New reporting obligation for digital platform operators

About DAC7

DAC7 (i.e. Directive 2021/514/EU) is a new addition to the already existing Directive 2011/16/EU on administrative cooperation in the field of taxation. The new reporting obligation obliges a digital platform operator to collect certain financial information relating to the digital platform sales and carry out a certain due diligence regarding the sellers/suppliers on the digital platform. This information must be reported by the digital platform operator to the tax authorities and to the relevant seller/supplier.

Reasons for introducing DAC7 and the consequences

Economic activities carried out via a digital platform are less easy to trace for tax authorities. Furthermore, there is generally no obligation for digital platform operators to automatically inform tax authorities of the income earned by sellers/suppliers selling or offering goods and services through the digital platform. Tax authorities do not always have the resources to obtain the necessary information to control the information given to them. This is more prominent with cross-border cases. The consequence is that there is a risk of insufficient taxation resulting in a so-called ‘tax-gap’.

Considering the challenges posed by the increasing digital economy, the European Commission considers a new step in international cooperation and information exchange to be necessary. The aim is to provide tax authorities more options to determine whether revenues from sales or services via digital platforms are properly reported. It is important for the economic well-being of an EU Member State that the government has the correct information to levy taxes. DAC7 therefore fits into the broader context of the pursuit of fairer taxation and transparency in Europe.

To whom does it apply?

The obligation applies to digital platform operators located both inside and outside the EU through whose digital platform certain transactions and services are concluded. DAC7 defines a digital platform as any form of software, website, app or otherwise arrangement that connects sellers/suppliers with users and enables them to perform relevant activities for a certain fee. This is the case when the seller/supplier of relevant activities is a resident of an EU Member State or rents out real estate located in an EU Member State.

Software that solely concerns the processing of payments for relevant activities, the advertising of relevant activities or the referral of users for relevant activities is not considered a digital platform for the application of DAC7. The relevant activities covered by DAC7 are:

• the rental of real estate;
• the provision of personal services;
• the sale of goods;
• the rental of transport/vehicles.

A digital platform operator is the party that makes a digital platform available to sellers/suppliers for relevant activities. To fall under the scope of DAC7, EU nexus of the digital platform operators is required. This is the case when:

• the digital platform operator is a (tax) resident of an EU Member State;
• the digital platform operator is established under the law of an EU Member State; or
• the digital platform operator has a place of effective management within the EU and/or has a permanent establishment within the EU.

The same obligations may also apply to non-EU platform operators if they facilitate relevant activities of EU sellers/suppliers or facilitate the rental of real estate located in the EU.

According to DAC7, sellers/suppliers are resident in an EU Member State if their primary address is based in an EU Member State or if they have a permanent establishment in an EU Member State. In addition, sellers/suppliers may also have EU nexus in case they are VAT registered in an EU Member State.

To limit unnecessary compliance costs, DAC7 contains several thresholds. For example, a digital platform operator does not have to report information about sellers/suppliers for which the digital platform facilitated less than 30 relevant activities for which the total amount of consideration paid or credited did not exceed EUR 2,000, the so-called ‘small sellers/suppliers’.

How does DAC7 impact digital platform operators and sellers/suppliers?

A digital platform operator must:

1. Collect certain (financial) information about the digital platform sales (including an overview of the revenue that a seller/supplier earns from the relevant activities, commissions and fees that the digital platform charges to sellers/suppliers and, in the case of rental of immovable property, the address of the rented location and number of rental days); and
2. Perform a certain due diligence regarding the sellers/suppliers of services on the digital platform (including assessing administrative data of the seller/supplier for reliability, including name and address details, identification numbers with tax authorities in the EU Member States, VAT registration numbers, the presence of permanent establishments in EU Member States and, in the case of immovable property, the relevant address).

This information must be reported by the digital platform operator to the tax authorities and to the relevant seller/supplier. If the information is not provided, it is left to the EU Member States whether to impose a fine. It should be noted that DAC7 may have an impact not only on digital platform operators but also on sellers/suppliers, as it will bring to light potentially new information about sellers/suppliers, which may result in an increase in tax audits.

Taxation

The receiving EU Member State can use the information to levy any kind of tax. This does not only concern income tax or profit tax, but for example also a local tourist tax.

Entry into force

EU Member States are obliged to implement DAC7 rules no later than by 31 December 2022. In the Netherlands it is therefore envisaged that this proposed legislation will enter into force on January 1, 2023. The very first year in which digital platform operators must start exchanging information about the sellers/suppliers is 2023. The information about this first year must be exchanged by 31 January 2024 at the latest.