OUR INSIGHTS AT A GLANCE
- On 22 March 2021, the EU Council adopted a new Directive, so-called DAC7, amending the Directive 2011/16/EU on administrative cooperation in the field of taxation for the sixth time.
- DAC7 creates a new obligation for digital platform operators to report the income earned by sellers of goods and services who make use of their platforms and for member states to automatically exchange this information.
- The new rules cover digital platforms located both inside and outside the EU and will apply from 1 January 2023 onwards.
- DAC7 also introduces a definition of the "foreseeable relevance" required for an information request, allows information requests on groups of taxpayers, provides a framework for the conduct of joint audits by member states and finally includes royalties in the list of income subject to mandatory automatic exchange of information under DAC.
On 22 March 2021, the EU Council adopted a new Directive, so-called DAC7, which strengthens administrative cooperation to include sales through digital platforms. DAC7 amends the Directive 2011/16/ EU on administrative cooperation in the field of taxation ("DAC") for the sixth time to create an obligation for digital platform operators to report the income earned by sellers of goods and services who make use of their platforms and for member states to automatically exchange this information.
DAC7 introduces new reporting obligations for platforms acting as "digital intermediaries" like under the common reporting standard ("CRS") and DAC6 which place obligations respectively on financial or tax intermediaries. The new rules will allow national tax authorities to detect income earned through digital platforms and determine the relevant tax obligations. DAC7 is part of the EU Commission's Tax Package which aims to ensure that the European tax policy supports Europe's economic recovery and long-term growth following the COVID-19 crisis.
The new rules cover digital platforms located both inside and outside the EU and will apply from 1 January 2023 onwards. The reporting obligation should cover both cross-border and non-cross-border activities.
DAC7 also brings clarifications and improvements to the existing rules on administrative cooperation and introduces notably, for that purpose, a definition of the "foreseeable relevance" required for an information request. In addition, the new rules provide a framework for the competent authorities of two or more member states to conduct joint audits. This framework will be operational in all member states from 2024 at the latest.
Finally, DAC7 adds royalties to the list of income subject to mandatory automatic exchange of information under DAC.
Platform operators subject to new mandatory automatic exchange of information
DAC7 extends the scope of the automatic exchange of information with respect to the information to be reported by digital platform operators and is inspired by the Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy issued by the Organisation for Economic Co-operation and Development ("OECD") on 9 July 2020 (the "OECD Model Rules").
DAC7 provides for:
- an obligation on the reporting platform operators to collect and verify information in line with due diligence procedures;
- an obligation on the reporting platform operators to report information on the reportable sellers which use their platform on which they operate, to sell their goods and provide their services;
- an obligation on the competent authorities to communicate the reported information to the competent authority of the appropriate member state.
Pursuant to DAC7, each member state shall take the necessary measures to require Reporting Platform Operators to carry out new due diligence and reporting obligations by 31 December 2022. They shall apply those provisions as from 1 January 2023.
DAC7 does not cover issues related to digital taxation or minimum effective taxation discussed at OECD level. In this regard, it is expected that the Commission will present a dedicated action plan on business taxation by mid-2021.
Scope of DAC7
a. Who will bear the burden of the new reporting duties?
With DAC7, the EU Commission targets the digital platform economy through platform operators, which makes the traceability and detection of taxable events by tax authorities very difficult.
Under DAC7, 'platform' means any software, including a website or a part thereof and applications, including mobile applications, accessible by users and allowing sellers to be connected to other users for the purpose of carrying out a targeted activity, directly or indirectly, to such users. It also includes any arrangement for the collection and payment of a consideration in respect of the relevant activities. Software that exclusively allows the processing of payments in relation to a targeted activity, users to list or advertise a relevant activity, or the redirecting or transferring of users to a platform, without any further intervention in carrying out a relevant activity, is not a platform under DAC7.
'Sellers' are defined by DAC7 as platform users, either individuals or entities, which are registered at any moment during the reportable period on the platform and carry out, for consideration, activities which include the rental of immovable property, the provision of personal services, the sale of goods (i.e., tangible properties) and the rental of any mode of transport (the "Relevant Activities"). A personal service is a service involving time- or task-based work performed by one or more individuals who act either independently or on behalf of an entity. This service is carried out at the request of a user, either online or physically offline after having been facilitated via a platform.
A 'platform operator' is an entity that contracts with sellers to make available all or part of a platform to such sellers.
The reporting obligation will fall on a "Reporting Platform Operator" described as any platform operator which is:
- either a tax resident in a member state, is incorporated under the laws of a member state or has its place of management (including effective management) or a permanent establishment in a member state (referred to as "EU Platforms");
- neither resident for tax purposes, nor incorporated or managed in a member state, nor has a permanent establishment in a member state, but facilitates the carrying out of a Relevant Activity by reportable sellers or the rental of immovable property located in a member state (referred to as "Foreign Platforms Operators").
For the sake of simplification and mitigation of compliance costs, it would be reasonable to require platform operators to report income earned by sellers through the use of the digital platform in one single member state.
b. Who will be reportable?
A Reporting Platform Operator will need to collect and report information on any seller other than an excluded seller (i.e., a governmental entity) which, during the reportable period, either carries out a Relevant Activity or is paid or credited consideration in connection with a Relevant Activity, and is resident in a member state or rented out immovable property located in a member state ("Reportable Seller").
A Reportable Seller is considered resident in a member state if, during the reportable period, it had its primary address in a member state, it had a TIN or VAT identification number issued in a member state or, for a seller that is an entity, it had a permanent establishment in a member state. Notwithstanding these criteria, a Reporting Platform Operator shall consider a seller resident in each member state confirmed by an electronic identification service made available by a member state or the EU to ascertain the identity and tax residence of the seller.
Governmental entities, entities (or related entities of entities) the stock of which is regularly traded on an established securities market, and entities for which the platform operator facilitates more than 2,000 Relevant Activities by means of the rental of immovable property in respect of what is called a 'property listing' during the reporting period are nevertheless excluded from any DAC7 reporting. DAC7 defines Property Listing as all immovable property units located at the same street address, owned by the same owner and offered for rent on a platform by the same seller.
DAC7 also sets up a threshold for being considered as a reportable seller. As a result, sellers for which the platform operator facilitates less than 30 Relevant Activities by means of the sale of goods and for which the total amount of consideration paid or credited does not exceed EUR 2,000 during the reporting period are not in the scope of the DAC7 reporting.
New duties for Reporting Platform Operators
a. Due diligence procedures
A Reporting Platform Operator will have to carry out due diligence procedures to identify Reportable Sellers. For that purpose, the Reporting Platform Operator will have to collect information for each seller (individuals and entities) and will then have to determine whether or not the information collected is reliable, using all information and documents available to the Reporting Platform Operator in its records, as well as any electronic interface made available by a member state of the EU free of charge to ascertain, for example, the validity of the TIN and/or VAT identification number.
Where the Reporting Platform Operator has reason to know that any of the information may be inaccurate, it will have to request the seller to correct information items which were found to be incorrect and to provide supporting documents, data or information which is reliable and of independent source, such as a valid government-issued identification document or a recent tax residency certificate.
Where a seller is engaged in a Relevant Activity involving the rental of immovable property, the Reporting Platform Operator will have to collect the address of each property listing and, where issued, respective land registration number.
If a Reportable Seller does not provide the information required to the Reporting Operating Platform after two reminders following the initial request but not prior to the expiration of 60 days, the platform will have to close the account of such seller and prevent the seller from re-registering on the platform for a six-month period or withhold the payment of the consideration to the seller as long as the seller does not provide the information requested.
A Reporting Platform Operator will have to collect the required information, verify its accuracy and have it available by 31 December of the calendar year in respect of which reporting is being completed (the "Reportable Period"). As the DAC7 provisions apply as from 1 January 2023, the first Reportable Period will be the 2023 calendar year and the first due diligence duties will have to be completed by 31 December 2023. In that case, for sellers that were already registered on the platform as of 1 January 2023 or as of the date on which an entity becomes a Reporting Platform Operator, the due diligence procedures are required to be completed by 31 December of the second Reportable Period for the Reporting Platform Operator (i.e., 31 December 2024 in this case).
A Reporting Platform Operator will be allowed to rely on the due diligence procedures conducted in previous Reportable Periods, provided that the required information has been collected or verified within the last 36 months, and it does not have reason to know that the information collected has become unreliable or incorrect.
A Reporting Platform Operator will be allowed to designate another platform operator or a third party to assume the obligations with respect to due diligence procedures, but such obligations shall remain the responsibility of the Reporting Platform Operator. A Reporting Platform Operator will also be allowed to only complete the due diligence procedures for active sellers upon election. The procedure for such election will be determined by each member state when implementing DAC7.
b. Reporting duties
The information, as collected and verified, will have to be reported within one month following the end of the Reportable Period in which the seller is identified as a Reportable Seller (i.e., no later than 31 January 2024 if the seller is identified as a Reportable Seller in 2023).
Reporting will only be made in one member state (i.e., single reporting). A Reporting Platform Operator will report to the competent authority of the member state where it is tax resident, or where it does not have a residence for tax purposes in a member state, in the member state where it is incorporated or has its place of management (including effective management), or where it has a permanent establishment. In the event the platform is linked to more than one member state based on the above criteria, the Reporting Platform Operator will have to elect one member state to report in.
Where there is more than one Reporting Platform Operator, any of those Reporting Platform Operators shall be exempt from reporting the information if it has proof that the same information has been reported by another Reporting Platform Operator.
A Reporting Platform Operator which is a Foreign Platform shall report in the member state it is registered in.
The information to be reported, as listed in DAC7, will provide member states' tax administrations with sufficient information to correctly assess and control gross income earned in their countries from commercial activities performed with the intermediation of digital platforms. This information includes income earned by sellers of goods and services who make use of the platforms. Information about the consideration paid and other amounts will have to be reported based on the quarterly figures of each Reportable Period in which the consideration was paid or credited. The definition of the 'consideration' under DAC7 excludes any fees, commissions or taxes withheld or charged by the Reporting Operating Platform.
The Reporting Platform Operators will have to inform each individual concerned that information will be collected and reported to the competent authorities and to provide all information the data controllers are required to provide under the General Data Protection Regulation ("GDPR") before the information is reported.
Automatic exchange of information reported by Reporting Platform Operators
The information reported by Reporting Platform Operators will have to be exchanged by the competent authorities of the member states where the reporting has been made with the member states where the Reportable Seller is a resident and/or the immovable property is located within two months following the end of the Reportable Period (i.e., by the end of February).
Penalties for non-compliance at national level
Reporting Platform Operators will be subject to penalties applied by member states in the case that the obligations laid down in DAC7 are not respected. The penalties shall be effective, proportionate and dissuasive.
Currently, in Luxembourg the penalties for noncompliance with the CRS and DAC6 regulations amount to a maximum of 250,000 euros.
Other clarifying measures included in DAC7
DAC7 also amends existing provisions on exchange of information and administrative cooperation, notably in order to clarify some requirements.
Exchange of information upon request: conditions of the request
a. Group requests
Considering there is sometimes a need for issuing requests for information that concern groups of taxpayers which cannot be identified individually but are instead described by a common set of characteristics, DAC7 addresses the issue of group requests in the context of a request for information.
In that respect, DAC7 provides for the possibility for tax administrations to make group requests for information. In such a case, the requesting authority has to provide the requested authority with a set of information including a comprehensive description of the characteristics of the group and an explanation of the applicable law and of the facts and circumstances which led to the request.
b. Foreseeable relevance and exhaustiveness
The 'foreseeable relevance' of the information requested by one member state to another conditions whether or not the requested member state shall be required to comply with the request for information, and thus constitutes one of the legal bases of the information order addressed by that member state to a relevant person and of the penalty imposed on that person for failure to comply with the information order.
The aim of DAC7 is to clearly delineate the standard of foreseeable relevance, to ensure effectiveness of the exchanges of information and prevent unjustified refusals of requests, as well as to provide legal clarity and certainty to both tax administrations and taxpayers.
For those purposes, DAC7 provides for a definition of the standard of foreseeable relevance under which "the requested information is foreseeably relevant where, at the time the request is made, the requesting authority considers that, in accordance with its national law, there is a reasonable possibility that the requested information will be relevant to the tax affairs of one or several taxpayers, whether identified by name or otherwise, and be justified for the purposes of the investigation".
DAC7 also lays down procedural requirements which the requesting authority must observe. Thus, "with the aim to demonstrate the foreseeable relevance of the requested information, the requesting competent authority shall provide at least the following information to the requested authority:
- the tax purpose for which the information is sought; and
- a specification of the information required for the administration or enforcement of its national law".
DAC7 also details the information which the requesting authority shall provide where a request relates to a group of taxpayers who cannot be identified individually:
- a detailed description of the group;
- an explanation of the applicable law and of the facts based on which there is reason to believe that the taxpayers in the group have not complied with the applicable law;
- an explanation how the requested information would assist in determining compliance by the taxpayers in the group; and
- where relevant facts and circumstances related to the involvement of a third party that actively contributed to the potential non-compliance of the taxpayers in the group with the applicable law.
Automatic exchange of information: extension of the list of income subject to mandatory automatic exchange between member states
According to the EU Commission, information related to income derived from intellectual property should be exchanged between member states as this is predisposed to profit shifting arrangements due to its highly movable underlying assets. As a result, DAC7 adds royalties to the list of income subject to mandatory automatic exchange of information under DAC. Currently, this list contains income from employment, director's fees, life insurance products not covered by other EU legal instruments on exchange of information and other similar measures, pensions, and ownership of and income from immovable property.
Before 1 January 2024, member states shall inform the EU Commission of at least four categories of income listed in respect of which the competent authority of each member state shall, by automatic exchange, communicate information concerning residents in that other member state to the competent authority of any other member state. The information shall concern taxable periods starting on or after 1 January 2025.
Following this amendment, member states will be required to exchange all information available on at least four categories of income with other member states with respect to taxable periods as from 2024.
DAC7 finally provides for the possibility for a competent authority of one or more member states to request the competent authority of another member state (or other member states) to conduct a joint audit. That request may however be rejected on justified grounds.
In order to ensure legal certainty, joint audits should be conducted in a pre-agreed and coordinated manner, and in accordance with the laws and procedural requirements of the member state where the activities of a joint audit take place. The audited person(s) shall be informed of the outcome of the joint audit, including a copy of the final report within 60 days of its issuance. In order to ensure legal certainty, the final report of a joint audit should reflect the findings the competent authorities concerned agreed on. Moreover, the competent authorities concerned could also agree that the final report of a joint audit includes any issues where an agreement could not be reached.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.