2nd February 2022
DAC7: Beware EU tax fraud risks
The battle against tax evasion remains a top priority for EU member states in 2022, as they continue to clamp down on tax fraud. With EU Council directives being continually amended, it is imperative for global recruitment companies placing contractors abroad to be aware of the changes as they happen. In this blog, we examine some of the key modifications to EU taxation regulations and requirements that will come into force and that they need to keep an eye on in the future. The changes to the reporting requirements of digital platform operators are foremost among them.
As reported by international legal business insights provider, lexicology.com, the first important piece of legislative news is the adoption of Directive 2021/514, the sixth iteration of the Directive of Administrative Cooperation (DAC) of Council Directive 2011/16/EU. The changes to the new seventh version or ‘DAC7’ are the latest measures to combat tax fraud and evasion while improving transparency of administrative tax cooperation among countries – with the digital economy in the firing line. Although the Dutch have already moved quickly to implement the changes, EU countries have until 31 December 2022 to follow suit.
The amendments to DAC over the years have often centred around the financial accounts reporting obligations of EU member states and advance cross-border pricing arrangements. Despite progress made in closely monitoring the implementation of DAC, the European Commission has continually sought to enhance the automatic exchange of information and strengthen administrative cooperation among member states. DAC7 comes in the wake of the Organisation for Economic Cooperation and Development’s (OECD) ‘Model Reporting Rules for Digital Platforms’ (MRDP).
The changes include the introduction of a new audit framework with a strong focus on transparency surrounding the exchange of information. The onus of responsibility lies with ‘platform operators’, such as tech companies, live streaming apps and online travel agents, to disclose income information of sellers who have conducted commercial activities. This applies to all personal services and the sale of goods on the platforms as well as the rental of any mode of transport and immovable property, both residential and commercial, including parking spaces. Businesses that don’t comply face severe penalties.
Tax fraud penalties in EU states
DAC7 covers the obligations of EU and non-EU platforms, especially in instances where they might facilitate the commercial activity (domestic and cross-border) carried out by EU sellers and suppliers. It is noted, however, that stock exchange-listed sellers and some platforms, for example, those dealing only with the processing of payments or the advertising and listing of goods, are exempt.
What kind of information is required by the directive to be disclosed? As well as the financial amounts paid to sellers including any taxes, fees and commission charged by the platform operators, the address of any property and seller must also be declared. In the case of the latter, VAT, tax ID and business registration numbers are also needed. It is the responsibility of the platforms to request all relevant information from sellers, who have up to 60 days to provide it, failing which their accounts must be closed or any payments withheld.
In terms of timelines, member states have until the end of 2022 to apply the directive and formally adopt it as law, thereby coming into effect on 1 January 2023. Platform operators will have until 31 January 2024 to report any commercial activities. The directive also stipulates those penalties regarding the failure of non-compliance of DAC7 are to be imposed by the individual member state – as long as these are “effective, proportionate and dissuasive”. Clearly, platform operators will need to start reviewing their data management systems and processes as soon as possible to prepare.
As we’ve seen previously with tax havens, the EU is hot on the heels of companies that might seek to under-declare their income in a bid to commit tax fraud and tax evasion. This is yet another example of the appetite to increase the transparent exchange of information and claw back lost millions in tax revenue. Global recruiters operating and placing contractors in the EU must be aware of all the latest developments or risk having to pay fines penalties for not complying. For all your contractor management requirements, you can call our 6CATSPRO experts for advice.