The creator economy is booming and has become a $100 billion industry. This unprecedented growth triggered the EU council to impose DAC7 to foster tax transparency along with other industries sharing similar features. The new directive will take effect starting January 1, 2023, and will apply to digital platforms operated in the EU as well as Non-Union jurisdictions.
What is DAC7?
DAC7 is a directive on cooperation between different EU member states on gathering and reporting data about natural and legal entities and their earnings through digital platforms and marketplaces.
The directive will force platforms to start reporting commissions earned by users selling goods, services, and rental of transportation and accommodation. Including influencer platforms, task-based-work platforms, used-goods marketplaces, etc. In other words, platforms such as Upwork, Fiverr, eBay, and Uber.
However, certain platforms are exempted from DAC7 requirements, e.g. if they don't actively handle payment flows and only list goods or services online.
Why Is DAC7 Important?
The astonishing growth of digital platforms has provided an avenue for the EU to revive the economy after the pandemic. However, income earned through platforms has remained intransparent for tax authorities. Thus, the proposed DAC7 is to improve traceability for tax authorities when the money is sent across borders. The directive states that proactive collection of information on the platform level during, e.g. registration is better rather than tax authorities trying to investigate it in hindsight.That is good news for businesses and honest entrepreneurs since it prevents tax fraud, tax evasion, and tax avoidance thus improving their competitiveness.
What Do You Need To Know About DAC7 As A Platform Operator?
As a digital platform in the gig or creator economy that facilitates personal services, your platform must comply with the DAC7 directive to avoid sanctions.
DAC7 has a few important steps for digital platforms to stay compliant:
>> Collect data
The platforms must collect slightly different data depending on whether their users are individuals or companies. Below are the lists of data points needed to collect.
IndividualCompanyFull nameYesYesPrimary AddressYesYesTIN (Tax identification number)*Yes**YesMember state of issuedYesYesVAT numberYesYesBusiness registration numberNoYesDate of BirthYesNoMember state of each permanent establishment of relevant activityNoYes
* All TINs that the Seller may have, unless it's not issued or required by the Member State of residence
** If no such number is issued, the place of birth of the Seller should be collected.
>> Verify data
The platform verifies customer data they have collected, which is possible to do so through digital means offered by a member state or the EU. The main data points that should be verified, if possible, are the users' TIN or VAT numbers.
If the platform deems the customer data unreliable, they should take additional measures to verify it, e.g. requesting official documents.
>> Update and renew data
The platform shall periodically request that its users provide new information. At the very least, they must do such periodic reviews at 36-month intervals. If the platform has reasons to believe that the data is out-of-date, they shall request the user to update their data sooner.
The platform shall report the customer data collected above, as well as data related to the commission that their users have earned throughout the year. The reporting shall be done annually, by the latest by March year after the commission has been earned.
What Happens If The Platform Is Not Compliant?
Fines for platforms that don't comply with DAC7 range from SEK 2,500 to SEK 12,500 per user, even more, depending on the member state involved. Details of the sanctions are still somewhat unknown in each member state. So it's left for each state to decide on an appropriate measure, as long as they are "effective, proportionate and dissuasive."
For instance, a year ago, Belgium introduced DAC7' light' reporting obligations for digital platforms within the gig economy, which will be removed to give room for the new DAC7 legislation. The Belgium tax authorities issued a comprehensive FAQ to clarify the DAC7 'light' information and reporting obligations.
The FAQ confirms that since no specific penalty is provided for noncompliance with the DAC 7 obligations, the general penalty provisions of the BITC (Belgian Income Tax Code) apply. Fines for noncompliance range from EUR 50 to EUR 1,250 per seller.
In Ireland, the Finance Act 2021 provides that a fine of €19,045 may be imposed for noncompliance and late reporting. And if there's a failure to deliver a return, a further penalty of €2,535 shall apply for each day the failure continues.
Here in Sweden, Swedish platforms are already preparing for DAC7 to remain compliant upon its activation on January 1, 2023.
The Cost To Implement DAC7
According to EU estimates:
- EUR 400,000 to implement per platform
- EUR 50,000 per platform per year to maintain
- One-off cost per seller and platform: €25-58
- Recurring costs for the seller that are being reported per platform: €3-6
One FTE takes (30 minutes per registration and +10 minutes per seller to update data annually) and with a salary of SEK 36,500. That is SEK 575,000 per year in salary cost (i.e. including employer fees).
Estimates Of Affected Platforms/Sellers
According to our Swedish estimates, 400,000 sellers and 350 platforms will be affected, of which 2/3 are Swedish platforms, and 1/3 are international with Swedish sellers. In contrast, our EU estimates show that about 10 – 35 million sellers and 500 - 2,300 platforms will be affected. Note, that there are concerns expressed by both Swedish authorities as well as the EU about the accuracy of the estimates.
How Can You Prepare For DAC7?
Your business will face extra administrative work when dealing with DAC7, which often could derail your platform from its core purpose, which is serving as the bridge between sellers and buyers. Notwithstanding, there are things you can do to prepare, such as:
- Learning more about what obligations you have related following the implementation of the DAC7 Directive
- Map out what data you collect today and what data you are missing
- Make sure that you know what data you can verify and where you can do it
- Automate your process to avoid a bad user experience
- Set up processes for determining the reliability of the seller's data and updating it when needed
- Ensure that you report everything on time to the Tax Authorities
This new directive means that digital platforms will need robust and flexible compliance solutions to handle the additional administrative demands. A solution like that can either be built in-house or bought from a third-party provider like Gigapay. No matter which option your platform prefers, it is important to be ready for when the directive is put into force on the 1st of January.