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What is DAC 7?
On September 30, 2022, amendments to the Tax and Social Insurance Procedure Code were proposed, introducing the seventh amendment to EU Directive 2011/16 on administrative cooperation in taxation, also known as DAC 7. These amendments pertain to the automatic exchange of information on income received by individuals who sell goods and services through digital platforms. The aim of DAC 7 is to improve tax compliance and increase transparency regarding income generated through digital platforms.
What is a digital platform?
A digital platform is a software product that can be a website, computer, or mobile application. The primary function of this platform is to connect sellers with users who want to purchase their goods or services. The platform acts as an intermediary between sellers and end users.
Not every platform falls under the definition of DAC 7. A platform does not include a software product that only performs the following actions without additional services or mediation:
- Processing payments: For example, payment processors that only handle payments but do not directly connect sellers and buyers.
- Advertising or listing: For example, classified ad sites where users post their offers but cannot conclude contracts directly through the platform.
- Redirecting or transferring users: Platforms that simply redirect traffic to other platforms without participating in commercial transactions.
Why was DAC 7 introduced?
DAC 7 aims to prevent tax evasion and ensure fair taxation. By collecting and reporting information on sellers’ income, tax authorities will be able to more effectively monitor tax compliance and take measures against tax fraud.
Who is affected?
DAC 7 affects all operators of digital platforms that allow third parties to conduct business activities on their platforms. This includes:
- Renting out real estate
- Providing personal services
- Selling goods
- Renting out vehicles
What are the obligations of digital platform operators?
Registration: They must register in one EU member state (or outside the EU if the platform has a connection to that state).
Collecting and storing information: They must collect, store, monitor, and verify information about the sellers using their platforms.
Reporting: They must annually report information on sellers’ income to local tax authorities. This includes providing a copy of the reported information to the sellers themselves and submitting the data in a standardized format (XML file) to the National Revenue Agency (NRA) or the relevant tax authority.
Due diligence: They must apply ongoing due diligence procedures for the sellers.
What does DAC 7 mean for freelancers?
If you are a freelancer using platforms like Upwork, Fiverr, or others, you should know that your income will be reported to tax authorities even if you do not declare it yourself. This means tax authorities will be aware of your earnings and will require you to pay the due taxes. This is a step towards greater transparency and fairness in taxation.
Important deadlines
The new rules take effect on January 1, 2023. The first reporting period is the calendar year 2023, and the information must be reported by January 31, 2024. Annual due diligence procedures must be completed by December 31 of the respective year.
Consequences of non-compliance
Failure to comply with DAC 7 obligations can lead to serious consequences. Companies may face significant penalties, including fines and other sanctions depending on the nature and scope of the violation. In the most severe cases, this could lead to the blocking of the platform’s operations. Additionally, the competent authorities of two or more EU member states may conduct joint audits and inspections, which could further increase the administrative burden and risks for businesses.
What should you do?
it is important to familiarise yourself with the new requirements and start preparing your business for compliance with DAC 7. This includes:
- Registering in the relevant member state
- Collecting and storing the necessary information
- Regularly reporting to tax authorities
By taking these steps, you can ensure compliance with the new regulations and avoid potential sanctions. Make sure you understand the new requirements and take the necessary actions to adapt your business to them.