As part of the new tax package on fair and simple taxation, in July of 2020 the European Commission proposed the amendment of the EU Council Directive 2011/16 on Administrative Cooperation in the field of taxation in the EU for the sixth time (DAC 7). The initial proposal has been subject to a number of amendments introduced by the EU Council and EU Parliament before it was finally approved on 22 March 2021.
It is now expected that the (revised) legislation will be officially published into the EU Journal after which Member States will have to transpose its provisions by 31 December 2022 and apply the new rules from January 2023 onwards. Different deadlines apply for joint audit provisions.
Expanding automatic exchange of information through digital platforms
The new DAC 7 legislation aims to safeguard tax revenues and ensure fair taxation through changing the existing DAC provisions and extending the scope of the automatic exchange of information reported by (multisided) digital platform operators. As per the explanatory memorandum of the legislation, such amendments were necessary due to the underreported income earned by taxpayers supplying goods and services through the use of digital platforms. The new regime will also limit the burden faced by the operators of such platforms, since it will introduce a “standardized” reporting obligation across the EU.
The legislation introduces new definitions setting out the objective, subjective, and territorial scope of the new DAC 7. In particular, it adopts a broad definition of ‘platform' using nearly an identical language to the OECD initiative. In this regard a digital platform is defined as any software, including websites and applications (i.e. Mobile applications) accessible by users which allow sellers to carry out certain sale activities.
Non-EU platforms facilitating such activities in an EU Member State (i.e. through a Permanent establishment) are also caught under the scope of the new DAC 7 regime. The legislation however excludes platforms that merely allow the processing of payments in relation to sales, advertising or redirecting users to a Platform (i.e. so-called intermediaries, without further intervention).
According to the legislation, Platforms are run by the so called “Platform Operators” who have an obligation to report sellers' income from “Relevant Activities” i.e. income arising from:
- The rental of immovable property (both residential and commercial);
- The provision of personal services;
- The sale of goods;
- The rental of any mode of transport;
- Investing and lending in the context of crowdfunding as defined in Union financial markets legal framework.
Income arising as a result of the seller acting as an employee and/or a related entity of the Platform Operator shall not be reported.
The inclusion of the sale of goods as a ‘Relevant Activity' in the DAC is expected to have the highest reporting impact as it ‘catches' into the scope of DAC the sale of goods through internet giant platforms i.e. e-Bay, Amazon, Etsy, even Facebook marketplace. Notably though, a de-minimis reporting exemption is provided for sellers who facilitate a maximum of thirty ( 30) sales of goods transactions in return for an overall consideration not exceeding EUR 2,000 per annum.
The impact of DAC 7 in achieving tax efficiencies
The information collected by the Platform Operators in their capacity as “digital intermediaries” will undoubtedly be more reliable. This stems from the fact that they will now be obliged to collect and verify data on their users by establishing a due diligence procedure, a process to be repeated by December 31 of each year. Such user's data includes, amongst others, the seller's identity, primary address, TIN or VAT Identification number, and in the case of sellers renting immovable property the address of each Property Listing and respective land registration number.
In addition to the Due diligence procedure, Platform Operators will have to report a number of information to their national tax authorities by January 31 of the following year. Such information includes among others the consideration received or credited and details of the Financial Account Identifier.
A national tax authority in possession of the data collected will have to forward such data to the tax authorities of the other relevant Member States. The reported information will be used by the authorities to assess, levy and collect income tax but also (for the first time) VAT and other Indirect taxes.
The legislation also sets out the legal framework for the authorities of two or more Member States to conduct joint audits, a move which will undoubtedly provide more clarity and legal certainty on the matter.
The notion of foreseeable relevance with regards to the exchange of information via request is also clarified as intended to provide for exchange of information in tax matters to the widest possible extent.
In terms of sanctions, all Member States should agree on a harmonised system of penalties across the Union in the case of infringement. This will prevent the exploitation by platform operators of loopholes and registration shopping based on the severity of penalties applied by each Member State. Exclusion from public contracts and the possibility of revoking the business licence of the platform operator should also be considered.
The shift in focus on sharing and gig economy platforms for reporting tax information indicate the crucial role multisided digital platforms can play at present in improving the tax field information sharing. Indeed, the central role of these platforms within the supply chain places them in the ideal position to become the “trustees” of new tax obligations. Adding into the equation the enhanced cooperation rules imposed on national tax authorities DAC 7 seems indeed promising in addressing current global tax transparency issues.
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