From Jan. 1, 2023, online platforms in the EU will be required to provide information about their sellers under Council Directive (EU) 2021/514, or DAC7. This gives tax authorities much better insight into sales via platforms. Not only platforms, but also underlying sellers must become aware of the increasing transparency of their activities and take steps where necessary to be compliant.
In this article, we discuss the value-added tax obligations for an online seller or a platform that facilitates sales and the new reporting requirements.
Goods and services are increasingly sold via online platforms, but the majority of VAT rules were drafted before platforms gained their importance in the economy. The rules consequently were made without the new business models in mind, and the applicability of the VAT rules to platforms as well as to platform sellers is not always straightforward.
In addition, many platforms operate globally and have clients all over the world. This can make compliance complicated, because the platform may become responsible for charging and paying VAT in (all) countries where final customers and/or underlying suppliers/platform sellers are located. Platform sellers or platforms facilitating the sales need to understand their EU VAT obligations.
This article not only gives a high-level overview of the new reporting requirements, but also mentions some main aspects that determine the applicability of EU VAT to the sales of goods and provision of services taking place via platforms.
New Reporting Requirements for Platforms
From Jan. 1, 2023, platforms will be obliged to share information on third-party sellers who use their platform. There will be automatic exchange of information among EU tax authorities, enabling them to assess income taxes and VAT correctly.
The reporting obligation applies not only to EU residents, but also to non-EU businesses having no permanent/fixed establishment in the EU who are facilitating, for example, the following “relevant” activities in the EU:
- The sale of goods;
- Any personal services;
- The rental of immovable property; and
- The rental of any mode of transport.
“Personal services” is defined broadly and includes not only services provided online/virtually, but also services provided physically offline after having been facilitated via a platform. It includes any service involving time- or task-based work performed by one or more individuals, acting either independently or on behalf of an entity, and carried out at the request of a user. It includes, for example, services such as transportation and delivery services, tutoring, cleaning, gardening, chores, and work such as bookkeeping, legal advice, and administrative work.
Relevant activities occurring on or after Jan. 1, 2023, are within scope for reporting. Annual reports are required by the end of the first month following the reporting year. The first DAC7 report for the year 2023 is due by Jan. 31, 2024. Many EU member states have already implemented the rules into their national legislation and those that have not done this yet need to do so by Jan. 1, 2023.
How Should Digital Platforms Prepare?
If a platform falls within the scope of DAC7, then it needs to identify sellers and transactions that fall under the reporting obligations, and implement and test the required procedures and tools. The platform needs to assess which of the required data it already receives from platform sellers and what data it still needs to receive.
Although DAC7 is mainly meant to obtain data for income tax purposes, the information also would make the activities of platforms and their underlying sellers more transparent for VAT purposes. Therefore, it is important to evaluate whether the VAT rules are complied with, and what steps need to be taken to become compliant.
Who is Responsible for Paying VAT on Sales Via Platforms?
In order to understand who becomes responsible for the VAT on sales via a platform, it is fundamental to understand:
- The business model applicable; and
- The place of taxation for sales.
Applicable Business Model
Identifying a business model of a platform is the first step in understanding its VAT liability.
Generally speaking, the VAT treatment depends on a form of intermediation used by the platform, whether it acts in its own name (as an undisclosed agent) or in the name of an underlying supplier (as a disclosed agent).
Even if the platform only receives a commission for its activities, it can still be considered a provider of the services or a seller of the goods for VAT purposes if it operates under an undisclosed agency structure. The platform can become liable for VAT on the underlying sale even if it does not become an owner of the goods.
Acting as an Undisclosed Agent for VAT Purposes
For VAT purposes, a fiction applies to supplies by an undisclosed agent/commissionaire. It means that if the commissionaire acts in its own name but on behalf of another person, then it shall be deemed to have received and supplied the services provided by the actual (underlying) supplier to the final customer.
Consequently, if the platform acts as an undisclosed agent then it becomes liable for VAT on sales taking place via its platform. The underlying supplier, however, should in this case take care of its VAT obligations (if any) on its supplies to the platform.
Nature of Supplies and the Place of Taxation
Platforms operating cross-border often become responsible for charging and paying VAT in the countries where the final customers of underlying suppliers are located.
Alternatively, platform sellers may become liable for paying VAT in countries where the final customers reside.
The platform and the underlying suppliers need to map all purchases and supplies and understand their VAT treatment. After the nature of purchases and supplies is identified, it is important to understand the VAT treatment of all transactions.
Some example of possible supplies are:
- Digital services: The place of supply of the cross-border digital services is always in the EU country where the customer is residing. Businesses need to charge and remit the VAT of the customer country unless the customer is a business, which can usually be proved by providing a valid VAT number.
- Sales of goods: Sales of goods via an online platform (also called digital goods) are always taxable in the country where the customer resides.
No threshold exists for cross-border sales of digital goods and/or services unless the seller is established in the EU, in which case the threshold is 10,000 euros ($10,390) for all sales across the EU. This means that when an EU business (which has pan-European sales above the threshold of 10,000 euros) or a non-EU business (no threshold applies) sells goods or services to non-VAT registered customers located in other EU countries, the supplier—either a platform or an underlying supplier depending on the applicable business model—becomes liable to register for VAT in all EU countries where it has customers.
One-Stop Shop Registration
The seller or platform who becomes liable for payment of the VAT in various EU countries could opt for the online One-Stop Shop to avoid registering in each EU country of its customers. However, the OSS cannot be used to report local sales, business-to-business sales or intra-EU stock transfers, for which a local VAT registration may still be required.
Platforms Can Be Considered Deemed Suppliers
An additional challenge for platforms is to understand and apply provisions that create a “VAT fiction” or “deemed supplies.” These rules primarily affect platforms which facilitate the provision of digital services or sales of goods through their platform. These provisions may make the platforms responsible for VAT collection on the supply to a consumer even where contractually the platform is not a party to that supply.
To Sum Up
Online sales become much more transparent after Jan. 1, 2023, when platforms are required to provide information about their sellers under DAC7. Significant due diligence and reporting obligations arise for in-scope digital platform operators.
Those operating a platform or selling goods or services via a platform need to be aware that from 2023 their activities become much more transparent to tax authorities. Therefore, they need to be aware of their VAT obligations and register (retroactively) in all EU countries where they have VATable sales or make use of simplified reporting via the OSS.
Steps to be taken by platforms or sellers:
- Map the activities and transactions;
- Determine whether in scope of DAC7;
- Fulfill the registration, reporting, and due diligence obligations;
- Prepare the data and processes to comply with new requirements;
- Inform sellers what data is needed from them; and
- Evaluate compliance with any tax rules.
What Should Businesses Do to Become VAT Compliant?
- Analyze their contractual relationships and supply chain to understand their VAT obligations and whether they could be considered a deemed supplier;
- Determine any reporting, invoicing and other compliance obligations; and
- Determine whether any VAT registrations are required.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Aiki Kuldkepp is Senior Manager, Tax, with Grant Thornton Netherlands.
The author may be contacted at: firstname.lastname@example.org