Why all digital nomads must pay attention to DAC7 for tax reporting
Published: June 26, 2021
DAC7 is not normally going to be a piece of tax lingo that digital nomads come across or pay attention to. But I’d like to get your attention so you don’t get a surprise tax bill. First let’s discuss (as briefly as possible) what DAC7 is and then I’ll get to the good part: what you need to do about it.
What is DAC7?
DAC7 is about gig platforms reporting the income of sellers to the local tax authorities who then exchange it with the country of residence of the seller. DAC7 is an EU framework that must be adopted by all EU countries. The OECD also has a similar framework (with some differences) called MRDP and OECD member countries (most of the world) can optionally sign up to implement it.
This new gig platform reporting is being implemented (roughly starting around 2022/2023) so that governments can find people that are under-reporting their income for income tax (and sometimes value added tax or VAT) purposes. One of the critical parts of the framework is that even if a platform is outside of the EU (like in the US for example) they become in scope of the reporting requirement if they allow EU sellers on their platform. This means the likes of Airbnb, Amazon, Upwork, Fiverr, Uber, etc could very likely be in scope to collect information about sellers (people earning money on their platforms) and annually report income paid to those sellers from selling their goods, services, or rental of accommodation/transportation on these platforms to end users.
Example: John, a Dutch tax resident, is living part of the year in the Canary Islands, earning income from a GigPlatform doing UX/UI work for a startup. GigPlatform will annually report the income paid to John through the DAC7 framework which is then transmitted to the Dutch tax authorities. Now the Dutch tax authorities are aware of the income that John has earned on GigPlatform and can pre-fill John’s Dutch tax return or use the information to cross-check the completeness of the Dutch tax return filed by John.
I’m a digital nomad and I pay my taxes, so what’s the problem?
In the framework as it stands today (which has not been implemented into local law yet) the platform (GigPlatform in our example) must determine to which country John’s income is reportable. John uses his sister’s address in France for his GigPlatform account as his primary address, it’s easier to have all of his mail delivered to her. John fills in his Dutch tax identification number when requested by GigPlatform. However when it comes time to do the annual reporting, John’s income and other relevant data will be sent to both the Dutch tax authorities and the French tax authorities. This is because the framework states that reporting shall be made to both:
Countries for which John provides a tax identification number (e.g. Netherlands)
Countries identified as a primary address (e.g. France)
In conclusion…
Digital nomads that use gig economy platforms should be careful when using the address of a friend or other digital/online mail boxes if those addresses are outside of their country of tax residence. In our example above, John has no tax presence in France and only uses his sister’s address for mailing purposes. So to avoid a nasty tax letter from the French tax authorities one day asking “where is your tax return?” John should use a mailing address within his country of tax residence (the Netherlands). But John should always talk to his tax advisor before choosing to use any mailing address to mitigate surprise tax bills in places he is not a tax resident.
Some extra notes for digital nomads with ties to the United States
While the United States is unlikely to participate in DAC7 or MRDP, there are already tax reporting rules inside of the United States called Form 1099 reporting. By not participating, this simply means that the United States will not transfer out and will not receive in any information about the income of United States tax residents earned on non-US gig platforms. Digital nomads should be very cautious about using a mailing address outside of their state of tax residence as they can get surprise tax notices or bills many years later. Let’s say, for example, that you are a tax resident of Colorado but you use your sister’s address in Kansas when liaising with your business partners. You get a Form 1099-MISC at the end of the year with your Kansas mailing address. You file your Federal Form 1040 tax return using your mailing address in Kansas. You file your Colorado state tax return as normal (as you are a tax resident there). In this example, you might get a notice (sometimes 3 years later!) from the state of Kansas saying you owe them taxes for the income you failed to report. This is because many states receive your Form 1099 and 1040 data based on the address you used (Kansas) and then assume you are a resident of that state. Digital nomads can solve this problem by either using a mailing address in Texas or Florida (for example) or by using a mailing address inside of their state of tax residence. Always talk to your tax advisor before selecting a mailing address.
