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As the first DAC7 deadline approaches online platforms are beginning to squirm. Those platform operators with obligations to comply with the European Union’s (EU) DAC7 requirement had circled January 31, 2024, some time ago but now the reality is hitting home: acquiring data is difficult, validating it even more so.
In this article we are focusing on the EU’s reporting obligations for online platforms. However, such obligations are being rolled out globally on the back of the OECD’s model rules for reporting by platform operators with new rules in place in the United Kingdom and New Zealand to name just two jurisdictions.
With ten weeks to go to the deadline for the first DAC7 reports there is an acceptance that complying with DAC7 has become a challenge in the market. The difficulty revolves around collecting, verifying, validating, and correcting the data on sellers resident in the EU who have made sales via online platforms, as well as non-EU residents renting out immoveable property located in an EU member state.
DAC7 – a brief background
The plan behind DAC7 came from tax jurisdictions in the EU (European Union) that realised they had no visibility on sales by multiple vendors across borders when online platforms operate in numerous jurisdictions. By introducing new reporting obligations for such platforms, tax administrations are attempting to increase their knowledge of selling activities.
DAC7 deviates slightly from the OECD’s recommendations as it applies to those platform operators that perform commercial activity in the EU but are neither resident for tax purposes, nor incorporated or managed, or have a permanent establishment in a Member State (‘foreign platform operators’).
Online platforms are required to collect information on their ‘reportable sellers’ and share this information with the relevant EU tax authority. This knowledge acquired through the collection of data, and increased transparency, is aimed at the more efficient and effective collection of taxes, such as VAT (Value Added Tax) and income tax, and mitigation of potential tax evasion. It is aimed at eliminating the risk that sellers carrying out activity via online platforms do not declare, or under-declare, income in their tax returns. One of key aims of these reporting obligations is to arrive at a point where the data is pre-populated to simplify compliance obligations.
First lets recap – what is required? DAC7 requires platforms to collect the following information from their sellers who are individuals:
· First and last name
· Primary address
· All Tax identification Numbers (TIN) issued to that seller, including each Member State of issuance
· In the absence of a TIN, the place of birth of the seller
· VAT identification number if the seller has one
and
· Their date of birth.
It is important to note, however, that data is also required from entities that may sell via the online platform. It does not end at the types of identifiable data listed above. Information on amounts paid, fees/commissions charged, and taxes withheld are also in scope of DAC7 requests. Certain entities, such as accommodation platforms, will need to collect details of dates when properties were rented by users of their platform and the addresses of said properties.
The aim of all this? To reduce tax evasion.
Collection, verification, validation, maintenance, and correction of data
The consequence of collecting such data is that online platform operators need to ask for additional data from existing customers – as it is unlikely that they already stored all the necessary information. But before we even get to this stage online platforms will have to engage with their sellers. How they do so will vary but the key point is that they (i) must tell their sellers why they are required to request this information, and (ii) they will have to introduce a system that allows the platform to collect the data.
This means planning communication with existing sellers to inform them of the platform’s DAC7 obligations, but it also means changing onboarding for new sellers to capture the data at the first point of contact. The consequence of both is pulling together cross-functional teams from development, legal, product, and tax departments to name just a few.
It is one thing to collect the data, but verifying, validating, maintaining, and correcting it is quite a different challenge. Remember, it is the platform’s responsibility to ensure that the data they collect from their sellers is reliable and accurate.
Consider the process of validating a tax number provided by a seller. In some tax jurisdictions, there may be separate tax numbers, such as a TIN and/or VAT/GST registration numbers. These numbers can differ in length and format, with some using alphanumeric characters and others using only numbers. Additionally, the numbers may be validated via separate validation services that are specific to each tax jurisdiction. To make it more challenging for online platforms, some EU member states lack a local database for TIN validation.
To be confident that the validation of this seller’s tax number is performed accurately the online platform may have to amend existing internal processes to ensure the validation is performed or they may outsource this validation to a third party. This all adds up for time and resources.
The curation of yet more data will be another challenge for platforms beyond how they practically gather the information.
Should they, for example, reformat their onboarding pages to gather this information at source from new sellers. For existing sellers there needs to be an additional educational process whereby they inform sellers of their obligations to provide the information.
Maintaining collected data will pose an additional challenge, as it must be validated every 36 months. However, if the platform has reason to believe that the information has become unreliable or incorrect, it should be updated as soon as possible. For instance, what to do when a seller changes address?
The problems are many, but the time to prepare and compile the all-important first DAC7 reports is short.
These obligations of platforms towards their sellers, has been driven by the changing landscape with sales via platforms becoming increasingly common. As a result, taxing jurisdictions have taken a keen interest in platform models and are pushing to know much more about sellers selling via platforms.
Describing the problem is one step but understanding the complexities involved in collecting and maintaining data is the next challenge for online platforms as the end of January 2024 closes in.
Image by: Ag Ku from Pixabay
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Disclaimer: The views, statements or opinions expressed in this article are solely those of the author and do not represent tax advice and are not to be designated to be the views, statements or opinions of any other person, group, association or company.
