DAC 7 In The UK And EU:
The digital economy has grown exponentially over the last few decades and more recently, as a result of the COVID 19 pandemic lockdowns. Its fast growth has been seen as both an opportunity for newfound hopes the economy would improve, but also as a challenging development since taxation rules did not manage to keep pace with the innovation in this sector.
In the European Union (EU), efforts have been made in the past few years to adapt tax regulations to the digital age with the introduction of the Digital Services Act; the Directive on Administrative Cooperation (DAC 7), and Tax transparency rules for crypto-asset transactions (DAC8).
Of the three, DAC 7 is of interest to us given that it has significant implications for VAT purposes in the EU. The first DAC 7 report is due on 31 January 2024 but covers all transactions for 2023 – therefore those affected should have been meeting their obligations since the beginning of 2023.
What is DAC 7:
The primary focus of DAC 7 (officially known as Council Directive (EU) 2021/514) is to extend the EU’s transparency, cooperation and information exchange rules to digital platforms.
The requirement applies to platforms that facilitate sales of goods and services, regardless of where they are based, as long as they trade in the EU (and a number of other conditions are met). It applies to the likes of AirBnB, Amazon, Apple, Ebay, Google, Uber and other similar operators. Platforms excluded from this new reporting requirement are those that only process payments, advertise the sale of goods and services, or redirect customers to another website.
The platforms will effectively have an obligation to provide information to the tax authorities on those that use the platform concerning income derived, and transactions they have undertaken on the platform. The purpose of DAC 7 is to mitigate the under-declaration of income which seems to occur in many cases when companies provide goods or services via platforms. This information is provided to authorities in each EU Member State and will also be shared among EU countries to enable cooperation, tax collection, and a more effective tax enforcement process if needed.
While DAC 7 represents a step forward towards bringing tax and compliance into the digital era, it also poses challenges for digital platforms and for vendors.
While platforms may have the resources to invest in reporting technology to ensure they provide the requested information to tax authorities, this requirement will ultimately trickle down to the vendors. Vendors will need to ensure their financial/accounting systems and processes are able to meet these demands. This means they might have to invest resources and time into new and better accounting software to ensure they provide the requested information to the platform. As the fines for non-compliance applied to platforms can be substantial we have seen them take a very strict approach to providing this information, to the point of removing the vendor from the platform if they are unable to provide the data they need.
As competition in the online e-commerce world is fierce, this might represent a challenge for some of the smaller online retailers. The risk of being kicked off the platform is also existential for some of them as e-commerce companies are heavily reliant on them.
Surprisingly, the new reporting requirements have also been backed up by traditional (usually high street) businesses that have seen their sales affected by the increase in e-commerce. Their view is that many of the online sellers are not fully compliant and as such are gaining an unfair advantage.
E-commerce businesses may also benefit from the application of DAC 7 in the medium and long term as it should be increasingly difficult for online businesses to avoid paying taxes.
The new reporting requirements under DAC7 are therefore seen as a way to level the playing field even though it might come with some additional costs