The main mechanisms of Exchange of Information under the EU Directive on administrative cooperation in the field of taxation

The European Union (EU) has established robust mechanisms for the exchange of tax-related information among its member states to enhance transparency and combat tax evasion and avoidance. The Directive on Administrative Cooperation (DAC) in the field of taxation, first introduced as Council Directive 2011/16/EU, and subsequently updated 7 times (the most recent being DAC8), provides a legal framework for cooperation between tax administrators in EU Member States (MS).

One of the key elements of this directive is the exchange of information (EOI) between tax administrations. The DAC outlines three main mechanisms for information exchange. Each of these mechanisms serves a specific purpose and operates under distinct conditions. This article explores these three types of exchanges and their implications within the framework of the DAC.

Definition and characteristics

Spontaneous exchange of information refers to the unsolicited sharing of relevant tax-related information between MS when a tax authority believes that such information may be useful to another country’s tax administration. This exchange occurs without a prior request and typically arises when one country detects potential tax risks that may impact another jurisdiction.

Situations where SEOI applies

Tax authorities are required to exchange information spontaneously in the following circumstances:

There are grounds to suspect tax evasion, tax fraud or other legal violations in another MS.
A person liable to tax obtains a reduction in, or an exemption from, tax in one MS which would give rise to an increase in tax or to liability to tax in another MS.
A cross-border transaction is structured in a way that may lead to tax savings in an abusive manner.
Information obtained in one MS may help in the correct assessment of tax liability in another MS.

Definition and characteristics

Automatic exchange of information involves the systematic, periodic and pre-defined transmission of tax-related information between MS. Under this mechanism, tax authorities exchange information on a regular basis without requiring a specific request from another country.

Situations where SEOI applies

Over the years, the DAC has expanded the scope of automatic exchanges through various amendments:

DAC1 (2011): Introduced five categories of income and assets: employment income, pension income, director fees, income from and ownership of immovable property and life insurance products. Royalties and non-custodial dividends were subsequently added to these categories following DAC7 and DAC8 respectively.
DAC2 (2014): Introduced the Common Reporting Standard (CRS) for automatic exchange of financial account information.

DAC3 (2015): Extended AEOI to tax rulings and advance pricing agreements.
DAC4 (2016): Covered country-by-country reporting (CbCR) for multinational enterprises (MNEs).
DAC6 (2018): Introduced the mandatory reporting of cross-border tax planning arrangements by intermediaries (e.g., law firms, accountants).
DAC7 (2021): Expanded AEOI to include digital platform operators (e.g., Airbnb, Uber)
DAC8 (2023): Regulates crypto-assets and e-money exchanges.

Definition and characteristics

Exchange of information on request is a case-specific mechanism where one tax authority formally requests information from another MS to assist in tax investigations or assessments. Unlike spontaneous or automatic exchanges, EOIR is reactive and depends on a specific inquiry from one country.

Process of EOIR under the DAC

Typically, a tax authority submits a written request detailing the information required, the tax purpose, and the connection to the taxpayer under investigation. The receiving country then gathers the requested information from its tax records, banks or other institutions and shares the information with the requesting country within a specified timeframe, usually within two to six months depending on complexity.

Legal basis and obligations

In terms of the DAC, MS must provide information as extensively as possible, unless:

The request lacks foreseeable relevance;
The requested information is not available within the jurisdiction;
The disclosure violates public policy or trade secrets.

Other forms of administrative cooperation

The DAC provides for other forms of administrative cooperation including the following:

Access to beneficial ownership information collected pursuant to the anti-money laundering legislation in terms of DAC5;
Presence of officials of an EU MS in the offices of the tax authorities of another EU MS, including during administrative enquiries carried out therein;
Joint audits allowing two or more MS to conduct controls of persons of common or complementary interest to the competent authorities of those MS.

EU Directive on administrative cooperation in tax (DAC)

Conclusion

The DAC provides a multi-layered approach to tax transparency and enforcement through different exchange mechanisms. Spontaneous exchanges allow proactive sharing of critical tax information, automatic exchanges ensure structured and systematic data sharing, while exchange on request serves as a targeted investigative tool.

Each method has its strengths and limitations, but together, they contribute to a more transparent and cooperative tax environment within the EU. As tax authorities continue to adapt to digitalisation and new financial structures, further enhancements to these mechanisms will be crucial to keeping pace with evolving tax challenges.

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Exchange of Information under the EU Directive on administrative cooperation

Other forms of administrative cooperation

EU Directive on administrative cooperation in tax (DAC)

Conclusion

How can we help?

If you require assistance with respect to any aspect of exchange of information please feel free to contact us. We have a specialised team who will be ready to assist you.

Contact us