The adoption of DAC7 by the EU has resulted in a host of new due diligence and reporting requirements for the digital platforms that are driving the online economy. Platform operators must quickly get to grips with DAC7, or risk being liable for fines and other sanctions.
Over the past few years, the online platform economy has experienced exponential growth; a trend further fuelled by the physical restrictions imposed during the Covid-19 pandemic. Also referred to as digital platforms, the online platform economy is the buying, selling and sharing of goods and services that's facilitated by the likes of Amazon, Baidu and Uber.
Goods and services are increasingly traded on a plethora of digital platforms, with both private individuals and businesses actively buying and selling. It's become more difficult for tax authorities to trace both the flow of goods and services as well as the identities of sellers, therefore making it much harder to ensure effective reporting and appropriate taxation.
New regulation for our online world
In an effort to resolve this growing problem, in March 2021 the European Union (EU) Council approved the adoption of DAC7, which is the sixth amendment to EU Directive 2011/16/EU on administrative co-operation in the field of taxation.
The main focus of DAC7 is to boost transparency and address the multiple tax challenges posed by the platform economy through the introduction of new reporting obligations for digital platform operators, as well as exchange of information rules for tax authorities.
In practice, both EU and non-EU digital platform operators are being asked to support the tax authorities in the ongoing battle against tax evasion, by drawing on their ability to collect information from their users. Moving forward, they will have to report information about sellers of certain goods, as well as personal and rental services.
Who needs to report what?
Under DAC7, the new reporting obligations fall on platform operators, with a platform defined as any digital interface that connects sellers of certain qualifying goods and services with potential buyers.
The scope for inclusion is quite broad, though some specific exceptions are provided, including for software that, without any further intervention, exclusively processes payments or allows users to list or advertise a qualifying activity.
And it's important to note that not every activity of a targeted seller falls under the remit of DAC7. It's limited to a number of reportable activities:
- The leasing of real estate located in the EU (for example, residential, holiday and commercial properties)
- The provision of personal services by an EU-based provider (time or task-based work, such as freelance support)
- The sale of goods by a seller established in the EU (B2C as well as B2B)
- The rental of any means of transport by a seller established in the EU.
In terms of the information that's then needed for these activities, qualifying platform operators are subject to both due diligence obligations for the collection and verification of seller-relevant data, and an obligation to collect information related to transactions carried out by qualifying sellers.
The due diligence requirements are extensive, going beyond standard KYC requirements. They include the collection and reporting of the seller's name, address, tax identification number, VAT identification number, date of birth, and the existence and location of a permanent establishment through which the activities are carried out.
The platform operator must also collect relevant information on each transaction, including account number, amount of compensation paid and credited, any fees, and commissions and taxes, before reporting it to the tax authorities of the relevant EU member state.
The important next steps
Following the formal adoption of DAC7, EU member states now have until 31 January 2022 to transpose the amendments into their national laws. The new provisions will then apply from 1 January 2023, with the first reporting required by 31 January 2024.
The DAC7 legislation states that the penalties for violating the reporting obligations should be “effective, proportionate and dissuasive”, with the decision about the exact penalties left to the individual member state to decide. It's expected that fines will likely be the main sanction against those who are non-compliant.
DAC7 also highlights measures against the seller, if they fail to provide the reportable information to the platform operator after two reminders. The platform operator will be able to either close the seller's user account, or else withhold the payment of the consideration as long as the seller does not provide the information.
It's therefore crucial for platform operators to carefully check their obligations under DAC7, make sure they fully understand them and their implications, and then implement a robust process to collate and report the required data. This includes reviewing existing contractual arrangements with their sellers to check whether their contracts allow them to collect and share the required data.
While these obligations are the responsibility of the platform operator, they can work with a suitable third-party service provider to do the heavy lifting to fulfil them.
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.