EU expands reporting obligations under DAC7 and DAC8 for the digital economy and crypto assets

Background

EU Council Directive 2018/822 of May 25, 2018, amending Directive 2011/16/EU concerning the “mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (broadly known as ‘DAC6’),” introduced a new mandatory disclosure regime for European advisors and taxpayers.

Last summer, the EU Commission proposed a sixth amendment to this Directive aiming to extend the EU tax transparency rules to digital platforms (‘DAC7’). On November 25, 2020, the EU Council presented draft text of the DAC7 amendments, which generally aligned with the Commission’s proposal.  

On March 10, 2021, the EP, acting as a consulting party to the process, adopted (by 568 votes in favor, 63 votes against, and 64 abstentions) the EU Commission’s proposed DAC7 text with minimal amendments. 

The EU Council can incorporate changes based on the EP’s recommendations, and additional consultation would be required only if it intends to substantially deviate from the EU Commission’s proposal.

On March 22, 2021, an EU Council press release announced adoption of the DAC7 rules to strengthen administrative cooperation and include sales through digital platforms. These new rules would apply beginning January 1, 2023. 

Separately on March 10, 2021, the EU Commission launched an open public consultation designed to gather stakeholders’ views on possible enhancements to EU administrative cooperation in the field of taxation, with an emphasis on crypto assets and e-money and the provision of services by intermediaries. Stakeholders’ responses will help the Commission determine whether an EU legislative initiative is needed to target tax revenue losses due to the underreporting of income or revenues that crypto assets and e-money generate.  The proposal is expected to conclude in the third quarter of 2021.  

DAC7

According to the European Union, a reliable system for the tracing and reporting of taxable events is needed to address challenges posed by the digitalization of the economy. Furthermore, this would ensure that income and revenue earned through digital platforms are correctly reported to tax authorities and properly taxed in the respective Member State. 

The DAC7 rules extend the scope of the EU automatic information exchange to include digital platform operators. DAC7 aims to mitigate the challenges posed by the digitalization of the economy, given that the digital platform economy makes traceability and the detection of taxable events by tax authorities very difficult, thereby possibly leading to tax revenue shortfalls. 

Due to the wide use of digital platforms in commercial activities, both by individuals and entities, the European Union understands the need for reportable information, regardless of the seller’s legal nature. In particular, the reporting of income earned through such activities should provide tax administrations with a comprehensive set of information necessary for correctly assessing the income tax due. 

Under the proposed DAC7 Directive, ‘Reporting Platform Operators’ that perform a ‘Relevant Activity’ will be required to disclose a significant amount of information on a regular basis, including counterparty details and income generated in their business activity. 

An entity qualifies as a Reporting Platform Operator if it meets the following conditions: 

‘Platform’ means any software, including a website or a part thereof, and applications, including mobile applications, accessible by users and allowing Sellers to connect with other users for the purpose of carrying out a Relevant Activity, directly or indirectly, to such users.

1. ‘Platform Operator’ means an entity that contracts with sellers to make available all or part of a Platform to such sellers.
2. ‘Reporting Platform Operator’ means a Platform Operator that:
   1. is resident for tax purposes in a Member State
   2. is incorporated under the laws of a Member State
   3. has a place of management (including effective management) in a Member State
   4. has a permanent establishment in a Member State, or
   5. is neither resident for tax purposes, nor incorporated or managed in a Member State, nor has a permanent establishment in a Member State, but facilitates the conduct of a Relevant Activity or the rental of immovable property located in a Member State.
3. ‘Relevant Activity’ means an activity carried out for consideration and is a:
   1. rental of immovable property, including both residential and commercial property
   2. personal service
   3. sale of goods, or
   4. rental of any mode of transport. 

Following the EU Council’s adoption of these rules, EU Member States will be required to adopt these rules into their domestic legislation by December 31, 2022. The provisions shall apply beginning January 1, 2023. 

Observation:  Based on previous DAC6 experience, local mismatches in the implementation and interpretation of the DAC7 Directive likely will occur within the EU community. This could result in additional complexity and increased compliance for MNEs. 

DAC8

The DAC8 project aims to ensure adequate taxation of revenues generated from investments in, or payments with, crypto assets and e-money.  

The DAC8 consultation aims to gather stakeholder views regarding the use of e-money and crypto assets, as well as determine the available information and potential reporting mechanisms to utilize.

The consultation period concludes on June 2, 2021 and the EU Commission will use the information gathered to prepare and define the provisions to implement for exchange of information purposes in the crypto asset and e-money environment. 

Observation:  Crypto operators, or similar parties, such as intermediaries in the crypto market, likely will become subject to similar obligations as the Reporting Platform Operators under DAC7.