When you have established that you as a multinational or an intermediary have reportable arrangements under the mandatory disclosure regime (DAC 6), you need to put a process in place to identify and collect arrangements and consider what system solution you need in order to manage the reporting. This article will give you some insights on important issues to take into consideration when evaluating a system solution.
What is it all about?
If you have established that you need to file reportable arrangements with tax authorities on a regular basis, you probably are considering what process to put in place to manage the reporting. In our discussions with intermediaries, multinationals and tax authorities, we have gained some insights in this area which we will share in this article. This article is written from the viewpoint of a multinational group, but some insights are valid for an intermediary as well.
Most multinational groups tend to look for a system solution to help them manage this process. Some of the reasons for choosing to implement a solution are to avoid manual work, to have a robust process in place, to keep track of arrangements over time and to get support with the conversion of the reportable arrangements to the applicable filing format. This article will help you, as a Head of tax, to identify some of the key things to consider when choosing a system vendor and a system solution. We have put together a list of things to check which will help you to decide which solution could support your handling of DAC 6.
What should you consider when choosing a system solution?
Identification of potential arrangements
One of the core challenges with mandatory disclosure reporting is to continuously identify and collect information regarding arrangements which may or may not be reportable. Not all information is found centrally which means you need to reach out to your local people and get their help to identify and collect the information. In this respect it should be underlined that failing to identify a reportable arrangement could give rise to significant penalties.
This reporting needs to be carried out on a regular basis, likely more than once per month considering the tight 30-day deadline for filing. Most groups report on a monthly basis in their financial systems which means you will most likely be unable to identify arrangements through an analysis of the financials.
Thus, it is of great importance that any system solution supports the local reporting of potential arrangements.
Supporting the local reporters in identifying arrangements
The hallmarks in the directive are worded in such a way that it is difficult to determine what arrangements fall under the reporting obligations. Furthermore, domestic hallmarks need to be taken into consideration in some jurisdictions.
Assessing if an arrangement could fall under the directive’s hallmarks could be complicated in some cases. Therefore, you need to have deep knowledge of local tax, something which local reporter might not have. To simply implement a solution where the local reporter can find the local legislation and its interpretation in the EU-countries will therefore not be a satisfying solution to support the reporters.
In discussions with representatives for multinational groups, we have found that they acknowledge the need to identify typical arrangements in the group that could fall under the MDR reporting obligation and to document these (“Typical arrangements”). The Typical arrangements will be listed and introduced to the local reporters in order to support them in identifying arrangements that should be brought to the attention of the central tax function. This approach will facilitate identification of arrangements and help the local reporters. Many groups see the need to tailor a solution to their group by adding both typical arrangements and other info into a solution which will make the process both simpler but at the same time better than a general approach.
Any solution used for managing the MDR compliance should therefore include functionality which allows the group to customize the “hallmarks” in line with its business environment and specify Typical arrangements.
Collection of information related to an arrangement
A system solution should support the process of collecting all necessary information in order to establish basis for a decision. This information consists of at least the following points:
- Taxpayers involved (incl. identification details)
- Intermediaries involved (incl. identification details)
- When the arrangement has been made available for implementation, been ready for implementation, has started being implemented or when any advice regarding the arrangement has been made
- The value of the arrangement
- Description of the arrangements
- Local regulations involved
Again, this information is not generally easily accessible in the financial systems. Instead, it needs to be gathered manually in most cases. In order to make the process as effective as possible, reporters should be able to collect the information they have access to. However, part of this information might only be available on a central level. This means that a solution must support collection of information, both on a local and central level.
When you consider the complexity of finding the information and making respective decisions within the short 30-days reporting timeframe, it should be stressed that your reporters will most likely have the best knowledge and insight to identify any potential arrangements on time for further analysis. Furthermore, they also have ready access to the respective information which is rarely the case for people outside of your organization unless you are prepared to pay for that service.
Collection process – improved over time
If you have identified your Typical arrangements and reported mandatory disclosure arrangements for a while, you will have gained a good understanding and a database of what typical transactions regularly take place within your organization. At this stage you will know which of your arrangements are normally reportable under MDR and which are not. Now, most likely only new arrangements need to be checked with an expert and thus your MDR solution should focus on supporting your local people to identify any new potential arrangements. Thus, completing the e.g. monthly reporting cycle in your solution should take less time from the local reporters going-forward. Your solution should ensure that you will make the respective decisions of the nature of any new potential arrangements as it is expected that many of these arrangements will be too complex to rely solely on an assessment provided by a system solution or questionnaire. Therefore, it is likely that you may need external help in the assessment process for making an assessment of any new arrangement types.
Process for assessing arrangements
A solution needs to include a process for the group to assess the identified and reported arrangements. This can be internal functions, external providers or a combination of both. Some arrangements may be difficult to assess and then you may want to utilise external experts to make the assessment. In such a case you probably want to grant restricted access to the external experts. The system should in this respect support the following functionality:
- A central review that helps you to ensure that all necessary information has been collected and makes it possible to add missing information.
- If several intermediaries are involved, the solution should facilitate keeping track of contacts as well as decisions regarding who should do the filing and what should be filed, and then support the documentation.
- If an external intermediary manages the filing, proof needs to be gathered which shows that filing has been completed.
When the head tax function has completed these steps and documented them, a basis for decision has been established.
The system should support the following steps:
- Notification of the person who is responsible for the assessment
- Decide who should do the filing, agree on what should be filed and then document this step.
- If an external intermediary manages the filing, proof needs to be collected and stored, including the actual filing documentation, showing that filing has been completed (proof of filing).
- If an external intermediary does not file, the solution should support the decision-making process which determines if the head office tax function could act as an intermediary and file in its jurisdiction.
- If the head office tax function cannot act as an intermediary due to lack of involvement in the arrangement or that the arrangement is domestic, decide which group entity is the taxpayer that should complete the filing.
If the head tax function decides that the headquarter company or a taxpayer within the group should manage the filing, the group needs to have a solution in place that supports the completion of the filing in that country and in accordance with the filing format required in that country.
You could potentially have to file in several EU member states. Even though the EU will issue a standard filing format there will most likely be local deviations from that format, as there were with the CbC XML reporting format.
Some jurisdictions will require that you file domestic arrangements. You need to manage filing of these arrangements according to local guidelines and have a solution which can support this process.
The filed information should be easily accessible in order to determine what has been filed. Questions may be raised several years after the filing has taken place.
Setting clear roles and responsibilities
With reference to the above, a system solution should include possibilities to set up roles and responsibilities for local reporting, review, decision making and filing.
A solution needs a proper access rights system for granting user access on a detailed level and should be able to allow external users limited access, e.g. to certain arrangements, entities or jurisdictions for assessment, either on a one-time or regular basis.
One example of when this is important is when you collect information on arrangements which have been reported by intermediaries to tax authorities. You probably would like to collect these arrangements in order to have knowledge of what information has become available to the tax authorities or to check that the information which has been filed is correct. In such cases there may have been more than one intermediary involved in the arrangement. Depending on your process you may want to grant several intermediaries access, to determine which intermediary has filed and to ensure that you have collected all of the filed information.
Another example is to be able to appoint local people as responsible for e.g. an entity, a jurisdiction, a selection of entities, entities belonging to a certain segment or a combination. You should be able to easily replace people when they leave the group and new people take on their reporting responsibility.
An independent solution provider
Some jurisdictions have strict rules on what systems solutions and services an external provider that is your audit firm can provide. These rules could differ between countries, meaning that some jurisdictions might not accept that you have an auditor which also provides a system solution. If you are considering using a system solution provided by an auditing firm, you should ensure that your provider does not fall under any such restrictions in any of the EU-countries that matter for your group. Furthermore, you need to consider the risk that an audit firm which is not your present auditor might be your auditor at later stage.
Another issue is to ensure that your advisor(s) is fine with handing over information on arrangements to an advisor who is also a system solution provider. There might be non-disclosure clauses or competition clauses in place in consultancy agreements which make it difficult to report arrangements in a solution from a competing advisor.
Corporate governance and internal control
From a corporate governance point of view, you as Head of Tax should be in control of the decision-making process and should be able to demonstrate that you have such control for internal control purposes. When setting up a process where an external system or an external advisor is part of the process, you should still ensure that you will have the control of the whole process and have the decision-making power.
From an internal control view, your solution should support a regular sign off that enables local reporters (i.e. the entities in the group) to indicate that they have reported all possible reportable arrangements.
The mandatory disclosure process requires that you identify, collect and file arrangements within a tight deadline. In order to minimize errors and speed up the process you may want to consider automating the process where possible. One example is to integrate with an entity management solution in order to always have up to date entities and entity information which you will need in the filing process.
Is the process and system solution cost effective?
Many of the multinationals we have discussed MDR with acknowledge that being compliant requires additional resources for the tax department. In this respect we would like to point out that even if you implement a system solution for collecting information or for formally assessing if an arrangement is reportable or not, you will still need to allocate resources from the central tax department taking part in the process.
Furthermore, if you choose a system solution that does not support local reporting by entities in the group, you must set a separate process with separate tools in place for managing this reporting which could be costly.
You should also check that any cost for filing in different countries is included in the fee for the solution or if it will be an additional cost.
A total cost assessment needs to take into consideration the cost of doing the work in-house, the cost of implementing and running an MDR solution, the cost for filing in all respective countries and the costs incurred by the use of external advisors before choosing a solution.
We at Blika would be happy to show you our solution for mandatory disclosure reporting for both multinationals and intermediaries. Drop us an email at Sales@Blika.com to book a meeting.
Mandatory Disclosure Reporting (DAC 6) – a guide on practical challenges in your daily operations.
Mandatory Disclosure Reporting (DAC 6) – why it matters for multinationals
Intermediaries’ challenges with Mandatory Disclosure Reporting (DAC 6)
Guide: Control of arrangements subject to mandatory disclosure reporting