The Italian version of this article is available on AgendaDigitale.eu at this link.
This article has been also published on the EACCNY website on February 2, 2021.
Increasing use of digital platforms to sell goods and services, according to the information available to the Commission, has led to inconsistent income reporting and significantly raised the risk of tax evasion.
The Commission hopes to put in place via the Commission proposal[1] (the “Commission Proposal” or “Proposal”) amending the directive regarding administrative cooperation in the field of taxation, also known as the DAC (Directive 2011/16/EU) a consistent system with common rules applicable to all Member States, especially in light of the border-crossing nature of many of the services provided by platform operators.
The solution is to seek to work together with private entities that owns the information needed to reconstruct income earned by digital commercial operators that currently may be overlooked by tax audits. If the Proposal is accepted by the States, the digital platforms shall be required to do their part in reporting information to tax authorities and complying with stringent reporting requirements. To do so they will need to invest both time and resources and, above all, to restructure their internal processes so that accurate due diligence can be conducted on Vendors in a timely manner.
What will change from 2022?
As the economy grows increasingly digital and dematerialized, Europe needs to team up with the major players in the platform economy to do battle against tax fraud, avoidance, and evasion. The ministers of economy and finance agree on the Proposal and on the need for new tools, in the form of sharing information about transactions and fostering transparency with regard to the revenues of vendors that sell goods and services on digital platforms.
Amazon, eBay, and Airbnb are just a few of the platforms affected by the new requirements. They may be asked to provide information on merchant, seller, and host transactions, making it easier for European tax authorities to assess and confirm the revenues of those parties. Member States are expected to receive the contents of the Proposal by December 31, 2021 so that they can then report information on the relative revenues generated on digital platforms beginning January 1, 2022.
It has been clear for some time that economic transactions on digital platforms—many of which are managed by companies based outside of the European Union—share certain characteristics that make it very difficult to identify business that generates tax obligations in European Union countries. The mechanism that has evolved has led to decreased tax revenues for Member States and further highlights the sharp tax disparity between “digitalized parties” and traditional economic operators.
What’s in the Proposal?
The Commission Proposal is arriving in a very fragmented regulatory context that is full of gaps and that lacks consistent regulation and application across individual Member States. Therefore, the idea is to require all platform operators to provide national tax authorities with a consistent set of information about revenues generated by vendors; European authorities could then share information, which should, in turn, lay the groundwork for a consistent approach across all European Union States.
Details of the reporting procedure that operators must follow are contained in Attachment V[2] (“Annex V”) of the Proposal, which establishes the following:
- the types of businesses subject to reporting; (
- the parties required to provide reporting;
- the parties about which operators must report information; and
- the reporting procedure.
What types of businesses are subject to reporting?
Businesses subject to reporting (the “Relevant Businesses”) are those geared to users of digital platforms for a fee, which fall into the following categories:
- leasing real estate;
- personal services;
- sale of goods;
- leasing any type of vehicle;
- crowdfunding investments and loans.
Types of businesses that are not subject to reporting requirements are those conducted by a vendor positioned as an employee of a platform operator that does have a reporting requirement or a body affiliated with such an operator.
Which parties are required to provide reporting?
The parties required to provide reporting (the “Platform Operators”) are operators of platforms (whether websites or apps) that allow vendors—who sign relevant contracts—to connect with potential customers for the purpose of directly or indirectly conducting Pertinent Business and that meet the following location requirements:
- residency for tax purposes in a Member State;
- established under the laws of a Member State;
- headquarters or a permanent establishment in a Member State.
In order to ensure that EU and non-EU platforms operate on equal footing, and with an eye to cutting off routes to unfair competition that might be detrimental to European operators, the Proposal also requires Platform Operators that do not meet the above location requirements (e.g., foreign platforms) but that facilitate leasing of real estate properties located in a Member State or conduct Relevant Business to be subject to reporting requirements; furthermore, they must register in a Member State in order to operate.
The Proposal also states that software that is used solely for the purpose of (i) processing payments; (ii) user listings or advertising; or (iii) potentially redirecting or transferring users to another platform is not subject to reporting requirements.
About which parties must operators provide information?
Given the widespread use of digital platforms across a wide range of business activities by both legal persons and legal entities, the Commission believes it is fundamentally important that information that must be reported shall be considered such regardless of the legal status of the vendor, with the sole exception of government bodies.
More specifically, Platform Operators must report to the appropriate authorities of the Member State all relevant information regarding parties (the “Vendors”) that:
- conduct business that falls under Relevant Businesses or that are remunerated/receive fees in relation to said businesses, and
- are located in a Member State[3] or lease real estate located in a Member State.
Platform Operators must take steps should a Vendor fail to provide the necessary information to be reported to tax authorities after two requests. Specifically, Platform Operators may close the account of Vendors in breach of the above and block it from registering on the platform for a period of six months or withhold the fees due.
What is the reporting procedure?
Platform Operators must collect and verify the information needed to identify Vendors operating in Member States.
Each Platform Operator must report to the appropriate authority of the Member State where it is located or registered certain information, such as, for example (and not limited to), the vendor’s personal data, the account number for the account to which fees for goods sold or services rendered are paid, and quarterly earnings.
For its part, the Authority receiving the information shall relay it to the Member State(s) in which Vendors are residents or where their real estate is located. This should ensure that tax authorities receive the information they need to allow them to draw up yearly tax assessments in a timely manner.
Measures predating the Commission Proposal
The Commission Proposal is not the first supranational effort to craft tax regulations for economic transactions that do not take place in a specific physical location.
Indeed, the earliest efforts to combat tax evasion in the e-commerce field date back a full twenty years, when, as part of international regulation designed to avoid double taxation, the OECD in its “Clarification on the Application of the Permanent Establishment Definition in E-Commerce: Changes to the Commentary on Article 5” provided criteria to use when determining the nation where an e-commerce company ought to be considered a taxpayer. Originally, focus was on the server, because it had a physical location and potentially could be used to identify a permanent establishment for the party that controlled its use.
The OECD later issued several sets of guidelines, reports, and amendments to its Model Agreement to fight double taxation as it attempted to adapt to a constantly changing world and to the dissolution of traditional paradigms used to determine residency for tax purposes.
In Italy, the 2018 Budget Law, in compliance with OECD guidelines, expanded the definition of a permanent establishment to encompass all scenarios in which a company has a “significant and ongoing economic presence in a country’s territory,” when organized in such a way that it does not have a physical presence in that territory. The Italian legislature expanded this definition to include companies that conduct their business in a wholly or partially dematerialized manner, yet generate earnings within national borders.
In 2018, the Commission also proposed measures for a common tax system with taxes on proceeds from providing certain digital services (COM (2018) 148/F1). These proposals, which never went into effect, were designed to (i) extend the concept of a permanent establishment to include those with a “significant digital presence”; and (ii) cover certain businesses on digital platforms with various users deployed all over Europe.
[1] “Proposal for a Council Directive amending Council Directive 2011/16/EU on administrative cooperation in the field of taxation” – COM/2020/314 final is available here: https://ec.europa.eu/taxation_customs/sites/taxation/files/2020_tax_package_dac7_en.pdf
[2] To see Attachment V to the Commission Proposal, click here: https://ec.europa.eu/taxation_customs/sites/taxation/files/2020_tax_package_dac7_annex_en.pdf
[3] A vendor shall be considered a resident of a Member State if during the reporting period: (a) it has its main address in a Member State; (b) it has a tax identification or VAT number issued by a Member State; (c) if the vendor is a body, it had a permanent establishment in a Member State.
