Since its inception Council Directive 2011/16/EU on administrative cooperation in the field of taxation has been the subject of amendment on five separate occasions. The amendments have facilitated the exchange of information between tax authorities and implemented new reporting obligations such as country-by-country reporting for taxpayers (‘DAC4’) and mandatory disclosure rules for intermediaries (‘DAC6’).
To improve tax compliance of digital businesses and coordinate the work of EU tax authorities, the new tax reporting regime will be introduced by the EU Directive DAC7 as from 1 January 2023. The new framework will affect not only global companies such as Apple, Amazon, Google, AirBnB, but also smaller traders that operate on digital platforms and distribute products or services of other retailers in the EU market.
Anna Vilka, Baker Tilly Baltics tax specialist, points out that in Latvia DAC7 will be introduced by the amendments in law On Taxes and Fees, which are expected to be published until the year-end. While waiting for more specific national instructions on DAC7 we suggest reading the overview of our colleagues Baker Tilly Ireland, who advices to evaluate your company’s operations as follows:
- Determine whether your company or your customers are subject to DAC7 (i.e. “fall” under DAC7 regulation);
- Analyse whether your company is currently collecting a sufficient amount of the data required by DAC7;
- Analyse the procedures and processes required for data processing to determine whether everything is adapted to the new DAC7 requirements or whether there will be legal or technical problems with their fulfilment. It also needs to be evaluated and understood already which country to opt for your company’s tax reporting requirements under DAC7.
Alma O'Brien from Baker Tilly Ireland informs that the sixth amendment now comes in the form of Council Directive (EU) 2021/514 ('DAC7') which aims to strengthen administrative cooperation between Member States and introduce new reporting obligations for digital platforms. The improvements in the area of EU administrative cooperation include:
- new protocols on the exchange of information regarding group taxpayers,
- new rules for carrying out simultaneous controls and allowing officials of a Member State to be present in another Member State during an enquiry, and
- a framework for joint audits to be conducted by tax authorities or two or more EU Member States.
Ireland has recently introduced this into its domestic legislation in the form of Finance Bill 2021 (which is shortly due to be enacted).
Ireland is a key location for digital platforms with most global players including Apple, Google (Alphabet), Microsoft, Amazon, AirBnB and Facebook established in Ireland. The success of Ireland in attracting foreign direct investment in the form of digital platform companies is evident with the World Trade Organisation (WTO) ranking Ireland as the seventh largest exporter of commercial services in its recent annual report on global trade for 2020. For this reason, it is anticipated the new reporting requirements will have a significant impact on a number of businesses in Ireland. DAC 7 will place a large burden on such businesses with significant due diligence and reporting obligations.
This article will consider the reporting obligations for digital platforms from the perspective of the 5Ws … Who, What, Where, When and Why?
Who must report under DAC7?
The reporting obligation applies to certain ‘Operators’ of digital platforms that allow sellers to be connected with other users for the provision of the following:
(a) the rental of immovable property, including both residential and commercial property, as well as any other immovable property and parking spaces;
(b) a personal service (time or task based carried out online or physically offline after having been facilitated via the platform)
(c) the sale of goods;
(d) the rental of any mode of transport.
A ‘Platform’ in this context means any software, including a website or a part thereof and applications, including mobile applications, accessible by users and allowing users to be connected to other users for the purpose of providing such services. However, certain digital platforms may be excluded on the basis the software solely provides for any of the following:
(a) processing of payments in relation to in-scope activities;
(b) provide sellers the opportunity to list or advertise activities;
(c) redirect or transfer users to other platforms
A ‘Platform Operator’ must have a qualifying nexus with the EU in order to be obligated to report under DAC7. The reporting obligation as a result applies to Platform Operators who are any of the following:
(a) resident for tax purposes in a Member State,
(b) incorporated under the laws of a Member State;
(c) have their place of management (including effective management) in a Member State;
(d) have a permanent establishment in a Member State and are not a Qualified Non-Union Platform Operator;
(e) are neither resident for tax purposes, nor incorporated or managed in a Member State, nor have a permanent establishment in a Member State, but facilitate the carrying out of activities by sellers or the rental of immovable property located in a Member State and are not a Qualified Non-Union Platform Operator.
A ‘Qualified Non-Union Platform Operator’ means a Platform Operator that is resident, incorporated or has its place of management (including effective management) for tax purposes in a jurisdiction which has entered into an automatic exchange of information agreement (AEOI) between the competent authorities of all Member States and provides for the exchange of information regarding reportable activities the Platform Operator facilitates between users and sellers.
What must be reported under DAC7?
Platform Operators are required to collect and report extensive information relating to ‘Reportable Sellers’ on their platform. A ‘Reportable Seller’ means any active seller on the platform that is resident in a Member State or that has rented out immovable property located in a Member State. The reporting period for which the annual report must be made is the calendar year (January – December).
The information on Reportable Sellers that a Platform Operation must collect and verify through due diligence measures includes the following:
- names;
- addresses;
- tax information numbers;
- dates of birth;
- VAT identification numbers;
- business registration numbers,
- information in respect of any permanent establishments in the EU;
- financial account Identifiers;
- the address and land registration number of each property listing;
- the number of days each property listing was rented;
- total consideration paid during each quarter; and
- any fees, commissions or taxes withheld or charged by the platform during each quarter.
Under DAC7, the reporting platform operator must provide a copy of the information to each individual Reportable Seller before it is reported to the relevant tax authority.
However, Platform Operators are not required to report on certain sellers who are any of the following:
(a) A governmental entity;
(b) An entity the stock of which is regularly traded on an established securities market;
(c) An entity for which the Platform Operator facilitated more than 2000 transactions for the rental of immovable property during the reporting period; or
(d) For which the Platform Operator facilitated less than 30 transactions related to the sale of goods and for which the total amount of consideration paid or credited did not exceed €2,000 during the reporting period.
Where must reports be made under DAC7?
A Platform Operator must comply with DAC7 reporting obligations in the Member State where it has a qualifying nexus i.e. tax residence, incorporation, place of management or permanent establishment. The tax authorities of the relevant jurisdiction must assign a unique ‘Platform Operator ID’ to identify the Member State where the reporting obligation exists.
A Platform Operator with a qualifying nexus in two or more Member States may elect to register for DAC7 reporting purposes in one designated Member State. For Irish reporting purposes, the Platform Operator must notify the Revenue Commissioners (Irish Tax Authorities) in writing of any such election.
A non-EU Platform Operator which does not have a nexus with any such Member States but facilitates relevant transactions for Reportable Sellers must register with the tax authorities of a Member State for reporting purposes.
When should reports be made under DAC7?
Member States are required to transpose DAC7 into national legislation on or before 31 December 2022. The reporting obligations will apply from 1 January 2023 and first reports should be filed on or before 31 January 2024.
For Irish reporting purposes, the failure to file a report by the deadline will result incur a penalty of €19,045 for the Platform Operator and an additional penalty of €2,535 for each day a report is outstanding.
Reportable Sellers are required to provide Platform Operators with such information as is necessary for that reporting platform operator to comply with the reporting obligations imposed. Where the information is not provided, the account of the reportable seller with the Platform Operator must be closed until the necessary information is obtained.
Why has reporting been introduced under DAC7?
The new rules aim to provide the tax authorities of EU Member States with the information necessary to ensure the enforcement of tax rules regarding commercial activities facilitated through intermediary digital platforms. In particular, the reporting obligations have been implemented to focus on the evasion of income taxes and VAT by non-compliant sellers operating via digital platforms.
The loss of tax revenues and non-compliance of sellers on digital platforms has been highlighted at a global level by the Organisation for Economic Co-operation and Development (OECD). As a result, DAC7 generally follows the principles of the OECD ‘Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy’.
Finally, the introduction of standardised reporting requirements should reduce the administrative burdens on digital platform operators which are required to assist with various information requests from tax authorities in multiple territories relating to users of their platforms.
Standardised reporting should come as welcome news to the growing number of digital platform based businesses established in Ireland which facilitate transactions across the EU market.
Actions required now
- Determine If you or your clients are within the scope of DAC 7
- Analyse if there are any gaps in data currently collected against the requirements of DAC. The legal implications of collecting and utilising this data will also need to be considered and the effect if any on contractual agreements
- Plan – consider processes and procedures required to collect and review data and assess if any systems need to be updated or reconfigured to meet the new requirements
Baker Tilly Baltics is ready to be involved in this process an if you have any questions regarding the reporting obligation or the compliance of your company's business arrangement with DAC7, please contact our tax specialist Anna Vilka, e-mail: anna@bakertilly.lv ; +37167321000
Article by: Alma O'Brien
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