Complying With EU’s DAC7 Reporting Directive

In 2021, the European Council amended Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC). The provisions went into effect Jan. 1, 2023, when EU member states were required to have transposed the DAC7 reporting obligations into their domestic laws.

DAC7 impacts international tax planning strategies for U.S. corporations and around the world, and even those outside the EU will need to become familiar with its requirements. This article outlines the reporting requirements, who is affected, and how the new directive may impact corporate tax planning strategies.

What is DAC7?

Primarily, the DAC7 directive extends tax transparency rules to digital platforms by requiring:

1. Reporting platform operators to collect and report prescribed information on reportable sellers using their platforms for certain commercial activities.
2. EU member states to automatically exchange this information.

Tax authorities use the information reported for the administration and enforcement of both income tax and value-added tax (VAT).

DAC7 is broadly aligned with the Organisation for Economic Co-Operation and Development (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.

Who is 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 allow only for the processing of payments, or for users to list or advertise, or that redirect or transfer users to a platform are excluded from the definition.

Provided the platform is engaged in a relevant commercial activity, DAC7 reporting requirements apply to operators of digital platforms who are:

• Tax residents in the EU
• Incorporated or managed in the EU
• Have a permanent establishment in the EU

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.

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

For the reporting requirement to apply, the activity must be carried out for consideration and may be cross-border or domestic. Moveable asset rentals and peer-to-peer lending don’t 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.

What seller information must be reported?

Reporting platform operators must identify reportable sellers and collect prescribed information on all nonexcluded 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
• 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 (GDPR), a reporting platform operator must also inform individual sellers that their information will be collected and reported in accordance with DAC7.

Who qualifies as a reportable seller under DAC7?

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 the reporting period. An exclusion also applies to sellers engaged in high-frequency renting of immoveable property, such as hotel chains and tour operators. To qualify for this exclusion, a seller must have more than 2,000 relevant transactions during a reporting period.

What are the DAC7 reporting and compliance requirements?

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 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 a 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.

Penalties apply for noncompliance with DAC7. Penalties are determined by individual member states, but they must be effective, proportionate, and dissuasive.

Sellers who fail to provide a reporting platform operator with the information required to perform due diligence will have their account closed after receiving two reminders.

How are EU member states required to comply with DAC7?

EU member states are required to exchange the reported information within two months following the end of the reporting period.

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.

DAC7 also contains provisions designed to clarify and strengthen existing administrative cooperation among member states, including:

• 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