Tax updates in the context of the digital economy
VAT and indirect tax
Tax updates in the context of the digital economy
Mon 15 Nov 2021
Key milestones are being reached in the digital economy in 2021. In this post, we review the most recent legislation and provide insight on how to keep up with the tax aspects of this fast-developing topic.
Digital commerce is increasing globally as the world becomes ever-more interconnected. More and more companies are exclusively active in the virtual environment, via digital platforms and the internet. This makes it much more difficult for tax authorities to trace transactional flows, identify sellers, and ensure taxation of the respective flows in accordance with their respective taxing rules.
The existing tax regimes were established based on a traditional rather than digital business model. It has become necessary to adapt tax rules to the new requirements of the market, so they are effective for activities carried out on digital platforms. In this article, we focus on developments in this area at an international level.
The tax authorities within the EU agreed to cooperate for the purpose of applying taxes correctly towards the taxpayers, whilst also combating tax fraud and tax evasion. As part of this agreement, several rules for the taxation of the digital economy have been adopted.
The first step was taken to address indirect taxation through a brand new e-commerce package which entered into force in July 2021. The purpose of this package was to adapt the VAT rules to evolving electronic commerce by taking into account the principle of taxation at destination (rather than source) in order to both protect Member States’ tax revenue and to also create an equal economic environment for all businesses.
One of the measures implemented in summer 2021 was the extension of the special schemes for telecommunications, broadcasting, and electronic services (TBE) services supplied to non-taxable persons, to cover all types of services, as well as to intra-community sales of goods and sales of goods imported from third countries.
An additional and very important measure was the introduction of a new notion in the VAT spectrum: electronic interface. From 1 July 2021, any electronic interface (such as a marketplace, platform, portal, or similar means) which is facilitating a supply of goods with a value below €150, or where the underlying supplier/seller is not established in the EU is considered a deemed supplier from a VAT point of view. Being a deemed supplier requires the online markets/platform to collect and pay the relevant VAT to the tax authorities.
As a result, in cases where the electronic interface is considered a deemed supplier, the supply from the seller to the customer is artificially split into two: one supply from the seller to the electronic interface, and another from the electronic interface to the customer. The European Commission offered several guidelines with respect to the activities which are not considered to be facilitating a supply of goods, such as processing of payments, listing or advertising of goods, redirecting or transferring of customers to other platforms, etc.
Online marketplaces/platforms need to keep records for the transactions they facilitate, irrespective of whether they become deemed suppliers or not.
It is still too early to determine the impact of these measures, however, it is expected that they will lead to both a substantial reduction of compliance costs for businesses using online market places/platforms and also an increase in the VAT revenues at the EU level (according to the European Commission, the increase is estimated at approx. EUR 7 billion annually).
Another step forward is made through the obligations imposed by a new Directive, known as DAC7 (Council Directive (EU) 2021/514), which will enforce tax transparency rules for digital platforms. The envisaged rules had as a starting point the transparency framework of the OECD known as Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy.
The stated purpose of DAC 7 is to monitor operations in the digital economy, particularly those involving intermediation between an individual or legal suppliers and customers and which, in the absence of reporting mechanisms, would be very difficult to identify and be verified by the tax authorities.
DAC7 defines a platform as any software 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.
The reportable activities will include:
- the rental of immovable property;
- provision of personal services;
- sale of goods;
- the rental of any mode of transport.
In order for such an activity to be reportable, it needs to be carried out for consideration in any form (paid or credited) to the seller, and which the digital platform operator can verify.
The information which should be reported includes the seller’s identity address, the consideration received, tax and financial account identification details (taxpayer identification number, VAT code, financial account, etc).
With regards to the penalties to be imposed, DAC7 states that these should be“effective, proportionate and dissuasive”. The concrete implementation of such penalties will be decided by each EU Member State.
For a formal enactment of DAC7, the Member States have until 31 January 2022 to transpose the provisions into their domestic legislation. Subsequently, the provisions will apply from 1 January 2023, whilst the first exchange of information between the Member States will be on 31 January 2024. Through the transposition of the DAC7 provisions, the national authorities will be able to identify the situations under which the tax should be paid, and the tax burden related to the digital platforms will be reduced. This will lead to a proper functioning internal market, ensuring fair competition across digital platforms, and a correct assessment of the taxes due.
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