During the COVID-19 pandemic, more buyers and sellers conducted business online than ever before, and remote workers flocked to short-term rental properties in far-flung locations. But the gig economy — also called the sharing economy — where individuals earn income by providing on-demand services or goods on a digital platform, such as an app, marketplace, or website, has long existed outside the regulatory boundaries of traditional businesses, enabling its delivery drivers, vacation property owners, and the like to avoid reporting and paying taxes on those transactions.
In the U.S., the Internal Revenue Service has cracked down on gig economy tax evaders, requiring both those generating income from on-demand services and goods as well as the digital platforms and marketplaces hosting those providing services to report that income. The EU has had similar legislation in the works for some time as well. If you’re a platform operator located in the EU, or you have sellers on your platform who are EU residents, you must become familiar with the DAC7 directive to prepare for reporting obligations that begin January 31, 2024.
What is DAC7?
In March 2021, the European Council adopted EU Directive 2021/514, commonly known as the DAC7 directive. DAC7 extends the scope of prior tax transparency rules to digital platforms, requiring platform operators – defined as any software, including a website, that allows sellers to connect with buyers – in the EU to collect and report personal and business information on income realized by sellers using their platforms for certain commercial services.
With a goal of ensuring that all taxes – income tax as well as value-added tax (VAT) – are reported and assessed (something the gig and sharing economy has proven easy to evade), DAC7 went into effect on January 1, 2023, applying to everything from ride-sharing and food delivery apps to vacation and car rental agencies, online jobs, and other marketplaces.
Even businesses in traditional industries may fall within the scope of DAC7 reporting if they connect third-party sellers and users through their website for commercial activities. However, payment processing platforms (e.g., PayPal, Venmo, Stripe) that only allow users to advertise/list goods or services, and platforms that redirect or transfer users to another platform, are exempt from compliance with DAC7.
Who does DAC7 apply to?
DAC7 primarily applies to operators of digital platforms incorporated or managed in the EU and tax residents in the EU engaged in relevant commercial activities. Platform operators located outside the EU who host sellers who are EU residents or facilitate the rental of immovable property located in the EU must comply as well.
Whose information must be reported?
Under DAC7, any digital platform that hosts EU-resident sellers who conduct covered business activities on that platform are required to report that seller’s information. You must also report information about non-EU residents who rent immovable property like a home in an European Union (EU) member state.
On the other hand, government and publicly traded entities are excluded from DAC7 reporting, as are casual sellers who have made fewer than 30 sales and for which the total amount paid doesn’t exceed 2,000 euros in any reporting period. Also excluded are smaller hotel chains and tour operators that conduct fewer than 2,000 transactions in a reporting period.
What information must be reported?
If you’re a platform operator, you were required to begin identifying and collecting the following information for all sellers on your platform (other than those explicitly excluded) as of January 1, 2023, in anticipation of reporting this information to the tax authority of the seller’s EU member state on January 31, 2024:
- The reportable seller’s identity (full name or legal name, primary address, and date of birth)
- EU member state of residence
- Financial account details
- Tax identification number
- VAT/business registration numbers (for entities)
- Consideration paid or credited per quarter, along with any fees, commissions, or taxes withheld by the reporting platform operator
In the case of immovable rental property, you are required to report additional information, including:
- Address and land registration number of each property listing
- Total number of days each property listing was rented
- Total amount paid in the reporting period
- Any fees, commissions, or taxes withheld or charged by the platform in the reporting period
In order to satisfy General Data Protection Regulation (GDPR) requirements, you must inform the seller in advance that their information will be collected and reported. If the seller does not share their data, you are obligated to send two reminders. If the seller has still not provided their data after 60 days, you must remove the seller from your platform and close their account.
In any given reporting year, you will be required to collect and verify the accuracy of the information in accordance with due diligence procedures by December 31 of that year. You may choose to collect the information at one point in time and verify it later, but the entirety of the process must be complete by December 31. By January 31 of the year following the seller’s identification as a reportable seller, you must provide them with a copy of the collected information you intend to report to tax authorities.
How to meet DAC7 reporting obligations
You can meet your reporting obligations for the entire EU by submitting all your EU seller information in one member state. If you are registered in the EU, you will submit your information in the state in which you are registered. If you are not registered in the EU, you may choose an EU member state in which to submit your data.
You must submit your reportable information no later than January 31 of the year following the calendar year in which you identify a reportable seller. The deadline for the first reporting period is January 31, 2024.
Once submitted, the member states’ tax authorities will distribute the data amongst themselves (similar to how the EU’s One Stop Shop for VAT works). EU member states are required to exchange the reported information within two months following the end of the reporting period.
You can submit the information yourself or you can engage an external provider to handle the electronic data submission for you.
NOTE: The UK is expected to become an EU-approved reporting jurisdiction beginning in 2024. Until then, UK platform operators must report the information in a current EU member state.
Just remember that the penalties for noncompliance range from country to country and can run from a few thousand to several hundred thousand euros, depending on the severity of the infraction. In addition to these financial penalties, the EU is empowered to block access to your platform if you are found to repeatedly or intentionally avoid compliance.
Preparing your business for DAC7
The first step in preparing for DAC7 is knowing whether your company falls within the scope of the directive and if the transactions on your platform are reportable. Then, it’s all about the data and your collection, storage, and reporting processes. Here are some initial questions to answer as reporting requirements loom on the horizon:
- Do you already collect the data you need from sellers for reporting purposes? If not, what do you need to do, process- and systems-wise, to collect that data?
- Do you need to amend any terms and conditions (T&Cs) or posted consent policies to facilitate data collection from sellers and notification requirements?
- Which new or additional steps do you need to take to protect the data you collect?
- Which systems and processes do you need to upgrade or implement in order to validate the sellers’ data during the reporting period?
- Which technological changes do you need to make to facilitate reporting data to tax authorities electronically?
- Are you subject to other regulations or laws that have similar collection, verification, and reporting requirements with which you can combine efforts?
How Persona can help
To help platform operators comply with DAC7, our no-code platform can be configured to quickly onboard, verify, and reverify any seller, trader, or merchant. You have the freedom to determine the information you’ll collect from sellers and how you’ll verify this data — whether it involves document verification, business verification, bank account verification, or any combination of techniques.
If you do business in the EU but you’re also based in the U.S., you’re also in scope for compliance with the new INFORM Consumers Act that takes aim at online fraud by adding more transparency to online transactions.
You can use Persona’s Know Your Seller solution to comply with the INFORM Act, making Persona a valuable partner across your compliance efforts.
Interested in learning more? Start for free or get a custom demo today.
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