How US gig and marketplace platforms are impacted by EU DAC7

Oct 2

Published: October 2, 2022

Are you a US based platform, offering a network for sellers/users to earn money from other buyers/users, with any of the following situations? Then read on for how the EU DAC7 may impact you.

You have any sellers with addresses, tax ID numbers, or other tax residency indications in an EU Member State
- Sellers include people that sell goods/products, that offer their home for rent anywhere in the world, that offer services, or sell rent of transporation
You allow sellers to offer property for rent that is physically located in an EU Member State
- Example: you are a US based platform with sellers that are resident only in the US but they offer out their property in Italy for rent on your platform

What is DAC7?

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.

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). 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 or allow sellers to list EU based real estate. 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.

Is DAC7 like the Form 1099-K reporting in the US? Sort of. They have very similar objectives but are implemented very differently and can have slightly different scopes. One of the main differences is that DAC7 reports compensation paid and is expected to be very useful to sellers in preparing their own tax returns. The Form 1099-K is only about gross payments settled (by credit card or third party network) and as such can have a larger disconnect to taxable income. Form 1099-K is very confusing for sellers in the US and many are unsure what to do with it when they receive it.

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).

A Netherlands case study: 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 US 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.

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
  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
  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 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.
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.
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 US 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 US 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.

Examples for US platforms

A US based platform, that has a permanent establishment in the Netherlands, is in scope of DAC7 regardless of the residence of the sellers or location of real estate activities. It must report annually in the Netherlands.
A US based platform, established under the laws of the US, solely tax resident in the US, with its place of management in the US, with no permanent establishment in any EU Member States, but who identifies an active seller of goods in their records with a main address in France is in scope of DAC7 as a foreign platform. 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.
A US based platform, established under the laws of the US, solely tax resident in the US, with its place of management in the US, with no permanent establishment in any EU Member States, but who identifies an active US resident seller in their records that is renting out a vacation home located in Germany is in scope of DAC7 as a foreign platform. 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.

What should US 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).
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 US 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.
Monitor adoption of the OECD MRDP in non-EU jurisdictions (e.g. Canada, Switzerland, Australia, etc). As of today, there is very little news on this front. A US platform should assess their exposure to the implementation of platform rules in these other countries if they have sellers resident in or offering real estate for rent in these non-EU countries that ultimately adopt the OECD MRDP.

How can Dune Consultants help?

Jessalyn Dean