What is DAC7?
Upcoming EU tax legislation DAC7, will soon affect digital platforms operating in the European Union.
Under DAC7 online platforms will need to report income earned by sellers in the EU, which means additional compliance responsibilities and cost.
To understand DAC7, it’s important to put it in perspective.
First, we have the high-level goals of the DAC framework, which are to a) avoid double taxation, and b) prevent and control tax evasion.
Second, the European Commission recognizes the fact that the digital economy is rapidly growing in size and impact, meaning that new challenges for tax regulations arise. The EC also aims to help EU states with their post-COVID economic recovery. It achieves this through a series of legislative measures aiming to simplify and improve tax collection. DAC7 will allow the automatic exchange of information on earnings generated on online platforms between EU member states.
When Will DAC7 Take Effect, And Who Will It Target?
EU members will formally adopt the new provisions by January 31, 2022, and start applying them from January 1, 2023. Platforms need to report information on EU sellers no later than January 31 of the following year, i.e. January 31, 2024.
The new rules will target both EU and non-EU platforms with sellers who are tax residents in Europe.
What Does DAC7 Mean For Online Platforms?
Digital platforms and sharing services will have to report revenue generated by EU sellers.
The EU commission defined digital platforms as “software-based facilities offering two- or even multisided markets where providers and users of content, goods and services can meet”.
This is a fairly broad definition, but we can distribute digital platforms across:
- Online marketplaces
- Collaborative or sharing economy platforms
- Communication platforms
- Social networks
- Music platforms
- Search engines and specialised search tools
- News aggregators
- Video sharing platforms
- Payment systems
Crowdfunding activities were initially included in the DAC7’s scope, but the EC has removed them and will reevaluate them at a later date.
In practice, DAC7 affects businesses in several ways.
Platforms will have to register in an EU state and report to its tax authorities. In most cases, that would be the same member state which has issued their VAT number.
Platforms will then need to verify this information through electronic tax ID validation that member states have made available and report it.
Platforms will also have to store and report sellers’ transaction information, details on the financial accounts that were used to withdraw funds, plus commissions or fees that platforms themselves are collecting. In case the sellers are renting a property, digital platforms will also need to collect details of the property’s location and the rental duration. Operators will then have to forward this information to local tax authorities by January 31 of the following year.
Tax offices will then automatically communicate relevant information to other member states.
Is DAC7 Similar To The Current MOSS Scheme?
Yes, DAC7 is similar to the existing Mini One Stop Shop (MOSS) scheme for a VAT. The difference is that the MOSS scheme facilitates central tax reporting and remittance, while the DAC7 initiative facilitates information exchange (reporting) only.
The MOSS scheme makes it possible for companies to register for VAT, file VAT returns, log VAT invoices and make VAT payments in a single EU country, instead of in each EU country they’re operating.
The new DAC7 system will allow digital platforms to report information centrally, in one EU country, which will then distribute the information across EU tax authorities. DAC7, however, explicitly covers online platforms and goods and services exchanged on them, and platforms will have additional reporting obligations under it.
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.