DAC7, the Seventh Directive on Administrative Cooperation, is a critical milestone in the European Union’s efforts to adapt to the evolving digital economy landscape. It emphasises the need for enhanced tax transparency, ensuring that all businesses, including those in the digital domain, pay their fair share of taxes.
What is DAC7?
DAC7 stands for the Seventh Directive on Administrative Cooperation. It was adopted by the European Council in 2021 to enhance tax transparency and ensure fair taxation in the digital economy. DAC7 extends the EU’s tax transparency rules to digital platforms.
The essence of DAC7 is the promotion of tax transparency and ensuring comprehensive tax reporting. This is in line with the broader EU goals of ensuring fair taxation and minimising the room for tax evasion.
DAC7 offers a clear definition of what constitutes a digital platform. It defines it as any software, be it a website or mobile application, that allows sellers to interface with other users for the sake of conducting relevant commercial activities. It encompasses platforms such as online marketplaces, where interactions occur for product or service sales,.
What does DAC7 mean for marketplace founders?
For marketplace founders, DAC7 implies the requirement to report income earned by sellers on their platforms. This is aimed at curbing tax evasion. Founders must be proactive in collecting information from sellers and ensuring timely and accurate reporting to relevant tax authorities.
DAC7 is more than just a piece of tax legislation for the EU. For marketplace founders, it represents a fundamental shift in the way they conduct business, particularly concerning transparency and taxation.
Marketplace founders need to be well-acquainted with their new responsibilities under DAC7. Given the directive’s provisions, it becomes paramount for founders to maintain meticulous records of income earned by sellers on their platforms. This isn’t just about ensuring fair taxation; it’s also about staying compliant and avoiding potential legal pitfalls.
The reach of DAC7 is vast. Whether you’re a giant like Amazon or eBay, or platforms dedicated to freelance services like Upwork or Fiverr, or even ride-sharing platforms like Uber, you’re under the DAC7 umbrella. Each transaction, every commission, must be accurately documented and reported.
What do you need to report under DAC7?
Under the provisions of DAC7, marketplace operators are obligated to provide a comprehensive set of details to the tax authorities. Specifically, operators must report the following information:
Seller’s identity information
This encompasses the basic identification details of the seller, including their full name, primary address, and date of birth.
EU member state of residence
It’s important to specify the seller’s member state of residence as tax obligations and reporting requirements might differ from one state to another.
Financial account identifier
This relates to the details of where the money is transferred to or from. It could be a bank account number, an e-wallet, or any other form of financial account identification.
Tax Identification Number (TIN)
This is a unique identifier that is assigned by tax authorities to individuals and entities. It helps in tracking tax obligations and payments for the respective sellers.
VAT or business registration numbers
For sellers that are registered businesses or traders, their VAT or business registration number would be pertinent. Private individuals, or those not engaged in business per se, would not possess this.
Consideration details
‘Consideration’ in this context refers to the total payment made to the seller for goods or services provided through the platform. It is crucial to report the full amount credited or paid annually.
Withheld amounts
Any amounts that the platform has retained, be it for fees, commissions, or taxes, need to be detailed out. This gives clarity about gross vs. net earnings of the seller.
Address of immovable rental property
This is particularly relevant for platforms that deal in property rentals, be it for vacation purposes like Airbnb or long-term rentals. The physical address of the property in question provides context for local tax obligations.
Who is obliged to comply with DAC7?
DAC7 has a wide reach, aimed at ensuring transparency in the taxation of revenue generated via digital platforms. Even if a platform is headquartered outside of the EU, it falls under DAC7’s obligations if it does business with sellers based in EU member states or serves consumers within the EU.
Types of platforms covered
Goods sales platforms
Platforms like eBay or Amazon, which facilitate the direct sales of goods to consumers, are affected by DAC7. They act as marketplaces where sellers can list products, and buyers can make purchases.
Rental platforms
Booking platforms for immovable property, such as Booking.com or Airbnb, are also subject to DAC7. This includes both short-term vacation rentals and longer-term leases.
Service platforms
Platforms like TaskRabbit or Uber, which allow individuals to offer personal services – from house chores to transportation – come under the purview of the directive.
Transportation rental platforms
Any platform facilitating the rental of transportation modes, such as cars, boats, or bicycles, must comply. Examples include Click & Boat, where users can rent boats, or Turo, a car rental platform.
Second-hand goods platforms
Platforms like Vinted, where individuals can buy or sell second-hand items, are also impacted. These platforms provide an online marketplace for users to carry out such transactions.
Financial transaction platforms
DAC7’s reach also extends to platforms involved in financial transactions, including e-money platforms and certain cryptocurrency platforms. This emphasises the broad scope of the directive.
How does DAC7 apply to a platform located inside of the EU?
The DAC7 directive primarily affects platforms operating within the EU. This encompasses platforms that are tax residents (i.e., based in the EU) and platforms outside the EU but have sellers operating within EU member states.
For platforms within the EU, they must report the earnings of all sellers, irrespective of the seller’s location or customer’s location.
How does DAC7 apply to a platform located outside of the EU?
Platforms outside the EU must report the earnings of sellers located in the EU or sales made to customers in the EU. Regardless of where your platform’s headquarters lie, DAC7 might still influence your tax reporting responsibilities.
Two critical elements dictate this: the location of your sellers and the location of your buyers. If your sellers are based in the EU or if sales are conducted with EU customers, then DAC7 becomes pertinent to your platform.
How does DAC7 apply to a platform located in the UK?
Post-Brexit, the UK is not bound by EU directives. However, if the platform has sellers in the EU or serves EU customers, they must comply with DAC7’s reporting requirements.
However, the UK is crafting its own set of rules. These are largely in sync with DAC7, though with nuanced differences. As per the timeline, while DAC7 became a part of national laws across EU countries by January 1, 2023, the UK will usher in its version with a slight delay. The UK’s rules become effective from January 1, 2024, and platforms will make their inaugural reporting under this system in 2025.
Until that time arrives, it’s imperative for UK-based platforms that collaborate with sellers from the EU to pick an EU member state of their preference for registration and reporting, ensuring they toe the line of compliance.
How does DAC7 apply to a platform located in the US?
A US-based platform will need to adhere to DAC7 regulations if they have sellers in the EU or if they serve EU customers.
If you are a US-based platform with business ties to the EU—whether through sellers or customers—you cannot substitute your 1042-S reporting for DAC7 obligations. The two are distinct, serving different purposes and stakeholders. Ensuring compliance with both sets of regulations is paramount, ensuring transparency in your operations both domestically and internationally.
What types of platforms are excluded from DAC7?
While DAC7 is a comprehensive directive aimed at enhancing tax transparency for digital platform activities, it acknowledges the varied nature of online services and provides exemptions for certain types of platforms. Here are some of the platforms and scenarios that are excluded from the DAC7 reporting obligation:
Platforms focusing on listings or advertising
If a platform primarily serves to list or advertise goods or services but doesn’t facilitate the actual sale or transaction, it’s exempt. An illustrative example here is Facebook Marketplace, where users can list items for sale, but the platform itself doesn’t typically handle the transaction process.
Payment processors
Platforms that solely handle payment processing are also excluded from DAC7. This means renowned payment processors such as PayPal and Stripe are not considered as digital platforms under this directive. They are primarily focused on facilitating payments rather than the broader spectrum of transactions the directive targets.
Stock-listed sellers
Sellers that have listings on stock exchanges are also exempt. This recognises the different regulatory landscape these entities already navigate.
Advertising platforms
Platforms that offer space or mediums for advertisements without being involved in any transaction process that may follow are also exempt. For instance, WhatsApp, where users might advertise services informally without any payment system integrated into the platform, falls under this category.
Regulated crowdfunding services
Platforms that facilitate crowdfunding, provided they are regulated and don’t take part in the broader e-commerce ecosystem, are also outside the scope of DAC7.
Additional exclusions
While DAC7 lays out a clear framework for reporting requirements on digital platforms, it also acknowledges the practical implications of casting too wide a net. As a result, the directive offers exemptions for specific types of providers:
Casual sellers
A casual seller refers to an individual or entity with a limited transaction frequency and volume on the platform. To be classified as such, the seller should have fewer than 30 sales transactions in the reportable period (12 months of a reportable calendar year) and the total consideration for these sales should not exceed 2,000 euros.
High-frequency real estate renters
These are entities, such as hotel chains or tour operators, that have a high frequency of room or property rentals. Their business model inherently involves multiple transactions, which could make reporting under DAC7 excessively cumbersome.
Local tax regulation
While DAC7 provides a broad framework, local nuances do exist. The specific tax regulations of individual EU member states might have additional or differing requirements.
Even if DAC7 exempts certain sellers, it’s crucial for marketplace operators to familiarise themselves with the specific tax laws of the member states they operate in. There might be scenarios where local tax regulations mandate reporting on sellers that DAC7 exempts.
What is the timeline for DAC7?
The Seventh Directive on Administrative Cooperation, commonly known as DAC7, was officially adopted in 2021. This marked the beginning of a transitional phase for member states and businesses to prepare for the incoming changes.
Every directive by the EU requires member states to transpose, or integrate, its provisions into their national legislation. For DAC7, member states were given a deadline until December 31st, 2022. By this date, every EU country was expected to have updated their national laws in accordance with the directive.
Starting January 1st, 2023, the directive formally came into effect. From this date onwards, platforms and marketplaces became obligated to record and monitor the revenues and other pertinent details of sellers to ensure compliance when reporting time arrives.
All data recorded in 2023, the first year of DAC7’s implementation, will serve as the basis for the inaugural reports under this directive. Platforms and marketplaces must collate this data, ensure its accuracy, and prepare for the reporting phase.
The first round of reporting under DAC7 is set for January 31st, 2024. By this date, platforms should submit their reports detailing the 2023 data to the designated authorities in the EU member state they are primarily reporting to.
What are the penalties for failure to comply with DAC7?
Marketplace operators who fail to adhere to DAC7’s reporting requirements can face significant financial repercussions. Depending on the EU member state’s specific regulations, fines can range from 1,800 to 3,800 Euros. This fine can escalate further for recurring offenses, potentially reaching up to 6,000 Euros. The exact amount and criteria for these fines will vary based on local jurisdiction.
It’s not just about collecting and reporting data. Marketplace operators also bear the responsibility of ensuring that their providers furnish the necessary information. Should a provider fail to provide the requisite details, the operator must send out two reminders. These reminders act as a means to ensure all parties involved are aware of their obligations.
DAC7 also has provisions to deal with unresponsive or non-compliant sellers. If a seller does not provide the needed information within 60 days of the second reminder, marketplace operators are obligated to take stringent action by closing the seller’s account. This step ensures that marketplaces are not harbouring non-compliant entities, reinforcing the importance of tax transparency.
What steps can be taken to prepare for the DAC7 obligations?
Educate yourself
Stay informed about DAC7 and its implications.
Data collection
Implement processes to gather the required data from sellers.
Technology
Invest in technology solutions that automate reporting processes.
Legal consultation
Engage with tax experts or legal consultants familiar with DAC7.
Communication
Inform your platform’s sellers about the changes and what information they will need to provide.
Stay updated
Tax regulations can evolve, so continuously monitor any changes to ensure compliance.
Summary
The DAC7, or the Seventh Directive on Administrative Cooperation, represents a significant leap by the European Union to address tax transparency challenges in the rapidly advancing digital economy. Instituted in 2021, this directive primarily targets marketplace platforms, seeking to curtail tax evasion by ensuring that all revenues generated via these platforms, whether they are based inside or outside the EU, are accurately reported and taxed.
This initiative covers a wide spectrum of online platforms, from goods sales and service offerings to financial transaction sites. In essence, the directive necessitates marketplace founders to adopt a meticulous approach in collecting, recording, and reporting seller incomes, under the threat of substantial penalties for non-compliance.
Preparatory steps like investing in technology, regular consultations with tax professionals, and consistent communication with platform users are pivotal for adherence. The broader message of DAC7 resonates with the EU’s commitment to a fairer tax system, emphasising that in the age of digitalisation, no business should evade its tax responsibilities.