The constant expansion of the digital economy leads automatically to legal changes and adjustments. With this in mind the 6th Amendment to the EU Mutual Assistance Directive, also known as DAC7, is an important step to improve tax transparency and compliance.
Digitalisation and its side effects
The steady growth of the digital economy leads automatically to legal changes and adjustments. With this in mind the 6th Amendment to the EU Mutual Assistance Directive, aka DAC7, is an important development to improve tax transparency and compliance. DAC7 strengthens the administrative cooperation of EU tax authorities by introducing new due diligence and reporting obligations for operators of online platforms. Therefore these obligations include the automatic exchange of information between tax authorities. They are set to take effect in 2023 through local laws. For Austria e.g. it’s the Digital Platforms Reporting Obligations Act (DPMG, Digitale Plattformen-Meldepflichtgesetz) published on 19 July 2022.
DAC7 is a response to the growing complexity of the “platform economy,” in which a wide variety of service relationships are facilitated through digital platforms. This complexity can thus cause a lack of tax transparency for national tax administrations. These authorities often have limited insight into the income of providers registered on platforms. The directive addresses the increased risk of tax fraud, tax avoidance, and tax evasion. It requires platform operators to report on the activities of their registered providers.
Who is affected by the new regulation?
DAC7 applies to platform operators that enable providers to carry out relevant activities. These activities can be rental or leasing of property or the sale of goods and personal services in return for payment. The term “platform” is unquestionably broadly defined. It thus includes any software that allows users to connect with one another and perform relevant activities. This definition includes indeed a wide range of digital platforms, obviously from well-known marketplaces to more specialized platforms that facilitate the exchange of goods and services.
Exceptions to the reporting obligations of course exist for certain types of providers, known as exempt providers. These include providers who only occasionally perform relevant activities, as well as providers who have already been subject to due diligence by the platform operator or another competent authority. DAC7 also provides for a de minimis threshold below which providers are not required to be reported.
Scope
Platform operators established in the EU and third countries are subject to DAC7. They must register with the competent tax authority in their jurisdiction. As a result they also have to carry out due diligence to check whether their registered providers are subject to the reporting obligation. If so, they must report on their activities. In addition, platform operators must maintain records of the relevant information and eventually make it available to the tax authorities upon request.
DAC7 has significant implications for platform operators, as failure to comply can result in financial penalties. It is therefore important for platform operators to determine whether they are subject to the reporting obligations. Moreover they have to ensure that they are in compliance before the end of the year.
Impacts of the new regulation
One potential impact of DAC7 is undeniably an increase in compliance costs for platform operators. They may even need to invest in new systems and processes to meet the reporting requirements. This could furthermore include the development of new software or the integration of existing systems with the reporting requirements of DAC7. Above that there is also the risk of potential disputes with providers over the reporting of their activities. That could also be a source of additional costs and administrative worry for platform operators.
Conclusion
All things considered, DAC7 is without a doubt an important step to improve tax transparency and compliance in the digital economy. Platform operators should be aware of their duties under DAC7 and take steps to ensure compliance before the end of the year to avoid potential penalties.
DAC7 transported into national law:
DAC7 implementation in progress:
- Belgium
- Bulgaria
- Croatia
- Czech Republic
- Estonia
- Finland
- Germany
- Ireland
- Italy
- Lithuania
- Luxembourg
- Netherlands
- Poland
- Slovenia
- Spain
- Sweden
- UK
DAC7 rules not yet published (date: 22.12.2022)
- Cyprus
- Greece
- Latvia
- Malta
- Portugal
- Romania