The origins of DAC7 can be traced back to the EU’s strategy to combat tax fraud, which laid the groundwork for a more unified approach to tax information exchange within the Union. From DAC1 to DAC6, the scope of information exchange gradually expanded to include banking data, cross-border tax rulings, country-by-country reporting, and aggressive tax planning. However, DAC7 takes a significant step forward by shifting the focus to digital platforms, reflecting the trend of global economic digitization.
The core objective of DAC7 is to enhance transparency and tax fairness in activities on digital platforms. To this end, the directive requires the automatic exchange of information regarding sellers on digital platforms, covering a wide range of goods and services. This move has profound implications for traditional financial institutions and the rapidly growing digital economy.
01
Main Provisions
Scope of Application: DAC7 applies to various digital platforms, including those facilitating real estate rentals, personal services, goods sales, and vehicle rentals.
Information Exchange Requirements: Digital platform operators are responsible for reporting detailed information about sellers, including identity, income generated, and the nature of the services or goods sold.
Compliance Obligations: Platform operators must fulfill strict due diligence and reporting requirements to ensure the accuracy and timeliness of information exchange.
02
Requirements for Cross-Border E-Commerce Compliance
Information Reporting and Transparency: According to DAC7, cross-border e-commerce platforms need to report transaction data to EU tax authorities, including the value of goods, quantity, seller information, etc., to ensure transparency in tax regulation. This regulation helps curb tax evasion and avoidance but also increases the compliance burden for cross-border e-commerce.
Identity Verification and VAT Number: Sellers need to legally register within the EU and obtain a VAT number to operate and report taxes legally in the EU. This regulation ensures the legality and transparency of taxes but also increases the registration and compliance costs for sellers.
Payment and Settlement: According to DAC7, cross-border e-commerce must ensure the ability to accept payments from within the EU and pay taxes on time. This regulation helps ensure the timeliness and completeness of tax payments but also places higher demands on the payment and settlement systems of cross-border e-commerce.
The specific implementation and requirements may vary depending on the domestic laws and regulations of member states. For example, according to Amazon’s platform requirements, if a seller’s company is an EU-based company and generates sales of €2,000 or more in the EU this year, or reaches more than 30 transactions, the seller must provide the information stipulated in the Administrative Cooperation Directive – Amendment 7 (DAC7) by October 1 this year.
If a seller fails to take any action within 60 days of receiving the platform’s first notification and does not submit the required information, Amazon will deactivate the seller’s account and withhold funds until the seller provides the required information and passes database verification.
03
Impact on Cross-Border E-Commerce Operational Costs
Increased Compliance Costs: To comply with DAC7’s requirements, cross-border e-commerce needs to invest more resources in tax compliance, data reporting, etc., increasing operational costs. This may place significant financial pressure on small and medium-sized cross-border e-commerce businesses.
Technology Integration and Data Security: Cross-border e-commerce needs to ensure that its IT systems can seamlessly integrate with the EU tax authorities’ systems while ensuring data security. This may require additional technological investment and resource integration to ensure system stability and security.
Logistics and Distribution: Due to the VAT reporting and payment requirements within the EU, cross-border e-commerce needs to optimize its logistics and distribution strategies to ensure timely tax payments and compliance with other requirements. This may place higher demands on cross-border e-commerce’s supply chain management and logistics network.
04
Impact on Market Competition Landscape
Competitive Advantage for Compliant Enterprises: Those cross-border e-commerce businesses that can quickly adapt to DAC7 requirements will gain a competitive advantage, raising the market entry threshold and protecting the interests of compliant enterprises.
Brand Building and Reputation: Tax-compliant businesses find it easier to gain consumer trust, which is beneficial for brand image building and market expansion.
Market Expansion and Potential: Although it presents challenges in the short term, DAC7 helps open up the EU market, bringing more business opportunities and development potential for compliant enterprises in the long run.
05
Impact on Consumer Experience
Shopping Costs May Increase: Due to DAC7’s tax regulation requirements for cross-border e-commerce, prices for certain goods may rise, affecting consumers’ willingness to purchase and their shopping experience.
Enhanced Shopping Experience: For businesses that comply with tax regulations, consumers can enjoy faster, safer delivery services and better after-sales services. This helps improve consumer shopping experience and loyalty.
Increased Information Transparency: Consumers can better understand the tax situation and price composition of goods, enhancing information transparency. This helps strengthen consumer trust and loyalty towards cross-border e-commerce.
06
Seller Response Strategies
To respond to the impacts of DAC7, sellers should take the following measures:
1. Understand and comply with EU tax regulations to ensure timely tax payments.
2. Ensure communication with buyers in their language so they can understand tax regulations and pay taxes on time.
3. Understand and comply with EU intellectual property regulations to ensure that the sold goods do not infringe any intellectual property rights.
4. Communicate with buyers regarding currency and payment issues so they can understand and accept pricing and tax regulations from different countries.
5. Ensure communication regarding language and cultural differences so buyers can understand and accept different consumption habits and expectations.
6. Ensure communication regarding returns and after-sales service issues so that buyers can understand and accept different return and after-sales service policies.
Currently, some sellers are adopting the following strategies to circumvent the DAC7 directive:
UK local accounts have a tax-free threshold of £85,000. Sellers can directly sell without binding VAT, as long as they do not exceed £85,000. By registering multiple UK local businesses on Amazon’s UK site, sellers can use established stores to grant brand authorization to these local stores and sell the same product as the old account. During inventory preparation, distribute a certain quantity of products to these local stores. Thus, each local store’s annual sales do not exceed £85,000, and they do not need to register for UK VAT or pay any taxes.
Northern Ireland local accounts are managed by the UK Companies House, but Northern Ireland has an EU agreement. Therefore, Northern Ireland can sell on the UK site without withholding tax, as well as sell on the European site without withholding tax, and is even unaffected by DAC7 because it is not part of the EU. Since it is managed by the UK Companies House, there is a tax-free threshold of £85,000, and sellers can directly sell without binding VAT as long as they do not exceed £85,000.
In summary, the implementation of the DAC7 directive will make cross-border e-commerce taxation more transparent and standardized. Sellers need to understand and comply with EU tax regulations and related provisions to ensure the compliance and sustainability of their business. At the same time, sellers also need to adapt to the new tax environment and take measures to improve their business efficiency and competitiveness.
Author Profile
Xu Wei, Lawyer
Certified Public Accountant, Certified Tax Consultant, with 10 years of practice experience, providing value-added legal services for enterprises in business management, commercial activities, economic disputes, and capital operations through a dual professional background in law and finance, achieving a balance between “legality” and “efficiency” for enterprises.
Liang Wenrong, Lawyer Leung Vera
Master of Law, Deputy Secretary-General of the Business Professional Committee of Beijing Jingshi (Shenzhen) Law Firm, with qualifications for securities practice. Since practicing, focused on corporate bankruptcy liquidation, corporate compliance, corporate legal affairs, civil dispute resolution, etc., with rich practical experience and adept at using various methods to resolve complex issues.
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