DAC7, short for the 7th Directive on Administrative Cooperation, is an initiative aiming to improve tax cooperation between EU member states. It allows EU countries to track taxable transactions on online platforms, and simplifies the collection of VAT and other taxes by local tax offices. The DAC7 was introduced on March 22, 2021, and the new reporting rules will apply from January 1, 2023.
Online platforms need to collect and verify the tax information of EU sellers who use their services and report taxable sales activities each year to local tax authorities, which will then transmit the information to other EU member states. The new rules are similar to the OECD rules for sellers and online platforms in the sharing & gig economy from 2020.
Who is concerned by the DAC7 rules?
The new DAC7 rules will apply to digital platforms that facilitate the sale of goods or services, or also the rental of property.
Digital platforms include software applications (for mobile or desktop), websites or parts of a website that connect sellers to buyers and allow them to carry out a sales transaction (“Relevant Activity”).
Some platforms are excluded, such as:
- Payment processing platforms (f.e. Stripe, Wise, PayPal)
- Platforms that only list items or services for sale or rent but redirect users to other platforms where the transaction takes place (f.e. Facebook marketplace, Craigslist).
The operator of a digital platform that facilitates sales transactions is called Reporting Platform Operator (RPO).
RPOs setup contracts with sellers to allow them to list their goods or services on the platform.
EU RPOs are either tax residents in an EU country, or are companies registered in an EU country, or have their headquarters or a permanent establishment in the EU.
Non-EU RPOs are platform operators who aren’t present in the EU in any way, but who might still be facilitating the sales transactions of EU sellers. They might not need to report sales activities in the EU under the new rules of the DAC7 if there’s already an existing agreement between the country where they’re located and EU member states.
What are the reportable transactions and who are the reportable sellers?
The transactions that RPOs need to report are known as Relevant Activities and include:
- Immovable property rental, including residential and commercial property and parking lots (f.e. Airbnb)
- The rental of cars, motorcycles, electric scooters (f.e. Turo)
- Services carried out at the request of a user (f.e. Uber, Upwork, Fiverr)
- The sales of goods (f.e. eBay, Amazon)
Transactions need to have a monetary value to be considered reportable, and need to be paid to the seller in a way that’s verifiable by the digital platform.
Reportable sellers are either EU tax residents (individuals or companies) who carry out taxable transactions according to the above definition, or sellers who rent out property that is located in the EU.
Sellers who have less than 30 transactions and for less than 2,000 € (in total) are excluded from the platform’s reporting obligations.
Platform operators need to collect and report details on:
- The seller’s personal information
- Their tax identification (TIN or VAT number)
- The transaction amounts
- The financial accounts used
- The fees withheld by the platform operator
- The rental property’s address & rental periods
They need to report this information by January 31 of the year after the reportable seller has used their services. Member states will determine the penalties for a failure to disclose all relevant information. Platform operators will also need to close the accounts of sellers who fail to provide all necessary information after 2 reminders.
How can Fonoa help comply with DAC7
DAC7 regulation and its rules shift far greater responsibility on digital platforms themselves as opposed to underlying platform sellers / buyers.
There will be a lot of work around monitoring platform participants’ transactions to keep track of the financials, and to see whether they crossed VAT thresholds in certain EU countries - thus having to charge indirect taxes. Furthermore, they will also need to make sure participants’ tax IDs are valid in order to properly report their income.
We have solutions that can help you to comply with DAC7
Fonoa was built to automate compliance for digital platforms and marketplaces, and we regularly heard marketplaces ask for solutions around tax ID validation, tax determination, and transaction reporting both for themselves and for underlying platform participants.
Through Fonoa Lookup we automatically validate whether buyer / seller tax ID is valid and live in a relevant government database, as well as if it is live in VIES which is very relevant in the EU context. Validating tax IDs helps platforms keep compliant but also to understand how to treat buyers and sellers from a tax perspective i.e. whether they are subject to indirect taxes or not.
Beyond assessing the tax status and validity of platform participants, Fonoa helps automate tax rate calculations to any transaction that takes place through a digital platform (currently for digital services only but expanding into goods shortly). Here, Fonoa looks at revenue generated by sellers to buyers in different countries (and keeps track of new transactions to see how this level is changing), and adds VAT obligations in case sellers had crossed the VAT threshold in buyers’ country (for eg. German seller selling to Italy and passing VAT threshold for Italy - which requires it to charge Italian VAT to further transactions)
Finally, since in DAC7 digital platforms need to keep track of financial transactions and report revenue generated by EU sellers, Fonoa Invoicing can automate invoice generation to any transaction that happens on a digital platform, both on behalf of platform participants and the platform itself and can store this data for any relevant time period on request.