DAC7: The businesses that must report and how to comply

DAC7 is the common term for the seventh version of the EU Directive on administrative cooperation in the field of taxation. In addition to placing requirements on digital platform operators, it introduces an automatic exchange of information between EU tax authorities regarding the taxable events and income generated through digital platforms. It also enables joint audits to be carried out between two or more EU member states.

Along with promoting cooperation between tax authorities, the European Council adopted DAC7 to address the issue of lost tax revenues arising from unreported income earned through digital platforms. Platform operators that don’t comply are subject to penalties, which are set at the discretion of individual EU member states and, according to the directive, “should be effective, proportionate and dissuasive.”

The businesses that must report

DAC7 is aimed at both EU and non-EU online marketplaces selling goods, supplying personal services, facilitating the sales of goods and services, and the renting of real estate and of transport. Some examples of relevant activities under DAC7 include livestreaming, food delivery, ride-hailing and online training. 

Digital platform operators provide their platforms to “sellers,” who in turn engage in economic activity in the EU. An example of this might be an online vacation rental app that connects sellers (in this example, property owners who want to rent their houses to vacationers) to potential buyers (in this case, people looking for short-term vacation rentals).

Platform operators must collect information from “reportable sellers” under DAC7. Reportable sellers provide relevant activities, such as the vacation rentals mentioned. Platform operators do not have to collect information from some sellers, referred to as “excluded sellers” in the directive. Excluded sellers include but are not limited to government entities, publicly traded entities, hotel chains, large tour operators, and sellers that don’t meet certain relevant-activity and cost thresholds as defined in the directive.

It’s important to note that DAC7 applies not only to digital platform operators that are companies (or tax residents) of EU member states, but also to platform operators that are not EU tax residents, not incorporated or managed in the EU and that don’t have a permanent establishment in the EU. These DAC7-eligible “foreign platform operators” engage in commercial activity in one or more EU member states through cross-border electronic commerce. An example might be a US company that offers a ride-sharing app in France but has no permanent establishment and is not registered in France. Though they may engage in activities in multiple EU countries, foreign platform operators are only required to register and report in a single EU member state.

Collecting information from sellers

Digital platform operators must collect the following information from reportable sellers that use their platforms. A seller can be an individual or a legal entity. The following information to be collected applies to both legal entities and individuals unless otherwise noted. The following list is not exhaustive; for example, the platform operator must collect additional information when the relevant activity involves immoveable property rentals.

• Legal name (or first and last name of an individual)
• Primary address
• Any TIN issued to that seller, including each member state of issuance (the following for individuals only: in the absence of a TIN, the birthplace of that seller)
• The VAT identification number of that seller, where available
• The date of birth (individuals only)
• The business registration number (legal entities only)
• The existence of any permanent establishment through which relevant activities under DAC7 are carried out in the EU, where available, indicating each respective member state where such a permanent establishment is located (legal entities only)

Critically, the platform operator must also “determine whether the information collected … is reliable” using its own records, electronically searchable records and/or other means. If the operator determines that any information is inaccurate, it must ask the seller to correct that information. The operator may use a third party to fulfil these due-diligence obligations, but those obligations remain the operator’s responsibility.

Reporting requirements

DAC7 has an annual reporting requirement, with a deadline of 31 January of the year following the year that a seller is identified as reportable.

Platform operators that are tax resident in an EU member state must file with the tax authority in that state. If an operator is resident in multiple states, it must choose one of those member states and report to that state’s tax authority. As we mentioned, foreign platform operators are similarly only required to register and report in a single EU member state.

In addition to the information mentioned in the previous section, platform operators must report certain information based on whether the reportable activity involved is immovable property or not. Information to be reported in all cases includes but is not limited to the total consideration paid or credited during each quarter and the number of relevant activities. (DAC7 defines “consideration” in part as “compensation in any form, net of any fees, commissions or taxes withheld or charged by the platform operator, that is paid or credited to a seller in connection with the relevant activity.”) The operator must also report any fees, commissions or taxes withheld or charged by the operator, among other information.

Next steps for operators

If the reporting obligations of DAC7 apply to a digital platform operator, it should establish processes for collecting and storing relevant information from existing reportable sellers that have been active on its platform in 2022. In addition, if the platform does not already capture DAC7’s required information from reportable sellers, the operator will have to establish new processes. Operators may also have to update their terms and conditions.

The operator should understand the data protection implications of DAC7, described in article 25 of the directive. Essentially, data exchanged and processed under DAC7 is subject to existing EU data protection rules with certain restrictions. Non-EU data protection regulations may also apply for foreign platform operators.

Platform operators should also keep in mind that EU tax authorities now have the data necessary to identify reportable sellers that have used marketplaces in their jurisdictions. These authorities could approach sellers directly to investigate their tax positions. This will place further scrutiny on platform operators themselves, who are held jointly and severally liable for potentially underpaid taxes by their users if they’re found non-compliant.