31st December 2023 and can be made through the tax portal, Internet Banking or via wire transfer. However, if the payment will be made before the 31st of January 2024, no interest and penalties will be imposed.
SDC and GHS for the 2nd semester of 2023:
- Payment of the Special Defence contribution ("SDC") and General Healthcare System contributions ("GHS") for the 2nd semester of 2023 on rental income which has not been withheld by the tenant, on overseas bank interest income and on any dividend income which may be subject to SDC and GHS shall need to be made no later than the 31st of December 2023.
Special Contribution for Defence on the profits of the year 2021 for deemed distribution purposes:
- The payment of SDC on the distributable profits of the year 2021 for deemed distribution purposes shall need to be made by the 31st of January 2024.
Note: Deemed distribution does not apply in respect to profits that are directly or indirectly attributable to shareholders that are non-resident for tax purposes in Cyprus or to individuals not considered to be tax resident and domiciled in Cyprus.
Contacts:
- Myria Saparilla, Partner, Direct Tax, myria.saparilla@cy.ey.com
- Petros Liassides, Partner, Direct Tax, petros.liassides@cy.ey.com
- Glykeria Terpizi, Manager, Direct Tax, glykeria.terpizi@cy.ey.com
