DAC 7: New Tax Reporting Rules for Digital Platforms

Background and Objectives

On 22 March 2021, the Council of the European Union adopted Directive 2021/514/EU amending Directive 2011/16/EU on administrative cooperation in the field of taxation (‘DAC’). Referred to as ‘DAC 7’, the EU tax transparency and automatic exchange of information rules are further extended to digital platforms, and requires reporting platform operators to collect, verify and report certain information with respect to reportable sellers carrying on relevant activities through their online platforms.

DAC 7 is intended to assist Member States in keeping up with the challenges faced by the growth of the digitalised economy by introducing reporting obligations for platform operators and aims to crack down on lost tax revenues arising from unreported income earned through such platforms.

Reportable Content and Automatic Exchange of Information

The Directive is specifically targeted towards digital platforms that connect buyers and sellers for the purposes of carrying on a relevant activity in exchange for a consideration. Relevant activities include the sale of tangible goods, the rental of immovable property and transport, and the supply of personal services.

Digital platform operators are required to collect and report to the relevant tax authorities, information relating to the seller, specifically, name, tax identification number (‘TIN’), tax residence, and financial accounts which would need to be verified, periodically renewed and cross-checked against EU public databases.

As with previous iterations of DAC, DAC 7 acts as a tool for the automatic exchange of information, allowing the competent authorities of EU Member States to monitor the income derived by its residents through digital platforms. The competent authority receiving the data from the platform will share the information with other respective EU tax authorities via a mandatory automatic electronic exchange of information tool.

Implications and Challenges for Platform Operators

1. Compliance Burden

The Directive places a significant administrative load on platform operators, compelling them to develop and maintain comprehensive systems for data collection, verification and reporting.

2. Legal and Operational Adjustments

To meet the new requirements, operators must modify their legal and operational frameworks, which may involve considerable changes to their existing processes and systems.

3. Data Privacy Concerns

The collection and reporting of seller information may potentially raise data privacy concerns, requiring operators to ensure strict compliance with the applicable data protection regulations.

4. Cross-Jurisdictional Co-Ordination

The mandatory automatic electronic exchange of information necessitates enhanced collaboration between platform operators and tax authorities across different jurisdictions, particularly for joint audits and information sharing.

Reporting Deadline

A reporting platform operator must report the required information for a reportable period to the respective competent authority by no later than 31^st January of the year following the calendar year in which the seller is identified as a reportable seller. The first DAC 7 deadline across the EU was 31 January 2024. In certain EU Member States, this deadline was extended.