The new year brought with it a new tax regulation for digital platforms: the DAC7 directive. Effective from January 1st, 2023, all digital platform operators that conduct business in the EU and are classified as Reportable Platform Operators will have to report revenue generated by sellers using their platform.
Keep reading to find out what the directive means, who is included in “reportable platform operators” and “reportable sellers” and how to stay compliant in your business.
What is DAC7?
DAC7 (short for 7th amendment to EU’s Directive on Administrative Cooperation) is a Council Directive adopted by the European Union, amending the original directive 2011/16/EU. In layman’s terms, this directive expands the existing tax transparency rules to digital platforms. According to this directive, every digital platform operator conducting services in the EU now has to register for an Platform Operator ID and report the revenue generated by sellers using their platform.
This amendment is aimed to make tax cooperation between EU member states smoother and make it easier for local tax authorities to collect taxes. This also means the scope of automatic exchange of information between tax authorities in member states is being extended.
The scope of DAC7
The new DAC7 regulation will apply to digital platforms that facilitate the sale of goods or services or the renting of immovable property. Included in “digital platforms” under this directive are also mobile apps and computer software, websites, and parts of a website on which it is possible to carry out sales transactions (by connecting sellers to buyers). Examples include eBay, Amazon, AirBnB, Uber, Upwork and Fiverr.
Reporting of revenue under this directive will apply to digital platforms that are incorporated and/or managed in the EU, have a permanent establishment in the EU, and the digital platform operators who are tax residents in the EU.
RPOs (Reporting Platform Operators) who are excluded in the above description will still have to abide by DAC7 rules if they facilitate sales transactions from EU sellers. However, if the country of non-EU RPO has an agreement with EU member states, they might be exempt from this rule.
Exclusions and exemptions
There are some entities that don’t fall under the “digital platforms” umbrella regarding DAC7.
- Websites of companies that only sell that company’s own goods
- Payment processing platforms (for example, PayPal)
- Platforms on which users can list items for sale, but the platform itself does not take part in facilitating the sale transaction or is not aware of the value of transactions (for example, Facebook Marketplace)
DAC7 disclosure requirements: What should be reported under DAC7?
Before delving into disclosure requirements, let’s clearly identify who reportable sellers are. Reportable sellers that fall under DAC7 reporting requirements are legal or natural entities that are registered to a digital platform and perform sales transactions. This includes sellers that are residents in a EU member state and those who rent out immovable properties located in a EU member state.
On the other hand, some digital platforms are not classified as reportable sellers. These non-reportable sellers are:
- Government entities
- Publicly traded entities
- Sellers who rent out immovable properties at a high frequency (more than 2000 activities per reporting period) like hotels
- Small sellers of goods (less than 30 activities with a revenue under 2000 euros per reporting period)
DAC7 disclosure requirements are categorized as “reportable activities”. These reportable activities under DAC7 are:
- The rental of immovable properties, including both residential and commercial properties and parking spaces
- The provision of time-based or task-based personal services (Services provided by natural entities; provided online or offline after being facilitated through a digital platform)
- The sale of goods
- The rental of any mode of transport
- Investment and lending in the context of crowdfunding
Recordkeeping under DAC7
In order to comply with DAC7, RPOs (Reportable Platform Operators) will need to collect and keep records of certain data regarding their reportable sellers. As the reporting period of DAC7 is a calendar year, records must be kept relevant to the specified time period. Information that needs to be collected and reported to tax authorities regarding reportable sellers include:
- Identification information (full name and address)
- Business registration numbers
- Financial accounts used for transactions
- Tax identification numbers (TIN and/or VAT ID)
- The revenue amount generated by sale transactions
- Any fees, taxes or commissions withheld by the RPO
In the case of rental of immovable properties, the following information might be required in addition:
- Address of the rental property
- Property registration number
- Type of property listed
- Number of days during the property was rented
The DAC7 regulation has come into effect on January 1st, 2023; which means that RPOs will need to verify reportable sellers’ information through due diligence and report relevant information to tax authorities by December 31st, 2023. RPOs are directed to keep records for at least 5 years following the reporting period (not more than 10 years) and inform reportable sellers of the information they will be sharing with the tax authorities in order to comply with GDPR.
There are some necessary considerations on the part of companies regarding DAC7 reporting. For example, companies should evaluate the data they already collect and whether it’s enough, and if not, what needs to be done in order to collect required data. There might also be a need to put certain processes in place to conduct due diligence when verifying the data. This might require changes to terms and conditions, system changes or even changes to the business model itself.
How DAC7 handles exchange of information
As the mode of work develops along with societal changes, new regulations need to be put in place to make sure everything runs smoothly. For example, during the heights of the pandemic, a lot of online businesses thrived with their consumers already at home. However, if these businesses were to grow but avoid paying taxes, it could lead to a loss of tax revenue. It is estimated that there is already a tax gap around $166 billion from a VAT perspective and an almost equally big tax gap on the side of corporate taxes in the EU.
DAC7 is an amendment to the EU Directive 2011/16 on Administrative Cooperation in the field of taxation. This means that now, digital platforms are included in the directive regarding reporting of income earned by sellers registered on that platform.
The intention with DAC7 is to create tax transparency in the EU, and prevent tax evasion and avoidance. Fair taxation is aimed to be achieved by standardizing the requirements for digital platform operators in all EU states. This directive will make it easier for tax authorities to track taxable transactions and alleviate the administrative burden on RPOs that comes from keeping up with individual tax requirements for each EU member state.
Penalties for non-compliance
In order to ensure compliance with DAC7, EU member states will determine penalties for non-compliant RPOs. Each member state is free to determine the exact penalty. However, these penalties are required to be effective, discouraging and proportionate.
However, there is some information regarding penalties for non-compliance from some member states that can give us a general idea:
- Netherlands: Non-compliant RPOs might be penalized for up to €900,000 or faced with criminal prosecution.
- Czech Republic: The Ministry of Finance stated that there is a possibility of a penalty fine up to €60,000 in the event of non-compliance.
- Hungary: If RPOs fail to fulfill their obligations of due diligence and reporting to the National Tax and Customs Office, they might face a fine up to HUF 5,000,000 (approx. €12,600).
- Romania: Romanian Fiscal Procedure Code states that failing to comply with reporting rules for digital platforms might lead to fines ranging from RON 2,000 to RON 14,000 (approx. €400-2800). However, this might be subject to change as the implementation of DAC7 to national legislation is still not completed.
- Slovak Republic: The Ministry of Finance determined the fine for non-compliance to be €10,000 which can be imposed repeatedly.
RPOs are also obliged to close the accounts of sellers that fail to provide necessary information after 2 reminders.
Frequently asked questions
How does the DAC7 Directive affect cross-border digital services?
DAC7 will be applicable to digital platforms and their sellers who are tax residents in the EU, also those who have permanent business establishments in the EU. Digital platforms which are incorporated/managed in the EU are also obliged to comply by this directive. Sellers who rent out immovable properties located in the EU will also fall under “reportable sellers” under DAC7.
When does the DAC7 Directive take effect?
The DAC7 directive took effect on January 1 2023. This first reporting period ends on December 31st, 2023.
Which countries are subject to the DAC7 Directive?
All EU member states are subject to the DAC7 and must implement the directive to their legislation.
How much does it cost to comply with the DAC7 Directive?
It doesn’t cost money to comply with DAC7. However, the cost of installing necessary verification and data collection systems might change for each business.
Where can I find more information about the DAC7 Directive?
The original document of the Council Directive for DAC7 can be found at the official EUR-Lex website; which is run by the Publications Office of the European Union. The website provides the most comprehensive access to EU legal documents in 24 languages.
Where can I find the relevant forms for reporting under the DAC7 Directive?
Reporting forms for DAC7 will be published by tax authorities of each EU member state.
As with all new things, changes to laws and regulations might be hard to understand and adapt to. The key here is being informed by the right resources. Browse our services and products to see how we can help you conduct your business compliantly, no matter where you are located in the world. Keep watching Ruul Blog to stay informed on new developments in the digital business world.