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DAC 7 and DAC 8: A new set of rules to expand reporting obligations for more tax transparency to the digital economy and crypto environments

26/10/21

In brief

While the Directive on Administrative Cooperation ("DAC") 6 aims to enhance tax transparency through automatic exchange of information between European Union ("EU") Member States on potential "aggressive tax planning" and circumvention of Common Reporting Standard ("CRS") reporting and Ultimate Beneficial Owner ("UBO") identification schemes, additional regulations also intend to strengthen transparency obligations in tax matters in broader areas. 

In this regard, the Council of the EU adopted on March 22, 2021 the proposal for DAC 7 in order to extend the EU tax transparency rules to digital platforms. 

Besides, the EU commission launched in March 2021 a public consultation to collect data and evidence in order to evaluate the need for new rules on reporting and exchange of information for tax purposes (corporate tax, personal tax and VAT) on e-money and crypto assets. This may lead to a potential future proposal for an EU Council directive “DAC 8” to enlarge the exchange of information framework in the field of taxation and include crypto-assets and e-money. 

In detail

DAC 7: the new digital platform reporting rules

DAC 7 addresses obligations on so-called reporting platform operators (located both inside and outside the EU), that perform a relevant activity, to collect and verify information on their users and notably on seller’s nature so that said platforms can report the necessary information to one single Member State on a regular basis. It also introduces new (standardised) automatic exchange of information between the EU tax authorities, regarding the taxable events and income generated through these platforms.

A platform operator is to be understood as "any software, including a website or a part thereof and applications, including mobile applications, accessible by users and allowing sellers to be connected to other users for the purpose of carrying out a relevant activity, directly or indirectly, to such users. It also includes any arrangement for the collection and payment of a Consideration in respect of relevant activity". 

As a result, this new extension of the DAC will certainly require the said platforms to quickly adapt to these new rules, even though some EU Member States already have similar rules in place. 

Reporting platform operator

A reporting platform operator is a resident of a Member State for tax purposes or incorporated, managed or has a permanent establishment in a Member State. In default, if a platform operator does not meet one of the previous criteria, it can still be considered as a reporting platform operator if it facilitates the carrying out of a relevant activity in a Member States under certain conditions, even if it is not located in the EU.

Relevant activities covered and information

The DAC 7 annex provides explicit definitions of the terms contained within the directive for which a disclosure obligation will be required.

In this respect, the transactions covered within the scope of the relevant activities that reporting platform operators will have to report, are the following:

  • the rental of immovable property;
  • the personal services;
  • the sale of goods;
  • the rental of any mode of transport.

The information to be collected by platform operators is extensive and ranges from company name, tax identification number (TIN and VAT), tax residence to financial accounts used. Those data would be obtained either from the seller (as financial institutions are doing under CRS) or from publicly available data sources.

In addition, the directive requires that such information be verified and subjected to periodic renewal. For instance, TIN and VAT numbers obtained from the sellers should be cross-checked with EU public databases. In case of doubt, additional supporting documentation should be obtained.

Some sellers are excluded from the platform’s reporting obligations, notably sellers for which the platform facilitated less than 30 transactions and for which the total amount of consideration did not exceed EUR 2,000 in a certain period of time.

Entry into force of DAC 7

Member States have to implement DAC 7 until December 31, 2022. 

After this date, digital platform operators will have to declare to the local authorities where they have their residence and the information concerning the income generated by their customers for each calendar year before January 31 of the following year. 

The first declaration will therefore have to be filed by operators before January 31, 2024 in respect of transactions for the year 2023, so that the tax administrations can exchange information by the end of February 2024.

In the event of non-respect of the reporting obligations, Member States will have the sovereignty to apply effective, proportionate and dissuasive penalties.

How can we help?

Based on our broad experiences on previous DAC versions, our Luxembourg tax transparency team could assist you dealing with this new reporting obligation, in particular by: 

  1. Conducting an eligibility and impact assessment, specifically tailored to digital platforms to assess whether your digital solutions are in scope, if your current systems collect the right information to be compliant and if you have processes in place to ensure that such information is reasonable; 

  2. Designing a target operating model considering your risk exposure to this directive and the different options available (e.g. where to report);

  3. Drafting procedures and control plans as well as training the relevant stakeholders;

  4. Collecting and verifying user tax information in a digital platform and ensuring that proper audit trails are maintained in case of controls of the relevant tax authorities; 

  5. Preparing and filing DAC 7 reports to the relevant tax authorities as a managed service.

DAC 8: reporting obligations for e-money and crypto assets

On 15 July 2020, the EU Commission adopted a new tax package namely the "Action Plan for Fair and Simple Taxation Supporting the Recovery Strategy" ("Action Plan"), which reinforces the fight against tax abuse. The Action Plan aims notably at updating the DAC to expand its scope and strengthen the administrative cooperation framework. As a result, the DAC 8 initiative and the related public consultation launched by the EU Commission in March also seek to ensure adequate tax transparency and proper taxation of income generated by investments or payments in crypto-assets and e-money. This initiative would ensure consistency as well with ongoing work at EU level in this respect, such as future legislative proposal on anti-money laundering and terrorism financing.

Context

(i) Development of new payment and investment products

The current technological developments combined with new financial trends have made it possible to offer customers new products and to increase efficiency gains. As such, crypto-assets and e-money have rapidly evolved over the last few years and represent a significant challenge in today's regulatory world while not being properly covered however by existing regulations notably regarding tax, money laundering and terrorist financing rules.

Crypto-assets and e-money, which can be used both for payment or investment purposes, raise classification issues and tax compliance complications. Difficulties arising from the qualification of crypto assets are not the only ones that the EU will have to tackle. Indeed, the absence of definition of crypto-assets and e-money, lack of centralised control, their pseudo-anonymity and valuation difficulties are all elements that will have to be taken into account.

(ii) Compliance challenges raised by these new products

From a Luxembourg tax perspective, Circular L.I.R. n° 14/5 – 99/3 – 99bis/3 of July 26, 2018 statesthat corporate taxpayers who derive business profits from a crypto or e-money related activity should be subjected to corporate income tax and municipal business tax in Luxembourg, while Luxembourg individual tax residents would remain subjected to personal income tax on such income (i.e. either the commercial income, benefit in kind, income from securities or capital gains taxation regime would apply, depending on the activity and investment performed).

However, for crypto-assets and e-money, there is no obligation for financial intermediaries to report to tax administrations for an exchange of information between Member States, as crypto-assets and e-money, as well as the relevant intermediaries for these assets, are not currently fully covered by DAC. It is therefore expected that electronic money establishments and crypto-assets custodians may be required to identify the tax residence of their clients and annually report them to their respective tax authorities under CRS.  

Objectives of DAC 8

Objectives of DAC 8 will be to establish a uniform transparency within the Member States and disclosure requirements for crypto-asset services providers and issuers, as well as for e-money institutions in order to ensure fair taxation. 

Beyond the uniformity sought by DAC 8, the implementation of this project aims also at keeping compliance costs to a minimum by providing a common EU reporting standard.

Therefore, the terms of the proposal would be key to assess the real impacts of DAC 8 over crypto-asset services providers and issuers as well as for e-money institutions and ultimately the actors of said platforms.

The public consultation on DAC 8

In this respect, a public consultation was launched in March 2021, which was divided into two sections:

  • The first section focused on the crypto-sphere in general in order to gather information regarding different aspects of the crypto-asset and e-money field so as to help the EU Commission to determine whether an EU legislative initiative to target tax revenue losses due to the underreporting of income/revenues generated by crypto-assets and e-money is needed; 

  • The second section did not focus on crypto assets, but rather aimed at gathering views of stakeholders on the global EU framework on administrative cooperation and reporting obligations.

The consultation period concluded on June 2, 2021 and the EU Commission will use the information gathered to prepare and define a new set of rules, planned for third quarter of 2021, to potentially update DAC and expand its scope to crypto asset and e-money.

How can we help?

We, at PwC Luxembourg, can assist you throughout any of the following processes:

  1. Monitoring the impact of DAC 8 (once available) on your structure;

  2. Assist you for any tax compliance issues you may encounter and obligations you should fulfill in this regard.

Contact us

Nicolas Sansonnet

Tax Director, Alternative Investment Funds & Wealth Management, PwC Luxembourg

Tel: +352 49 48 48 2025

Estelle Gille

Tax Senior Manager, Wealth Management, PwC Luxembourg

Tel: +352 49 48 48 3423

Pierre Kirsch

Partner, Tax Information Reporting Sàrl, PwC Luxembourg

Tel: +352 49 48 48 4031

Camille Perez

Director, PwC Tax Information reporting Sàrl, PwC Luxembourg

Tel: +352 49 48 48 4618

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