Brexit, MDR and DAC-6: the “London System” against a “Sicilian Defence”?The DAC-6 directive: the hard-to-navigate “defence” by the EU


“London System Opening” is a chess opening that is widely considered versatile and simple and thus beginner friendly; “Sicilian Defence Opening” is a chess opening that is generally considered to be very strict and hard to execute and win against. Do OECD Mandatory Disclosure Rules MDR rule represent the “soft opening” by the UK, and are the DAC-6 rules are unreasonably strict? With all the recent legal (and non-legal) uncertainty caused by the ongoing Brexit procedure in the UK, legal professionals are finding it difficult to navigate the seas of uncertainty during the transitional period.

In a surprisingly fast-tracked decision from a DAC-6 perspective, the UK Revenue and Customs (HMRC) announced on the 4 of January 2021 to no longer apply the DAC-6 (European Directive 2018/822) regarding Mandatory Cross Border Tax Arrangements Disclosure Rules, despite having implemented it in domestic law. Instead, the UK will adopt the General OECD MDR orientations for general arrangements.

The Directive details the situations in which companies and advisors must report not only potential and current tax fraud, but also attenuation and aggressive tax planning schemes to local tax authorities. The aim is to fulfil the disclosure requirements that derive from OECD BEPS Action 12, which in turn seeks to “enable governments to quickly respond to tax risks through informed risk assessment, audits, or changes to legislation or regulations. DAC-6 amends the prior directives, instituting even harsher penalties and requirements for failure to report, while also broadening the range of persons covered by the duties stated therein, which has sparked some controversy in the legal world.

This decision represents a breakthrough and a victory for the line of thought, defended by many tax practitioners around the globe, that the DAC-6 rules are unreasonably strict, imposing too heavy a burden on clients, intermediaries, and lawyers alike, who are obliged to report on any potential tax infractions that fall under one of many “hallmarks” stated in the Directive. This means an actual infringement is not needed to justify a report: the mere indicator of a potential risk of fraud is sufficient, and failure to comply may lead to heavy fines that, in some countries, may even afflict professionals with legal privilege. Some say that, in practice, this means that European taxpayers must act as both citizen and police officer, without having any say in the matter.  All the controversy regarding key design aspects of the regime have led to heavy criticism, both from academics and practitioners alike, especially because they differ so blatantly from OECD orientations developed in the context of BEPS Action 12, which is much lighter and less restrictive about which arrangements must be reported.

The “soft opening” by the UK: OECD Mandatory Disclosure Rules

The main difference between the DAC-6 and MDR regimes is that, under the latter, only two kinds of cross-border arrangements will fall under the obligatory duty to report, namely:

  1. Arrangements that effectively undermine reporting requirements under agreements for the automatic exchange of information

  2. and

  3. Arrangements that obscure beneficial ownership and involve offshore structures with no real substance.

These are the specifically the hallmarks listed in Part II Category D of the DAC-6, which represents a small proportion of the many hallmarks that are present in the document, corresponding to a very limited set of situations in which taxpayers and practitioners fall under reporting obligations.

In practical terms, the UK has excluded, for example cross-border arrangements in which there is a specific transfer pricing issue, one of the current main concerns of the European policies regarding tax evasion, which may cause some concern about this decision’s effectiveness on the long overdue fight against tax evasion. In addition, the decision’s unexpectedness may cast some doubts on the previously established reporting deadlines. On this matter, the HMRC has determined that “reporting obligations apply to arrangements where the first step was entered into on or after 25 June 2018. Reports were due to be made in respect of these arrangements by 28 February 2021, although an earlier reporting deadline of 30 January 2021 applies to both arrangements which were made available for implementation, or ready for implementation, or where the first step in the implementation took place between 1 July 2020, and 31 December 2020; and arrangements in respect of which a UK intermediary provided aid, assistance or advice between 1 July 2020 and 1 December 2020.” 

It is important to highlight, however, that the HRMC has recently stated that the domestic Disclosure of Tax Avoidances Schemes (DOTAS) will once again apply, with the changes being applied retrospectively.

Conclusion: Stalemate between the UK and EU?

Given the importance of the UK as an intermediary country in tax schemes for many international enterprises, this represents a significant relief, which may act as a strong factor conditioning a company’s decision to remain in the country despite the loss of the many benefits of being an EU Member State. In a political sense, it represents an astounding strategic movement to subdue all the uncertainty surrounding the Brexit negotiations and following implementation policies, which may result in increased confidence of companies in British government policies following this one.

The remaining question is whether continental states will follow suit and form a united front against the EU on the so called “draconian” DAC-6 rules or will they let the UK take the lead and keep its position as the “corporate hub” for multinationals in western Europe. In any case, this can be interpreted as the first step by the UK to combat uncertainty about what the last few governments had stood for when (repeatedly) passing and amending the Brexit procedure over the last few years.


The author would like to acknowledge the assistance of João Gabriel Gonçalves, intern at CMS Legal Croatia, in preparing this article.