What is DAC 7?
The official name for DAC 7 is the Council Directive (EU) 2021/514 of March 22nd, 2021, amending Directive 2011/16/EU on administrative cooperation in the field of taxation. DAC 7 enables members to share tax information with one another thereby increasing tax transparency and overall consistency in the exchange of information.
Who does DAC 7 apply to?
DAC 7 defines a digital platform as any software, such as websites or mobile applications, that enables sellers to engage in commercial activities with other users. This includes various types of platforms, ranging from peer-to-peer product/service/accommodation platforms to ride-hailing, car-pooling, and food delivery apps, noting that 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.
DAC 7 applies to two types of businesses:
- Platform operators that are tax residents or are established in the EU
- Foreign platforms that are performing commercial activities within the EU
With respect to tax residency as mentioned above, it is important to remember that this can be established by incorporation but also by the creation of a permanent establishment.
Examples of these two types of business include:
- Rental of immoveable property, both residential and commercial, including parking spaces
- Provision of personal services
- Sale of goods
- Rental of any mode of transport
What type of information will be disclosed under DAC 7?
As of January 1, 2023, in scope platform operators are required to identify their reportable sellers and collect personal identification and financial information. This information includes name, address, country of residence, financial details, tax identification numbers, VAT, business registrations numbers, fees, commissions and taxes withheld by the reporting platform operator, and the address of immovable rental property where applicable. This data is then shared with tax authorities to ensure proper taxation of income generated through these platforms. The directive aims to close the tax gap and ensure that income earned in the digital economy is appropriately taxed.
With the enforcement of DAC 7 and the requirement to collect additional personal and financial information, the reporting platform provider must continue to comply with other regulations and requirements like the General Data Protection Regulation (GDPR). With that in mind, the reporting platform provider is required to inform individual sellers that their information will be collected and reported in accordance with DAC 7 requirements.
What is the intention?
DAC 7 aims to enhance tax transparency and address tax evasion and avoidance in the digital economy. It introduces new reporting obligations for digital platforms, requiring them to disclose certain personal and financial information about the seller and the income earned. The directive primarily targets online platforms that facilitate the sale of goods or services, such as e-commerce marketplaces, accommodation booking platforms, and app stores – think of businesses like Airbnb and Uber. This also includes the rental of immoveable property, both residential and commercial, including parking spaces.
DAC 7 builds upon previous directives and international efforts to combat tax evasion and promote transparency. It aligns with the Organization for Economic Co-operation and Development’s (OECD) sharing of information under the Common Reporting Standard (CRS). It is important to keep in mind that in complying with these new regimes, marketplace operators will need to handle the collected data in accordance with GDPR, informing providers about the data collected and ensuring compliance with privacy regulations. There are many competing regulations and not all are made equal.
How is it being implemented?
Each EU member state is responsible for implementing DAC 7 into its national legislation, specifying the reporting requirements and compliance obligations for digital platforms operating within their jurisdiction. The directive is part of the ongoing efforts to adapt tax rules to the digital age and promote fair and efficient taxation in the European Union.
The directive came into effect on January 1, 2023, and the deadline for complying with DAC7 was December 31, 2022, with the first report under DAC7 required by January 31, 2024, covering data from calendar year 2023. Reportable information must be submitted to the tax authority no later than January 31 of the year following the calendar year in which a reportable seller has been identified. Each EU member state provides a reporting method, and marketplaces affected by DAC7 need to report to one member state, which will share information with other EU countries as necessary.
As the DAC7 directive is being adopted uniquely by each EU member state, comprehending the extent of European Union regulations concerning digital platforms can present an intricate challenge. Each member state is also responsible for imposing fines and punishment for noncompliance. Regardless of whether your platform is situated within the EU or in another jurisdiction, the geographical positioning of your sellers and their assets could potentially subject you to the provisions of DAC 7.
With the introduction of DAC 7 and the compliance requirements imposed by other regimes, it is becoming increasingly challenging for companies to prioritize and comply with these regulations and requirements that are often not made equal. Keep an eye out for our next article where we look into other regimes, like DAC 8, and how collecting information electronically can help you centralize and streamline these competing requirements.