The exchange of information has been widely considered as a one of the most effective measures in tackling tax evasion and protecting the integrity of tax systems. Historically, the exchange of information was facilitated through bilateral tax treaties, the multilateral Convention on Mutual Administrative Assistance and, more recently, in the context of the Global Forum on Transparency and Exchange of Information.
At a European level, the exchange of information was institutionalized with the introduction of the European Directive in administrative cooperation in the field of taxation (DAC) in 2011[1]. The scope of application of the Directive was significantly expanded in 2014 with the recast of the Directive and the introduction of DAC2, encompassing the rules of the OECD’s Common Reporting Standard, introducing a system of automatic exchange of financial account information. In 2018, through DAC6[2], the EU introduced reporting obligations on intermediaries to disclose reportable cross border arrangements, that trigger certain hallmarks and may potentially entail elements of aggressive tax planning.
Over the last years, the expansion of the digital economy and the new types of services relating to e-commerce gave rise to new additional streams of income and new types of digital assets. The need to adjust the framework for the exchange of information in order to accommodate the recent trends and developments emerged.
The rise of the sharing and gig economy, powered by digital platforms, has created new economic actors which carry their activities in non-conventional ways. Under the DAC7 Directive[3] digital platform operators with nexus in the EU will have to identify certain sellers and report information regarding sellers and certain relevant activities. The Relevant Activities include the rental of immovable property, including both residential and commercial property, personal services, the sale of goods, the rental of any mode of transport, when carried out for a consideration. Platforms should file information in relation to the so-called reportable sellers, i.e. individuals, companies or legal arrangements, that carry out a relevant activity and either are resident in the EU or rent out immovable property located in a Member State. The provisions of the Directive should enter into force on 1 January 2023 and the first reporting is expected by 31 January 2024.
Aiming to tackle yet another form of tax evasion, and in this specific case VAT fraud, the EU has introduced rules[4] to establish a Central Electronic System of Payments (CESOP), requiring payment service providers (PSPs - as defined under the Payment Services Directive 2). Though an amendment to the VAT Directive, CESOP may be seen as yet another DAC-like initiative. PSPs will need to report payment data to their local tax authorities on a quarterly basis, who will share this data with other EU countries in a central database called CESOP (Central Electronic System of Payment information). CESOP will enter into force on 1 January 2024.
Notwithstanding the recent so-called ‘’crypto crash’’ given the sizeable increase in investing in crypto assets and e-money in recent years, there were concerns of taxpayers not understanding the tax obligations accompanying cryptos and e-money. This obviously led to growing risks for uncollected tax revenue through intended or even unintended means. The EU is responding through another link in the DAC chain, the expected DAC8 Directive, which introduces new rules that will require all financial institutions, such as crypto exchanges, e-money institutions and other platforms to report transactions on an annual basis. The proposed rules are admittedly broad in scope, especially as far as the types of digital assets that fall within the ambit of the proposed set of rules. At the same time, in October 2022, the OECD published their final report for a new Crypto Assets Reporting Framework, which details new and amended reporting requirements covering the reporting of crypto-assets and e-money. In addition, broader revisions to the existing Common Reporting Standard (CRS) are also proposed. OECD is expected to push for adoption globally from 2024 onwards.
While the specifics of each of the aforementioned frameworks will differ, a common modus operandi is expected to exist. Information will be shared automatically between tax authorities to allow them to target under-declared or even non-declared income. From a procedural standpoint, affected organisations will need to adjust their existing procedures or even adopt new ones in order to collect, validate documentation, identify, classify and monitor their clientele and through a process of data control, to report specific data to the respective tax authorities.
Panayiotis Tziongouros
Director
International Tax and Transaction Services
EY Cyprus
[1] Council Directive EU 2011/16/EU
[2] Council Directive (EU) 2018/822
[3] Council Directive (EU) 2021/514
[4] Directive 2020/284 and Commission Implementing Regulation (EU) 2022/1504
