DAC7 in the EU: Why valid VAT numbers are critical for tax compliance

Last year’s introduction of the Directive on Administrative Cooperation (DAC7A tax directive in the EU that requires digital platform operators to report personal and business information about their providers to tax authorities.) is just one of many new compliance requirements placed on tax teams around the world in recent times.

Aimed at enhancing transparency and combating tax evasion, DAC7 extends the European Union’s (EU’s) tax reporting requirements to include digital platforms.

For businesses operating within or alongside these digital marketplaces, this means a heightened scrutiny on tax obligations.

In particular, DAC7 has been the catalyst for an increased focus on VAT numbers; indeed, these are now of unprecedented importance across the bloc.

What is DAC7?

DAC7, an amendment to the Directive 2011/16/EU, mandates digital platforms to prove the identity and report revenue generated by sellers on their platforms, facilitating tax authorities in identifying tax obligations.

This regulation covers a broad spectrum of digital services, from the sale of goods and services to the rental of property.

Its primary goal is to ensure fair taxation of income generated through the digital economy, thereby levelling the playing field for all market participants.

What details must sellers collect?

Digital marketplaces are now required to collect an extensive data set from sellers, including:

• Name
• VAT number
• Tax residence
• EU member state of residence
• Bank account number of other financial account identifier
• Total VAT paid or credited per year
• Any withheld taxes

The information gathered by each digital marketplace must be provided to the tax authority by 31^st January each year.

And DAC7 is not only about collecting data. The legislation also demands that digital marketplaces must also verify the accuracy and authenticity of the information they collect. This can be achieved by cross-checking with the EU’s databases.

Potential penalties

If online platforms fail to report the relevant data – or it is found to be invalid – by the required deadline, they could face fines.

In terms of individual sellers, marketplaces must send two reminders asking for the information they need. If there is no data provided within 60 days, they are legally required to sever ties with sellers.

The crucial role of valid VAT numbers

The need for digital platforms to verify the VAT numbers of their sellers has become one of the cornerstones of DAC7 and serves multiple purposes, such as:

• Ensuring accurate tax reporting: Accurate VAT numbers are crucial for correct tax filings. They enable tax authorities to efficiently allocate tax liabilities and ensure that the right amount of tax is collected from the right entities.
• Preventing tax evasion: By verifying VAT numbers, digital platforms play a crucial role in preventing tax evasion. This vetting process helps to confirm who the buyer and seller is and identify discrepancies and potentially fraudulent activities, thereby protecting the integrity of the tax system.
• Facilitating cross-border transactions: For businesses engaging in cross-border transactions within the EU, a valid VAT number is essential for VAT exemption on intra-community supplies. This not only simplifies the tax reporting process but also enhances operational efficiency by reducing unnecessary tax burdens.

What does DAC7 mean for your business?

The introduction of DAC7 underscores the need for businesses to ensure their VAT registration numbers are accurate and up to date. Here’s why:

• Compliance: Businesses must comply with the new reporting requirements to avoid penalties. Ensuring that their VAT numbers are valid is a crucial step in this compliance journey, as it provides proof that they are who they say they are.
• Reputation: Compliance with tax regulations reflects positively on a business’s reputation. It demonstrates a commitment to legal and ethical standards, fostering trust among customers and partners. Tax Authorities are also less likely to be less lenient on companies that have poor quality tax master data and identified tax issues.
• Operational Efficiency: Valid VAT numbers streamline the process of tax reporting and invoicing, reducing administrative burdens and potential conflicts with tax authorities, which will become even more important for those countries introducing e-invoicingElectronic invoicing - widely referred to as e-invoicing - is the exchange of a digital document between a supplier and a buyer. E-invoices are issued, transmitted and received in a structured data format that enabled automatic and electronic processing. They contain data in a machine-readable format so that an AP system can read an invoice without manual data entry, leading to faster and more efficient invoicing..

Finding the right solution

To navigate the compliance landscape effectively, businesses should take proactive steps:

1. Regular verification: Regularly verify the validity of VAT numbers and not just at the time of first entry.
2. Stay informed: Keep abreast of updates to tax regulations and reporting requirements to ensure ongoing compliance.
3. Monitor the gaps: You need to identify any issues or gaps within your master data on an ongoing basis. It’s not enough to check once and then forget about it.

At Innovate Tax, we’ve developed the industry-leading VAT number governance and risk management audit tool for your tax master data, LimeLyte® Entity Manager, to deliver all this and much more for users.

The award-winning solution automates the validation and verification of your tax master data to first find any errors or gaps. It subsequently allows you to monitor its progress in fixing those issues via a user-friendly dashboard. Finally, even when tax authority sites are down, LimeLyte® Entity Manager continues to operate in the background until it connects with portals such as the EU’s VIES system to verify your data.

In addition to the automation of all your VAT number verification needs, the solution offers:

• Evidence of every VAT number check that can be used as proof at audit.
• Automatic and continuous re-checks of VAT numbers on a periodic basis to ensure ongoing compliance.
• 24/7 updates; LimeLyte® Entity Manager is always looking to identify and fill gaps in your data.
• A user-friendly dashboard, providing a clear overview of all your VAT data in real-time.

LimeLyte® Entity Manager is part of the LimeLyte Tax Control Framework suite, a platform that finally gives both Tax and IT the visibility and transparency of data and the tools to control it.

Conclusion

The introduction of DAC7 marks a significant milestone in the EU’s efforts to modernise tax reporting and combat tax evasion in the digital economy.

For businesses operating within this realm, ensuring the validity of VAT numbers is not just about compliance; it’s about safeguarding the integrity of operations and contributing to a fairer tax system.

As we navigate these changes, the collective effort of businesses, digital platforms, and tax authorities will be crucial in shaping a transparent, equitable digital marketplace.

Having a tool like LimeLyte® Entity Manager to identify, manage and monitor all your tax data allows your company to stay ahead of the curve. After all, prevention is always better than the cure.

Alternatively, why not take a look at our new technology-enabled service suite for the management of tax master data, TaxMaster™? TaxMaster™ will check, cleanse and complete your master data – propelling your business towards tax process perfection!

Use our verification tool to easily validate your VAT, GSTGoods and Services Tax, or Tax Registration Number (TRNWe use TRN for Tax Registration Number instead of VRN (VAT Registration Number) or GRN (GST Registration Number) because there is more than one indirect tax type out there and we cover them all. So whether you only need to check VAT numbers, have Japanese Consumption tax or Indian GST, don't worry, when you see TRN, it all means the same thing.) from any country that has GST.