On 22 March 2021, the EU Council unanimously approved the adoption of the so-called DAC7, the sixth amendment to EU Directive 2011/16/EU on administrative co-operation in the field of taxation (“DAC”). The draft DAC7 was previously agreed by Member States in November 2020.
The primary focus of the changes being introduced by DAC7 are to address the tax challenges posed by the digital platform economy through the introduction of new reporting obligations for digital platform operators and exchange of information rules for tax authorities. In addition a number of other amendments to the DAC, not limited to digital platforms, are also to be introduced to strengthen administrative cooperation.
Some of the key changes to be introduced by DAC7 include:
- Reporting obligations, in respect of sellers carrying out relevant activities, for operators of digital platforms from 1 January 2023 and mandatory exchange of reported information between tax authorities.
- The inclusion of a codified definition of ‘foreseeable relevance’ as the standard for exchange of information on request under DAC.
- The inclusion of ‘royalties’ within the categories of income subject to mandatory exchange of information.
- A new legal framework for tax authorities of two or more Member States to conduct joint audits from 1 January 2024.
New Reporting Obligation for Digital Platforms
One of the main changes being introduced by DAC7 is the introduction of a new reporting requirement for operators of digital platforms located both inside and outside the EU which have a nexus with the EU.
Entitles Within Scope
The reporting obligation applies to operators of digital platforms which allow certain sellers to be connected to other users in order to carry out relevant activities. The activities within scope include: (i) the rental of immovable property; (ii) the provision of personal services; (iii) the sale of goods; and (iv) the rental of any mode of transport.
Operators of these platforms will be required to collect and verify certain information on the sellers using their platforms for relevant activities and report it to the relevant tax authorities. The information, including details of revenues generated, will then be automatically exchanged with the tax authorities of other Member States with the stated aim of enabling tax authorities to assess income taxes and VAT due correctly.
The reporting digital platform operator will need to carry out specific due diligence procedures over sellers in order to collect and verify the information necessary for the purposes of meeting its reporting obligation.
Once adopted by Members States, operators of digital platforms within scope will be required to:
- Register as a reporting entity in a Member State.
- Collect and verify information on certain sellers using their platforms.
- Report it to the relevant tax authorities.
Introduction of Definition of ‘Foreseeable Relevance’ to Clarify the Standard for Exchange of Information on Request
Under the terms of the DAC Member States are obliged to share information which is ‘foreseeably relevant’ to the administration and enforcement of the domestic tax laws of the Member States. Prior to DAC7, the DAC did not contain a definition of ‘foreseeably relevant’. The courts interpreted it as meaning information that it is not “manifestly devoid of any foreseeable relevance”.
With a view to providing legal certainty, DAC7 introduces a definition of ‘foreseeable relevance’ noting that requested information will be ‘foreseeably relevant’ where “the requesting authority considers that, in accordance with its national law, there is a reasonable possibility that the requested information will be relevant to the tax affairs of one or several taxpayers, whether identified by name or otherwise, and be justified for the purposes of the investigation”.
Next Steps and Timeline For Digital Platform Reporting
The new rules for must be implemented by Member States in domestic legislation by 31 December 2022 and will be applicable from 1 January 2023. The first reporting of data will take place by 31 January 2024.
Taxpayers which are within scope of the new digital platform operator rules should assess what systems and technology changes may be required to ensure that they can comply with the standard of reporting required.