The latest amendment to the EU’s Directive on Administrative Cooperation (“DAC6”) requires EU intermediaries (and in certain cases relevant EU taxpayers) to report on cross-border tax arrangements that are potentially aggressive or abusive, so-called “reportable cross-border arrangements” (RCBAs).

This blog is part of a series designed to help our clients react to the new requirements during this time when the guidance is still evolving by sharing our experiences. This particular blog discusses selected banking offerings that potentially qualify as RCBAs and require reporting by banks or their customers.

What makes a banking service reportable?

To quickly recap, an RCBA means any arrangement that:

• Concerns either more than one EU member state or an EU member state and a third country, including Switzerland (i.e. it is a so-called “cross-border arrangement”) and
• Meets at least one of the characteristics or features that are listed in the Annex to the Directive, presenting an indication for aggressive tax planning or tax avoidance (so-called “hallmarks”).

Most banks will, at least to a certain extent, be involved in cross-border arrangements, either because they themselves have an EU nexus and serve foreign clients, or in the case of non-EU banks because they serve EU clients. More challenging is assessing whether banking offerings meet one of the DAC6 hallmarks.

Examples of banking services that could meet a DAC6 hallmark

While many banks refrain from providing tax advice in its traditional form, their offerings may still affect their customers’ tax positions and thus could be covered by DAC6 as demonstrated by the non-exhaustive examples below:

• Banking services may fall under a hallmark if they lead to non-reporting under the Common Reporting Standard (CRS). A clear example would be situations where a bank transfers a client’s account to a bank in another jurisdiction that does not exchange CRS information with the client’s jurisdiction of tax residence.
• Banking services may also meet one of the hallmarks if they involve the facilitation of deductible cross-border transactions between various entities of a client group, e.g. as part of cash pooling offerings, and the payment recipient is not tax resident in any jurisdiction, is resident in a black-listed jurisdiction, is taxed at a rate of (almost) zero, or benefits from a preferential tax regime.
• In some instances, banking clients make use of tax-motivated investment strategies (e.g. “cum-ex”, securities lending over dividend date, wash sales), which could also be caught by the hallmarks.
• Further, the hallmarks may apply to certain standardized mandates or products the primary aim of which is to provide certain investors with a beneficial tax outcome. For example, this could include mandates or products that aim to generate capital gains instead of dividend income, and thus may be more appealing to clients in countries where capital gains benefit from a preferential tax treatment or a tax exemption. Another example would be products that replicate the economic exposure of an underlying stock but provide for a more beneficial tax treatment.
• Finally, banks providing private banking services often offer their customers additional support concerning wealth, pension, succession or relocation planning. Due to the nature of those topics, tax considerations are a key aspect, which could bring the advice in scope of the hallmarks.

Are banks required to report?

Whether the reporting obligation for an RCBA lies with the bank depends on whether it has an EU nexus (e.g. residence or provision of services through a branch in the EU) and its involvement. There may be many instances where a bank’s involvement and consequently its knowledge of the client’s tax motivations is not sufficient to allow it to determine whether an offering falls under a hallmark. This is particularly true because many of the hallmarks (NB: not the CRS avoidance hallmarks) require knowledge of whether a main benefit of an arrangement is obtaining a tax advantage.

If the bank is not obliged to report, e.g. because it is a non-EU bank or not sufficiently involved, reporting may still be required by other involved EU intermediaries or the EU clients benefitting from the arrangement.

What should banks do now?

There is a number of preparatory tasks that banks can already start executing today as outlined in our prior blog post.

The examples above reinforce the necessity to conduct a proper impact assessment and to analyse the complete service catalogue against the DAC6 hallmarks. Such impact assessment will enable the bank to identify focus areas and structure its implementation project appropriately.

Even though a bank may conclude that its reportable population is smaller than for existing tax reporting regimes (e.g. FATCA or CRS), it should not forget to establish stable processes and controls to identify reportable outliers and document the non-reportable status and rationale for audit purposes.

Finally, we want to emphasise that banks may not only be affected due to the services provided to their customers (i.e. as an intermediary) but also when receiving tax advice from third parties or when carrying out intra-group transactions (i.e. as a relevant taxpayer). In its relevant taxpayer capacity, DAC6 affects banks similarly to non-FS industry participants, and we will focus on this aspect in the next blog of our series.

By: Robin King, Senior Manager and Marnix Kippersluis, Senior Consultant, Financial Services Tax 

If you would like to discuss more on this topic, please do reach out to one of the key contacts below:

Key contacts

Brandi Caruso - Partner, Financial Services Tax 

Brandi heads the Tax Transparency offering within the Financial Services Tax practice across Switzerland, responsible for services related to QI, 871(m), FATCA, CRS, and DAC6. She is a technical advisor and a subject matter expert to a number of Swiss-based trust companies and banks and leads the Deloitte Trust Forum. She has more than 15 years of experience with Deloitte in the US, UK, and in Switzerland.

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Karim Schubiger – Director, Financial Services Tax 

Karim leads the Tax Transparency team in the Suisse Romande and Ticino markets within the Financial Services Tax & Legal practice, responsible for services related to QI, FATCA, CRS, 871(m) and DAC6. He is a technical advisor and subject matter expert to financial institutions in the banking, trust, and insurance sectors. Prior to joining Deloitte, Karim worked for eight years in support teams of Swiss banks, in particular in areas such as operations, project and change management as well as operational taxes.

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Michael Grebe - Director, Financial Services Tax

Michael is a Director in the Financial Services Tax practice. He advises banks, trust companies, and insurers in relation to the interpretation and implementation of the global transparency related regimes. He has over ten years of experience in the financial industry covering a broad spectrum ranging from Process- over Project- to Product- Management. Prior to joining Deloitte, he led the FATCA and CRS implementation project for a global financial institution.

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Robin King - Senior Manager, Financial Services Tax

Robin is a Senior Manager working in Financial Services Tax. He is currently advising leading Swiss universal and private banks, acting as subject matter expert in the area of QI, FATCA , CRS and DAC6. Robin is the author of several articles on CRS. Prior to joining Deloitte, he worked as a cross-border tax compliance expert at a Swiss private bank.

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Marnix Kippersluis - Senior Consultant, Financial Services Tax

Marnix is a Senior Consultant in the Financial Services Tax practice, where he advises international financial institutions on the implementation and interpretation of FATCA, CRS and DAC6 regulations. Marnix holds a Master of Law degree from Utrecht University, the Netherlands.

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