New Tax Transparency Rules for Digital Platforms introduced by DAC 7

While efforts to reach a global digital tax deal are making very slow progress and tensions over the tax liability of U.S. internet companies is marring a renewed EU-U.S. relationship, the Council recently adopted new tax transparency rules for digital platforms. A Directive called “DAC 7” (Directive 2021/514), which was adopted on 22 March by the EU Council, introduces specific reporting obligations for digital platforms. The overall aim of this Directive is to improve administrative cooperation in the field of taxation and address the challenges posed by the digital platform economy. 

In practice, DAC 7, which amends for the sixth time the Council Directive 2011/16, translates at EU level concepts already developed by the Organisation for Economic Co-operation and Development (OECD) and its Base Erosion and Profit Shifting Project (“BEPS Project”).  Action 12 of the BEPS Project in 2015 recommended that States should adopt an international standard of compulsory data reporting, the so-called "Mandatory Disclosure Rules", with the purpose of strengthening tax transparency and countering international abusive practices. Directive 2011/16 was introduced to render more efficient the exchange of information for tax purposes among Member States to the greatest possible extent, in order to assess tax violations. Since this time, Directive 2011/16 has undergone a series of amendments designed to take into account the evolution of the business models. The latest amendments aim to address the development of the digital economy. 

In the context of the rapid digitalisation of the economy over recent years, an increasing number of individuals and businesses are using digital platforms to sell goods or provide services, including across borders. A prevailing concern is therefore that profits obtained by such vendors through the conclusion of transactions on digital platforms may not be properly reported by the latter for tax purposes, particularly where platforms operate in several countries. Consequently, Member States may be not in a position to correctly assess income earned by the vendors selling goods or services through these digital platforms, including from a VAT perspective. 

In essence, DAC 7 will transfer the operators’ reporting obligations to digital platforms in order to help Member States in the fight against tax evasion. These reporting of activities would cover a wide range and type of earnings from, inter alia, the rental of real estate, the provision of personal services, the sale of goods and the rental of any means of transport. However, in order to reduce unnecessary compliance costs for the real estate sector, including hotels and tour operators, there should be a threshold of a number of rentals per property that will be out of the scope of reporting obligation. Safeguards will be introduced in order to avoid any circumvention to such exemption.   

DAC 7 should therefore allow national tax authorities to identify the income profits realised through digital platforms. In the interests of simplification, it is foreseen that the reporting will take place in only one Member State, according to a common framework adopted at EU level. In addition, platforms located outside the EU will have to report to the authorities of their home country, which will be responsible for exchanging information with EU Member States.

Furthermore, Member States will be required to automatically exchange data received from the platforms with another country in a short timeframe (within one month following the reporting), through a common communication network that has already been established. 

The reporting obligation will include information relevant to the vendor, i.e. name, date of birth, registered office, Taxpayer Identification Number (TIN), Value Added Tax (VAT) number and business registration number, as well as each Member State of residence of the vendor. In addition, the obligation will include information related to the profits realised on the digital platform, such as the revenues received, the account number where the monies are credited, the address of the property being rented out and the number of days for which it was rented out and type of property.

In terms of deadline, this information should be reported by 31 January of the year following the relevant calendar year. 

Next Steps

DAC 7 requires Member States to adopt and publish, by 31 December 2022, the laws, regulations and administrative provisions necessary to comply with the Directive, with the new rules due to enter into effect on 1 January 2023.

With regard to applicable penalties in case of failure to report, each Member State has the discretion to lay down the relevant measures for their country provided that these penalties are effective, proportionate and dissuasive. 

For further information contact: Giuliana Polacco and Annarita De Carne

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