In Brief
Unpacking EU’s DAC7 Directive
On March 22, 2021, the European Council adopted EU Directive 2021/514 amending Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC).
Member states have until Dec. 31, 2022, to transpose the DAC7 reporting obligation into their domestic law and are required to give effect to those provisions as of Jan. 1, 2023.
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What is DAC7?
Primarily, the DAC7 directive extends tax transparency rules to digital platforms by requiring (i) reporting platform operators to collect and report prescribed information on reportable sellers using their platforms for certain commercial activities, and (ii) EU member states to automatically exchange this information.
DAC7 is broadly aligned with the OECD’s Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy, although the scope of reportable activities under DAC7 is wider.
The information reported is to be used by tax authorities for assessment of both income tax and value added tax (VAT).
Who will be affected by DAC7?
DAC7 defines a digital platform as any software, including websites and mobile applications, that allows sellers to connect to other users to carry out a relevant commercial activity. However, platforms that only allow for the processing of payments, users to list or advertise, or that redirect or transfer users to a platform are excluded from the definition.
DAC7 reporting applies to operators of digital platforms who are tax residents in the EU, incorporated or managed in the EU, or have a permanent establishment in the EU, provided the platform is engaged in a relevant commercial activity.
Non-EU platform operators must also comply with DAC7 if they facilitate relevant activities of sellers who are residents in the EU or the rental of immoveable property located in the EU. Consequently, DAC7 impacts companies in the U.S. and around the world, and even those outside the EU will need to become familiar with its requirements.
What activities are covered by DAC7?
The relevant activities that trigger an obligation to report under DAC7 are:
- rental of immoveable property, both residential and commercial, including parking spaces
- provision of personal services
- sale of goods
- rental of any mode of transport
To apply, the activity must be carried out for consideration and may be cross-border or domestic. The rental of moveable assets, and peer-to-peer lending, do not currently fall under the directive. An important difference between DAC7 and the OECD Model Rules is that only DAC7 applies to the sale of goods (though the OECD has now presented an option to extend its Model Rules to sales of goods).
Whose information is DAC7 targeting?
Under DAC7, a reportable seller is an EU resident individual, company or legal arrangement, registered on the platform and carrying out a relevant activity. Non-EU residents renting out immoveable property located in an EU member state are also reportable sellers.
Government and publicly traded entities are excluded from DAC7 reporting. So, too, are casual sellers of goods for which the platform has facilitated fewer than 30 sales and for which the total consideration paid does not exceed 2,000 euros during a reporting period. An exclusion also applies to sellers engaged in high frequency renting of immoveable property, such as hotel chains and tour operators, requiring more than 2,000 relevant transactions during a reporting period to qualify.
What information must be reported?
From Jan. 1, 2023, reporting platform operators must identify reportable sellers and collect prescribed information on all non-excluded sellers carrying out a relevant activity. Due diligence provisions also require the platform operator to verify the reliability of the information gathered.
The information to be disclosed to the tax authority includes a reportable seller’s identity (full name or legal name and primary address), EU member state of residence, financial account details, tax identification number, VAT/business registration numbers, consideration paid or credited per quarter, and any fees, commissions or taxes withheld by the reporting platform operator. Additional information is required in the case of immoveable rental property.
For the purposes of satisfying the General Data Protection Regulation, a reporting platform operator must also inform individual sellers that their information will be collected and reported in accordance with DAC7.
How will reporting be carried out?
Reportable information must be submitted to the tax authority no later than Jan. 31 of the year following the calendar year in which a reportable seller has been identified. The deadline for first reporting by platform operators is Jan. 31, 2024.
The reporting platform operator must file a report with the competent tax authority of the EU member state in which it has the required nexus. This is determined by the directive and generally will be where the operator is tax resident. If the platform operator has nexus in more than one EU member state, the operator must elect the one to which it will report.
Non-EU platform operators must generally register with a member state of choice and report to that state. They may, though, be relieved from reporting in the EU if equivalent information is already exchanged under an agreement between the country in which the operator is located and a member state.
EU member states are required to exchange the reported information within two months following the end of the reporting period.
How is compliance ensured?
Member states are required to have rules and administrative procedures in place to ensure effective compliance with the due diligence procedures and reporting requirements set out in the directive. These include measures requiring reporting platform operators to keep records of the steps undertaken, and any information relied upon, for a period of five to 10 years following the end of the reportable period to which they relate.
Penalties will apply for non-compliance with DAC7. These penalties are to be determined by individual member states, but they must be effective, proportionate, and dissuasive.
Sellers who fail to provide the requisite information to a reporting platform operator to perform due diligence will have their account closed after receiving two reminders.
How else does DAC7 affect member states?
DAC7 also ushers in further amendments to DAC which are designed to clarify and strengthen existing administrative cooperation between member states. Specifically, it introduces, inter alia:
- A definition of “foreseeable relevance”
- Mandatory automatic exchange of information on royalties
- Rules for requesting information on groups of taxpayers
- A legislative framework for the conduct of joint audits, which is to become operational in the EU from Jan 1, 2024, at the latest
How can platform operators prepare for DAC7?
Platform operators should:
- Assess whether they fall within the scope of DAC7 and if the activities taking place on the platform are reportable
- Consider the information currently being collected from sellers and what further information is required for reporting purposes
- Determine what IT systems and processes are needed to comply with DAC7 due diligence and reporting requirements
- Consider the effect of DAC7 on contractual relationships with sellers and prepare a plan of action to address this moving forward
- Determine any data protection implications
- Monitor the implementation of domestic legislation for expansion in scope, and assess any further actions needed