How non-EU (ex-US) gig and marketplace platforms are impacted by EU DAC7
Published: October 3, 2022
At first glance, the OECD Model Rules and EU DAC7 look very straightforward. They are far less complicated than earlier tax transparency laws aimed at financial institutions such as FATCA, Common Reporting Standard, and all of the related DAC pre-cursors in the EU. However, upon closer inspection the obligations get quite complicated for non-EU platforms that have sellers resident in an EU Member State or that offer immovable property (real estate) for rent in an EU Member State. The complication arises based on how and when the non-EU jurisdiction adopts the OECD Model Rules, and the differences in the OECD Model Rules to the EU DAC7.
Are you a US based platform? Read on an earlier blog for how the EU DAC7 may impact you. This blog would also be relevant to you if you are a non-EU and non-US platform and your home jurisdiction is not expecting to adopt the OECD Model Rules.
What is EU DAC7 and OECD Model Rules?
DAC7 is about gig and marketplace platforms reporting the income of sellers to the local tax authorities of EU Member States who then exchange it with the country of residence of the seller. DAC7 is an EU minimum framework that must be adopted by all EU Member States. The OECD also has a similar framework (with some differences) called MRDP and OECD member countries (most of the world, but excluding the US) can optionally sign up to implement it. In simpler terms: the OECD Model Rules are aimed to be adopted by all OECD member jurisdictions around the world, and the EU takes the Model Rules and issue a required directive to all 27 EU Member States to implement the rules. As these rules are aimed at global data exchange, countries that adopt the OECD Model Rules version need to be able to interact with the countries that are required to implement the stricter EU DAC7 without creating duplicate reporting.
This new gig platform reporting is being implemented in EU Member States effective 1 January 2023 so that governments can find people that are under-reporting their income for income tax purposes (and sometimes value added tax or VAT). Platforms in scope will be required to collect information about sellers (people earning money on their platforms) and annually report to tax authorities the income paid to those sellers from selling their goods, services, or rental of accommodation/transportation on these platforms to end users.
Each EU Member State must implement the DAC7 into their own legislation. For some countries, this can mean a direct copy/paste of the DAC7 language supplemented with an FAQ. For other countries, this can mean a broadening of the scope of DAC7 (e.g. to include domestic sellers in addition to cross-border sellers). No EU Member State can reduce the scope of the DAC7 (it is a minimum standard).
How is DAC7 different from OECD Model Rules / MRDP?
There are a number of smaller differences such as what information is collected and reported but the two biggest differences which will greatly effect the compliance obligations of platforms are:
The DAC7 defines residency based on 4 different criteria whereas the MRDP defines residency based on only 2 of those criteria.
The DAC7 requires reporting and exchange of 4 relevant activities: services, sale of goods, transportation rental, and rental of immovable property (real estate). The MRDP requires reporting of 2 relevant activities: services and rental of immovable property but only recommends an optional module for reporting of goods and transportation rental.
A Netherlands case study: why this matters, with examples
Most EU Member States are still working to translate the DAC7 into their local legislation. As some jurisdictions have published their draft guidance, it is useful to examine one to see how this might play out for a non-EU platform. For today’s summary, we will review the Dutch draft issued by the Dutch Ministry of Finance in September 2022. Keep in mind that this guidance could change.
In short, a platform located in a non-EU jurisdiction may be required to register and report in an EU Member State of it’s choice if any of the following are true:
It is resident in a jurisdiction (e.g. UK) that plans to adopt the OECD Model Rules but it will not be adopted by 1 January 2023 (e.g. UK currently slated for January 2024 adoption). More specifically: if the first reporting will not take place in the non-EU jurisdiction in January 2024 then the platform may need to register in an EU Member State in the interim (e.g. UK expects first reporting in January 2025). It must register for a unique ID number and report annually in any EU Member State of its choice. If it fails to register and report then it could face actions by an EU Member State including preventing the platform from operating within the EU.
It is resident in a jurisdiction that has adopted the OECD Model Rules but that jurisdiction has not adopted one or both of the optional modules for transportation rental and sale of goods (but only if one or both is a relevant activity to the platform offering). In this case, because that jurisdiction will not collect information on that activity then it cannot exchange that information with EU Member States and therefore cannot be viewed as having an equivalent data exchange. The platform would need to register in an EU Member State in order to report the transportation rental or sale of goods activities that are not reported and exchanged in its home country. It must register for a unique ID number and report annually in any EU Member State of its choice. If it fails to register and report then it could face actions by an EU Member State including preventing the platform from operating within the EU.
It is resident in a jurisdiction that has adopted the OECD Model Rules, including any optional modules relevant to the platform offering, but that jurisdiction is not exchanging that data with all relevant/applicable EU Member States. As example, if the UK adopted the OECD Model Rules, including both optional modules, but chose not to exchange services activities with Germany, then the platform would need to register in an EU Member State in order to report the services activities of German tax resident sellers. If the platform is offering exclusively rental of immovable property (real estate), then this registration and reporting in an EU Member State should not be required in this specific example. It must register for a unique ID number and report annually in any EU Member State of its choice. If it fails to register and report then it could face actions by an EU Member State including preventing the platform from operating within the EU.
An illustration is presented below which walks through a sample (though draft) logic flow. A larger version can be viewed at this link. Disclaimer: this is a high level overview and is missing some smaller nuances that overcomplicate a a basic introduction. This flow should not be used for assessment of your own obligations but simply as a tool to help navigate the general impacts.
Compliance in the Netherlands, interesting developments in implementation
Most EU Member States are still working to translate the DAC7 into their local legislation. As some jurisdictions have published their draft guidance, it is useful to examine one to see how this might play out for a non-EU platform that is required to register and report in an EU Member State. For today’s summary, we will review the Dutch draft issued by the Dutch Ministry of Finance in September 2022. Keep in mind that this guidance could change.
A Reporting Platform includes a platform that facilitates a Relevant Activity and:
1- is tax resident in an EU Member State
2- is established under the law of an EU Member State
3- has its place of management in an EU Member State
4- has a permanent establishment in an EU Member State and is not a Qualified Non-EU Platform
or
5- is none of the above, but facilitates the operation of a Relevant Activity by Reportable Sellers or a Relevant Activity related to the rental of immovable property (i.e. real estate) located in an EU Member State, and is not a Qualified Non-EU Platform
Such foreign platforms in the last bullet may choose any EU Member State in which to register and submit annual reporting by January 31. They will receive a unique registration number which the EU Member State will share to other EU Member States via a central register. Keep in mind that a US platform that already meets one of the first 4 triggers for being in scope of DAC7 is not a foreign platform operator and is simply in scope of DAC7.
A Qualified Non-EU Platform is basically a platform in a non-EU jurisdiction that has adopted the OECD Model Rules, and is exchanging all relevant activity/modules with all relevant EU Member States.
A Relevant Activity includes activities of a seller who is not an employee of the platform and earns compensation for:
the rental of immovable property (e.g. real estate)
personal services
the sale of goods
the rental of means of transportation
Platforms cannot collect information about a seller of goods in advance of them reaching a threshold of 30 Relevant Activities and €2,000 of compensation, unless the seller has other Relevant Activities (e.g. services, etc). These are one category of Excluded Sellers (which also includes publicly traded companies, amongst others). Read on an earlier blog for details of the GDPR issue.
A Reporting Platform must determine the residency of a seller. If more than one residency is identified then all residencies are reportable. The platform must also record and report the manner in which it determined each residency:
Residency by main address (also adopted by the OECD MRDP)
Residency by Government Verification Services (also adopted by the OECD MRDP)
Residency by jurisdiction of TIN issuance (not adopted by OECD MRDP)
Residency by identification of permanent establishments (only applies to entities, and not adopted by the OECD MRDP)
Existing sellers on the platform as of 1 January 2023 must be documented (if they are not an Excluded Seller) by 31 December 2024. If they are documented in 2023 then they are first reported in January 2024. If they are documented in 2024 then they are first reported in January 2025.
If the seller does not respond to the first request for information, and after 2 reminders still has not responded, then the platform must close the account and prevent further payments from being disbursed until the information is provided. However, a minimum of 60 days must have passed since the first request before this kicks in.
Only active sellers are documented, which means they must have at least 1 Relevant Activity in the current reporting period. Non-active sellers must therefore be monitored in case they later become active. The DAC7 does allow platforms to optionally document non-active sellers so in case this is chosen, it should not be in violation of GDPR as their is a legal basis to collect and verify this information.
Very different from the Common Reporting Standard (CRS), there is no form or other certificate that sellers must fill out and sign. Preliminarily, it appears that platforms can collect the required information in any way they see fit which gives flexibility for low-friction user experiences. Also different is the timing: platforms must collect information on new sellers before 31 December of each reporting period which means it is not required before registration/onboarding of the seller or even before payment is made.
Specifically relevant to the discrepancy between the definition of residency (DAC7 having 4 criteria and the OECD Model Rules only having 2), if a platform collects seller residencies based on the 4 DAC7 criteria and identifies a seller is resident in a non-EU jurisdiction which has adopted the OECD Model Rules, it must evaluate which of the 4 criteria were used to identify the residencies before concluding that the seller is reportable. For example: if the platform identifies an individual seller with a main address in the US, a government verification service returns no tax residencies, and they have in their records a TIN that was issued by the UK, then the seller would not be reportable by the platform. This is because the US is not a country exchanging data with any EU Member States so sellers resident in the US are not reportable. And though the platform identified a UK residency via the country of TIN issuance, this is a residency criteria of the DAC7 but not of the OECD Model Rules. As such, the seller is not considered a resident of the UK under the OECD Model Rules and is therefore not reportable to that jurisdiction.
The platform is required to disclose to the seller what they are doing with their information and is also required to give a copy of the tax information that was filed prior to (or equal to) the date it is filed with the tax authorities (which is no later than 31 January). This information must be summarized by quarter as that is how it is reported to the tax authorities. There is not currently a prescribed form for this report.
Information collected and verified about sellers goes stale after 36 months so it must be re-verified or re-confirmed on a regular cadence.
Penalties will apply to platforms that do not comply with their obligations. If necessary, an EU Member State can take action to prevent the platform from operating within the EU.
An obvious issue here is which comes first, the chicken or the egg? If a non-EU platform has not collected information about their sellers such as jurisdiction of TIN issuance or jurisdictions of permanent establishment, then it would not know that it might have EU resident sellers and be in scope of the DAC7. It will be interesting to see how guidance handles the issue of needing to follow the DAC7 rules to find out if you are in scope of DAC7 as a foreign platform operator.
Further points that will need clarity from the Dutch guidance:
When should a platform register? The guidance says “when the bill comes into force” but it is obvious that a window of “within X days” would be prudent. It also says that a platform that is not a Reporting Platform today but becomes in scope in the future must register at that time. A window of “within X days” would be necessary in this situation as well.
If a platform is not in scope but later becomes in scope (e.g. a non-EU platform registers a French seller) then by when must the platform have collected the information about the seller? It seems there is a 2 year date to collect information for existing sellers but it is unclear how this would apply to a newly in scope platform. Imagine a platform registers a French seller on December 15 then it could not be expected to collect and verify information on that seller and report by 31 January of the following year as it would need time to adopt policies, procedures, and tooling processes to facilitate an end-to-end compliance program.
How would penalties apply to foreign platforms that have not registered in any EU Member State? The way the penalties are written seems to only address Reporting Platforms that have registered with the Dutch tax authorities but failed to comply with their obligations. As the choice of jurisdiction is freely made by the platform, and in this example a foreign platform has not registered in the Netherlands, then it is doubtful that the Netherlands could apply any penalties to the foreign platform if that platform has no Netherlands resident sellers or Netherlands located real estate. Logically then, it seems that the only jurisdictions that could levy penalties or other enforcement against these foreign platforms are those jurisdictions where sellers have residency or where real estate is located.
What should non-EU platforms do now?
Check your possible exposure to being an in scope EU Reporting Platform (one of the first 4 triggers) or an in scope foreign Reporting Platform (the 5th trigger). As of today, as there are no known jurisdictions implementing the OECD Model Rules by 1 January 2023 then it is not yet possible for a non-EU platform to be a Qualified Non-EU Platform.
Monitor the adoption and implementation of the OECD Model Rules in your home country as it will change how you report in the EU, in order to avoid duplicate reporting.
If you are in scope as a foreign platform, pick your EU Member State to register and do annual reporting. Some factors that you should consider:
Maybe pick a country with a common language to your business or that published guidance in English; and / or
A country that has modernized data exchanges for tooling providers to develop on top of. Picking a country that allows tooling / software providers to automate the transmission of annual reports directly to the tax authority on your behalf could be more desirable than a country that requires you to manually upload files through their portal login. Your tooling / software providers may soon develop a list of recommended jurisdictions for these reasons.
Prepare for monitoring your exposure to the EU DAC7 on an ongoing basis if you are not currently in scope.
Consult with your tax, legal, and compliance departments about your EU based sellers or real estate activities. Though not explicitly mentioned in the DAC7 guidance, it could be imagined that if a tax authority sees a non-EU platform with significant seller activity in their country this may lead to questions about the tax residence or permanent establishment of the platform itself in that jurisdiction.
How can Dune Consultants help?
Contact us today to discuss at info@duneconsultants.com. Or you can jump in the calendar for an introduction call.
