DAC7: How the EU Tax Reporting Rules Affect Online Platforms

The European Council’s 7th Directive on Administrative Cooperation (DAC7) aims to improve information sharing among European Union taxing authorities to combat tax evasion and ensure fairness.

DAC7 focuses on the automatic exchange of information regarding income earned through digital platforms. It addresses the challenges posed by the digital economy by attempting to ensure individuals and businesses operating through online platforms fulfill their tax obligations.

Under DAC7, digital platforms are required to report income earned by sellers on the site. That can include sales, rental income, capital gains or fees received through the platform.

The rule affects all digital platforms, whether in the EU or based elsewhere, that facilitate economic activity in the region. However, platforms are exempt if they’re outside the EU, have reporting obligations equivalent to the DAC7 rules and make that information available to EU tax authorities.

After collecting the income information, digital platforms are required to share it with the applicable tax authority.

If a seller is noncompliant, the platform operator must close the account, prevent reregistration and, if applicable, withhold payment for relevant activities until the seller provides the required information. EU member states can set their own penalties for noncompliance. Those will go into effect Jan. 1, 2024, at the latest.

A New Requirement for Digital Platforms

DAC7 applies to any website or application that allows sellers to connect to other users for commerce.

The directive also introduces measures to enhance administrative cooperation among taxing authorities by streamlining information sharing and facilitating cross-border tax enforcement. It includes provisions for standardizing reporting formats to ensure data consistency across EU member states.

Each EU member state will devise its own laws to achieve the directive’s goals. Those laws are rolling out on a country-by-country basis. 

Overall, DAC7 represents the EU’s commitment to adapting tax regulations to the evolving digital landscape. By improving transparency and cooperation, the directive strives to fortify the integrity of the EU’s tax systems.

Procedures for DAC7 Reporting Compliance

DAC7 does not provide specific Know Your Business (KYB) verification guidance, but it requires platforms collect a range of information from sellers, including full name, primary address, tax identification number, value-added tax identification number, business registration number and details about permanent establishments the seller uses.

Digital platform operators can adopt KYB best practices to meet the requirements to identify and verify sellers. Those practices can help platforms:

• Verify the legal entity’s name, registration number and registered address
  
• Identify the nature of the business, its industry and its primary activities
  
• Gather information about the company’s ownership structure and verify the identities of people with significant control
  
• Check the business against sanctions lists, politically exposed persons (PEPs) lists and other watchlists and determine its risk profile based on factors such as location, industry and ownership structure
  
• Monitor the seller’s transactions and activities on the platform for signs of tax evasion or other illicit activities

For individual sellers, platforms can consider adopting Know Your Customer (KYC) best practices. That due diligence can help platforms:

• Verify the seller’s identity through documents or data
  
• Understand the nature of the business relationship
  
• Conduct ongoing transaction monitoring to detect suspicious activities and ensure consistency with the seller’s risk profile
  
• Check the person against sanctions lists, PEPs lists and other watchlists
  
• Perform risk-based assessments to determine the level of due diligence

Platform operators must report to taxing authorities annually, and the information should include the seller’s identity, residency details and total income generated through the platform.

Accelerate Seller Verification

Organizations often rely on multiple point solutions to meet their KYB and KYC requirements. But juggling those point solutions can be time-consuming, costly and complex.

An integrated identity platform that provides layered business and person verification through a single, automated workflow can accelerate and simplify seller onboarding in all EU countries. When digital marketplaces automate seller due diligence through a single platform with a broad range of capabilities, they can position themselves to efficiently achieve DAC7 compliance and quickly adjust to new regulations on the horizon.