The unstoppable development of the cooperation between tax authorities in the EU

February 2022 | EXPERT BRIEFING | CORPORATE TAX

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Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC) was created with the aim of tackling tax fraud, evasion and avoidance by, among other means, the exchange of certain fiscal information between different member states’ tax administrations.

Information exchanges can take place on request, spontaneously or automatically, the latter being the most effective form for achieving DAC’s objectives and therefore the one on which it is particularly focused.

Initially, the mandatory automatic exchange of information concerned only five non-financial categories of income and capital: income from employment, director’s fees, life insurance products not covered by other directives, pensions, and ownership of and income from immovable property.

However, the DAC was subsequently amended to gradually extend the scope of mandatory automatic exchange of information to financial information (interest, dividends and similar type of income, gross proceeds from the sale of financial assets and other income, and account balances) (DAC2), cross-border tax rulings and advance pricing arrangements (DAC3), information on country-by-country reporting (DAC4), anti-money laundering information (DAC5), potentially aggressive cross-border tax planning arrangements (DAC6) and, recently, to income generated by sellers on digital platforms (DAC7).

In addition, the European Commission (EC) has begun work on a proposal to expand the scope to crypto-assets and e-money (DAC8).

DAC7: new tax transparency rules on digital platforms and other amendments

The EC carried out an evaluation of the DAC in 2019, concluding that, although significant improvements had been made, there was still a need to improve provisions concerning all forms of exchanges of information and administrative cooperation.

For this reason, in 2021, the DAC has been further amended by Directive (EU) 2021/514 of 22 March 2021 (DAC7) with the aim of: (i) extending the scope of mandatory automatic exchange of information to revenue from sales made through digital platforms as well as to royalties; (ii) introducing clarifications in relation to the exchange of information on request; (iii) clarifying the regulatory framework for conducting joint audits; and (iv) improving the security of all data exchanged between member states’ competent authorities in the framework of the DAC.

Extending the automatic exchange of information to revenue from sales made through digital platforms. The DAC has been amended by DAC7 primarily to extend the mandatory automatic exchange of information to income generated by sellers on digital platforms.

This has become necessary due to the increasing digitalisation of the economy and the cross-border nature of services offered through platform operators. This complexity has inevitably led to tax fraud, evasion and avoidance, since member states’ tax administrations have insufficient information to correctly assess and control gross income earned in their country from commercial activities performed with the intermediation of digital platforms. This is particularly problematic where the income or taxable amount flows via digital platforms established in another jurisdiction.

Against this background, and on the basis of the ‘Organisation for Economic Co-operation and Development (OECD) Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy’, published in July 2020, new tax transparency rules on digital platforms have been introduced in the DAC.

To this end, platform operators must disclose to the corresponding member state information on sellers using those platforms. Subsequently, member states must communicate, by automatic exchange, such information to the member state in which the seller is resident.

The reporting obligation will also be extended to those platform operators which perform commercial activity in the European Union but are neither resident for tax purposes, nor incorporated or managed, or have a permanent establishment in a member state (known as foreign platform operators). This will ensure a level playing field among all digital platforms and prevent unfair competition. To achieve this objective, foreign platform operators will be required to register and report in one single member state for the purpose of operating in the internal market.

Relevant activities that fall within the scope of the reporting obligation by platform operators are rental of immovable property, personal services, sale of goods and rental of any mode of transport. This scope is therefore wider than the OECD Model Rules, which do not include the sale of goods.

Extending the automatic exchange of information to royalties. Royalties are now included in the categories of income subject to mandatory automatic exchange of information in order to strengthen the fight against tax fraud, evasion and avoidance.

It is important that member states exchange information related to income derived from intellectual property, as this area of the economy is prone to profit shifting arrangements due to the high mobility of the underlying assets.

Clarifying the exchange of information on request. As provided for in the DAC in relation to the exchange of information upon request, the requested authority should communicate to the requesting authority any information in its possession or obtained as a result of administrative enquiries, which is foreseeably relevant for the administration and enforcement of member states’ domestic laws concerning the taxes falling within the scope of the DAC. To ensure efficient exchanges of information and avoid unjustified request refusals, as well as to provide legal certainty for both tax administrations and taxpayers, the internationally agreed standard of foreseeable relevance should be clearly delimited and codified.

DAC7 clarifies this standard by stating that the requested information is foreseeably relevant where, at the time the request is made, the requesting authority considers that, in accordance with its domestic law, there is a reasonable possibility that the requested information is relevant to the tax affairs of one or several taxpayers, whether identified by name or otherwise, and is justified for the purposes of the investigation.

In order to demonstrate the foreseeable relevance of the requested information, the requesting authority needs to provide the requested authority with at least the following information: the tax purposes for which the information is requested; and a specification of the information requested for the administration or enforcement of its domestic law.

In addition, where the request for information relates to a group of taxpayers that cannot be identified individually, DAC7 also provides the minimum information the requesting authority must provide to meet the foreseeable relevance standard.

The recent judgment of the European Court of Justice of 25 November 2021 (Case C-437/19) seems to point in the same direction as DAC7 on group requests for information, even for fiscal years prior to this change.

Clarifying the legal framework for conducting joint audits. The DAC is supplemented with a number of provisions that further clarify the framework and the main principles that should apply when competent member state authorities choose to a joint audit.

Joint audits should be an additional tool available for administrative cooperation among member states on taxation, supplementing the existing framework that allows officials of another member state to be present in administrative offices and to participate in administrative enquiries, as well as simultaneous controls.

Improving the security of all data exchanged between competent member state authorities in the framework of the DAC. In order to improve the security of all data exchanged between competent member state authorities in the framework of the DAC and, in particular, to limit damages in the event of data security breaches, DAC7 supplements the DAC with procedural rules to be followed by member states and the EC in the event of a data breach and with measures such as requesting suspension of the exchange of information with member states where the data breach occurred.

Entry into force of DAC7

The new tax transparency rules on digital platforms will apply from 1 January 2023 and the first reporting of data will be required by 31 January 2024.

Other amendments introduced by DAC7 will also apply from 1 January 2023, with the exception of the legal framework for conducting joint audits, which will apply from 1 January 2024.

DAC8: new tax transparency rules on crypto-assets and e-money

The EC has begun work on a proposal to further extend the DAC to cover crypto-assets and e-money to promote transparency and tackle tax evasion and avoidance.

Because of the difficulties in tracking and valuing cryptocurrencies, the EC is proposing a seventh amending directive on administrative cooperation in taxation, to be known as DAC8, to enable tax authorities to properly identify crypto-assets and e-money for tax purposes.

The proposed initiative, which is part of the EC’s ‘Action Plan for Fair and Simple Taxation Supporting the Recovery Strategy’ adopted on 15 July 2020, “should provide tax administrations with information to identify taxpayers who are actively using new means of exchange, notably crypto-assets and e-money, in order to curb tax fraud and evasion”.

The EC launched a public consultation, which ended on 2 June 2021, to evaluate the need for new rules on reporting and exchange of tax information on crypto-assets and e-money.

The EC will use the information collected to put forth a proposal originally planned for the third quarter of 2021, but now delayed until the second quarter of 2022.

Final remarks

Recent economic changes, as well as experience gained in administrative cooperation on taxation, have made it necessary to continuously adapt and amend the DAC, even going beyond the international standards set by the OECD for exchange of tax information, in order to make the fight against tax fraud, evasion and avoidance truly effective within the single market.

However, it remains to be seen whether member states’ tax administrations have sufficient resources and means to manage such a large amount of information.

Eduardo Gracia is practice group head of tax and Lorena Viñas is a senior tax expertise lawyer at Ashurst. Mr Gracia can be contacted on +34 91 364 9854 or by email: eduardo.gracia@ashurst.com. Ms Viñas can be contacted on +34 91 364 9417 or by email: lorena.vinas@ashurst.com.

Eduardo Gracia and Lorena Viñas

Ashurst