DAC 7 – Reporting Obligations for Digital Platforms

Introduction

The digital economy has rapidly grown in the last few years. The blossoming of the digital platform economy and the cross-border reach of platform operators in facilitating the connection services between the underlying suppliers registered on the platform, and customers created unseen challenges. 

One of those challenges is the cross-border fluctuation of considerations transferred to the platform or the seller. Monitoring the income obtained by the online merchants operating through the platform poses a continuous challenge for the Member States’ tax authorities. 

The Organization for Economic Cooperation and Development(OECD) on June 2020 published the so-called Model Rules for Reporting by Platform Operators concerning Sellers in the Sharing and Gig Economy. These guidelines paved the way for introducing similar rules across the globe. 

The European Council’s Directive, 2011/16/EU on Administrative Cooperation in the field of taxation, laid the foundation for introducing different kinds of reporting obligations of economic operators, mainly guided by a vision to enhance the quality of cooperation and automatic exchange of information between member states’ tax administrations. 

In March 2021, Council Directive 2021/514/EU  was published, colloquially known as the DAC 7 Directive. This Directive represents the 6th amendment to the European Council Directive on Administrative Cooperation and Automatic Exchange of Information in the Field of Taxation.

The DAC 7 Directive introduced special reporting requirements for the digital platform operators operating within the EU common market. One of the goals of the Directive is to establish a successful system that will permit tax authorities of the Member States to have transparency and efficiency in monitoring the operations of digital platforms and online merchants conducting business thanks to their intermediation services. 

The Directive imposes obligations on platform operators that are in scope to collect, verify, transfer, and store relevant information as indicated in the Council Directive. 

Regulatory Scope

The Directive is introduced from the perspective of indirect and direct taxes as the legislative tool to establish EU Member States’ interconnected automatic exchange of data related to reportable platform operators and sellers operating through those platforms. 

The Directive introduced reporting requirements on a few groups of digital platforms that facilitate the performance of the relevant activity by online merchants to customers. 

Important to notice is that not all types of digital platforms are under the scope of DAC 7 reporting requirements, as well as not all sellers registered on the platform. 

Platform means any software, including a website or a part thereof, and applications(mobile, desktop) accessible by users that allow sellers to be connected with users to carry out relevant activity directly or indirectly.

The reporting provision of EC DAC 7 covers those types of digital platforms that open a way for sellers to be connected and to receive consideration from customers for the following relevant activities: 

• The sale of goods( e-commerce platforms);
• The rental of immovable property( accommodation);
• The provision of personal services( time or task-based work carried out online or offline);
• The rental of any mode of transport.

These reportable platform operators, the company behind the platform that contracts with reportable sellers and users, must prepare and submit yearly DAC 7 returns. 

To be able to prepare and submit requested reports, the reportable platform operator first needs to register in the elected Member State for the DAC 7 reporting mandate. 

Reporting Platform Operators 

EU Reportable Platform Operators

The legislation stipulates that the reporting platform operator should register in the Member State where it has: 

• Tax Residency or;
• Incorporated under the laws of a Member State;
• Has place of management(including effective management) in a Member State;
• Has permanent establishment in a Member State, and it is not a Qualified Non-EU Platform Operator.

If the reportable platform operator fulfills the following conditions in multiple Member States, it can choose the reporting country. 

Non-EU reportable Platform Operator 

The foreign reportable platform operator is if any of the following conditions are met: 

• it does not fulfill any of the conditions related to the EU reportable platform operator;
• it is not a Qualified Non-Union Platform Operator;
• It facilitates the carrying out of the following:
  • a relevant activity by a reportable seller or
  • a relevant activity involving the rental of immovable property in the Member state.

Reportable Platform Operators’ Duties under DAC 7(non-exhaustive list)

The DAC 7 mandates the following operations to be performed by the reportable platform operators:

• To register for DAC 7 reporting obligation;
• To collect mandatory identification information about each reportable seller;
• To perform traceable due diligence procedure of identification information of each reportable seller;
• To validate the obtained identification information;
• To manage and verify all income-related information of reportable sellers made via the facilitation service of the digital platform in question.

Reportable Sellers 

Based on the  Council Directive 2021/514/EU, reportable sellers are legal or natural persons who perform relevant activity towards customers thanks to the facilitation services provided by the reportable digital platform. 

The reportable sellers must provide verified, accurate, and up-to-date identification information to the reportable platform operator. The identification information of online merchants is detrimental to the mandated compliance obligations of each reportable platform operator. 

If the platform operator submits inaccurate ID information of the reportable seller, it could result in an offense and a fine. 

The reportable sellers should provide the reporting platform operator with at least the following identification information: 

Natural person’s 

• First and last name; 
• Primary Address;
• TIN or TINs issued to that seller, including each Member State of issuance; 
• In the absence of TIN, the place of birth of the seller;
• VAT ID when possible;
• Date of birth.
  

Legal persons 

• Legal name;
• Primary Address; 
• Details for each reportable seller of each Member State where relevant activities are carried on through a permanent establishment in any Member State, if possible;
• TIN or TINs issued to that seller, including each Member State of issuance; 
• In the absence of TIN, the place of birth of the seller;
• VAT when possible;
• Business registration number.

The reportable seller should remember the importance of its place of residence for tax purposes. Defining the place of residence can sometimes be confusing for the online merchant and implicitly for the reporting platform operator during the due diligence process. 

Reportable sellers should always remember that the tax residence must be accurately provided to the platform operator. If it changes, it must be promptly updated within the personal business profile of the seller on the platform.

Following the DAC 7 provisions related to the seller’s identification information, it is necessary to emphasize the importance of providing the platform operator for DAC 7 reporting purposes valid, accurate, and up-to-date information. 

When the reportable seller has more than one TIN, it’s recommendable for DAC 7 reporting reasons to submit this information to the reporting platform operator and the information about the Member States of issuance.

Let’s not forget one of the main reasons why the DAC 7 came into existence: the possibility of automatic exchange of tax-related information between tax administrations of all Member States. In plain language, it means that if a reportable seller operates in more than one Member State, through different establishments, or using other TINs for various reasons, the tax authority of the taxable country will have additional reason to be aware of the tax registration of the merchant.

It should be noted that the importance of the DAC 7 Directive is founded on the possibility of Member States’ tax authorities having a more precise dashboard on the revenue of reportable sellers, declared income in their OSS, domestic returns, and tax paid to the receiving tax authority. 

DAC 7 Return 

The reportable platform operator collects identification information of reportable sellers during the reportable period, and it’s obliged to perform due diligence procedures within the reporting period, which closes on December 31 of the reporting year. 

The verified identification information of the reportable sellers, alongside the income information of each reportable seller(following the schema of how it should be provided), is submitted as a DAC 7 return to the elected Member State. 

The DAC 7 yearly return should be submitted to the elected Member State by January 31 following the reporting period. 

The next step would be for the tax administration of the receiving Member State to transmit all DAC 7 returns received from the reportable platform operators to the European Commission central database. 

The deadline for the Member State to submit the returns is February 28 of the year following the reportable period. 

The DAC 7 return, besides the ID information of the reportable sellers, includes at least the following income base information of each reportable seller: 

• Total consideration paid or credited is calculated quarterly using the yearly reportable period;
• Amount of relevant activities quarterly calculated;
• Fees, commissions, or taxes withheld or charged by the reporting platform operator during each quarter of the reportable period;
• Financial account identifier, if available.

Additional income-based information should be provided to the platform operator for the reportable seller that rents immovable property. 

Penalties 

The Member States have a discretionary right when deciding what penalty should be imposed on the non-compliant reportable platform operator. The range of penalties is defined quite differently between Member States. 

Reportable platform operators can expect penalties for the following cases of DAC 7 non-compliance: 

• Submitting DAC 7 return late;
• Submitting the incorrect return, fragmented return, lacking relevant identification information of reportable sellers.