Digital platforms face an ever-increasing workload and responsibility when it comes to adhering to reporting obligations from a growing number of tax administrations worldwide. The key recurring phrase used by tax administrations introducing such reporting obligations is 'transparency'.
While these platforms have become accustomed in recent times to ever-increasing responsibilities- first, collecting VAT on digital services, and then to support obligations in terms of low value goods sales. It is not the end. As tax authorities begin to realize the huge advantage they can derive by relying on digital platforms and the wealth of commercial information to which these platforms have access in the normal course, no doubt an increased workload in relation to additional reporting obligations is hovering on the horizon.
The vessel for many of these obligations is the latest Directive on Administrative Cooperation (or DAC7), which was adopted on March 22 this year by the European Union (EU) Council. These reporting obligations, however, are not limited to DAC7: today we already have similar obligations in, for example, German law where digital platforms must request VAT certificates from the sellers of goods on digital platforms.
Recent global developments
As taxing jurisdictions train their focus to sales performed via digital platforms there is more activity when it comes to understanding the impact of these obligations on the business world.
To this end, the following developments outside the EU show how such reporting obligations are growing in popularity among taxing jurisdictions:
- United Kingdom - the government is inviting comments from digital platforms that facilitate the provision of services, such as taxi and private hire services, food delivery services, freelance work and letting of accommodation, as well as those that facilitate the sale of goods and transport rental. The consultation period is open and ends on October 22, 2021.
- Australia - a new bill introduced in Australia's House of Representatives that impacts platforms in the sharing and gig economy. According to the Bill, platform operators will be required to report to the ATO information regarding certain transactions that occur on their platforms, such as seller identification and payment details. The reasoning behind the Bill is also touched on when it states that "a transparency gap has emerged as existing tax reporting requirements do not adequately capture information about transactions in this part of the economy." The proposed introduction date for such rules is July 1, 2022.
- India - Recommendations from India’s GST Council include the extension of GST to e-commerce activities of those in the gig and sharing economy including transport operators and restaurant services. These recommendations are to come into effect from January 1, 2022. More information from the 45th GST Council meeting here. The upshot of these recommendations is that affected e-commerce operators would be liable for tax on services performed via their platforms.
- General - Other reporting obligations have been adopted by Mexico to include withholding responsibilities, and there are city taxes that specifically target digital accommodation platforms (e.g. AirBnB).
Why are tax administrations seeking more reports from digital platforms?
The dramatic increase in the sharing and gig economy has been a windfall for many that sell goods and provide services via digital platforms to customers worldwide. This windfall has led to concerns that not all the sales are being reported and, therefore, potentially significant tax revenue is lost. Tax administrations now want to know more, specifically who (e.g. sellers on digital platforms) is making money from these sales and, crucially, where (e.g. in what jurisdiction) they are doing so. It is believed that this information, together with expected significant information sharing among jurisdictions, will allow tax administrations to identify gaps in their tax collection systems.
The background to, and rationale behind, this increased demand in reporting obligations for digital platforms can be understood on multiple levels. Tax administrations, especially in these pandemic times, believe there is significant leakage of tax revenue and want more information on the business performances of sellers on digital platforms to address this issue. In addition, tax administrations are still playing catch-up with outdated tax collection systems coming to terms with the digitalisation of the economy while there is also the perpetual attempt to level the playing field between traditional local brick-and-mortar businesses and remote digital platforms.
Tax administrations have also realised that they have no visibility on sales by multiple vendors across borders when digital platforms operate in numerous jurisdictions. By introducing new reporting obligations for such digital platforms, tax administrations are attempting to increase their knowledge of the selling activities on these platforms. This knowledge, and increased transparency, is aimed at the more efficient and effective collection of taxes, such as VAT, and mitigation of potential tax evasion.
OECD's model rules for reporting
With more and more activity on this front, the Organisation for Economic Cooperation and Development (OECD) last year published a report titled ‘Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy’.
The aim of this report is to provide interested tax administrations with guidance on how “to collect information on transactions and income realised by platform sellers, in order to contain the proliferation of different domestic reporting requirements and to facilitate the automatic exchange agreements between such interested jurisdictions.”
The situation has led to EU member state tax administrations agreeing to exchange more information. This exchange of information approach is effectively cemented in DAC7.
In a recent communication, the European Commission stated DAC7 attempts to ensure that EU member states “automatically exchange information on the revenues generated by sellers on digital platforms, whether the platform is located in the EU or not.”
On April 19, the OECD issued an additional report building on the body of work in the ‘Model Rules'. This report, 'The Impact of the Growth of the Sharing and Gig Economy on VAT/GST Policy and Administration', is the result of an inclusive consultation process "with more than 100 delegations from countries, jurisdictions and international organisations, as well as representatives from the business community and academia through the OECD Global Forum on VAT."
The 'Model Rules' are referenced in Annex C of this report which emphasises how digital platforms should first report to their jurisdiction of residence and then to the jurisdiction where the sellers are located. The reporting is to include data such as:
- Seller’s name
- Primary address
- Tax Identification Number (including a VAT/GST Registration Number issued by the jurisdiction of the Primary Address of the Seller) and
- Date of birth
Impact on VAT collection is inevitable
Interestingly, the scope of DAC7 was said to not include VAT. However, in practice, it does relate to VAT as the information exchanged can (and likely will) be used by tax administrations to determine whether VAT (as well as income taxes) has been collected correctly.
Indeed the OECD report mentioned earlier stated that "the information reported may also have relevance for other domains, such as indirect taxes . . . such information, which includes the consideration received and the types of services provided in addition to the seller's tax identification data, is likely to be relevant for VAT/GST compliance purposes in the jurisdictions receiving the information."
The OECD report focuses on the use of Tax Identification Numbers (TIN), a VAT/GST registration number, in such reporting obligations. It recommends that reporting digital platforms "should also report any other TIN issued by the jurisdiction of residence of the Seller, including the jurisdiction of issuance."
Requests for VAT/GST registration numbers to be included in such reporting will no doubt mean further tax obligations (perhaps income tax and VAT/GST) for sellers on digital platforms that are included in reports.
The reporting requirements that we have touched on in this article are really just the tip of the iceberg. We are also confident that additional requirements will appear in the near future as jurisdictions battle with reduced tax revenues.
Affected digital platforms should note that the adoption of the DAC7 reporting obligations is the responsibility of EU member states with a deadline to do so by December 31, 2022. The new rules apply from January 1, 2023, onwards with the filing of the first reports for the year 2023 required by January 31, 2024.
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