Understanding VAT validation responsibilities under DAC7

Why platform operators must prioritise accuracy and due diligence?

Under DAC7A tax directive in the EU that requires digital platform operators to report personal and business information about their providers to tax authorities., platform providers have specific responsibilities when it comes to gathering and reporting information on sellers, including VAT identification numbers where they are available.

The legislation states that ‘the VAT identification number of the Reportable Seller, where available’ must be communicated to the competent authorities. This means that if a seller provides a VAT number, it becomes the platform operator’s responsibility to report it accurately.

The due diligence procedures outlined in DAC7 imply a need for accuracy and completeness in reporting. Simply asking for a VAT number ‘to tick a box’ does not meet these due diligence standards, particularly if the information provided by the seller turns out to be incorrect. Ensuring that VAT numbers are accurate is crucial, as the primary purpose of DAC7 is to enhance tax transparency and prevent tax evasion.

Section II, Part C, Point 1 of Annex V further supports this requirement by stating that platform operators must establish reasonable procedures to collect and verify the information of Reportable Sellers.

This includes ensuring the reliability of the information provided, such as VAT identification numbers. Furthermore, the use of electronic interfaces is highlighted as an important tool in the due diligence process, helping platform operators effectively collect, verify, and maintain accurate data. This reinforces the importance of validating VAT numbers to fulfil due diligence obligations.

Verification of seller information in DAC7:

1. The platform operator must determine whether the information collected from sellers is reliable. This includes using their own records, as well as any electronic tools provided by the EU or member states, to verify the validity of tax identification numbers (TIN) and VAT numbers.

2. In some cases, platform operators may rely on electronically searchable records to verify information as part of the due diligence process.

3. If the platform operator has reason to believe that any information may be incorrect, especially based on information provided by a tax authority, they must ask the seller to correct it. The seller is required to provide reliable proof, such as a government-issued ID or a recent tax residency certificate, to verify the corrected information.

If incorrect VAT numbers are reported, it could be argued that the platform operator is not fulfilling their obligations under DAC7. The intention of the directive is to ensure that tax authorities receive reliable data for effective tax assessment. Therefore, not verifying the validity of a VAT number exposes the platform operator to the risk of non-compliance, which could lead to scrutiny from tax authorities and potential penalties.

In summary, while DAC7 does not explicitly state that VAT numbers must be validated, it does impose a requirement for accurate and reliable reporting. By validating VAT numbers, platform operators can demonstrate that they are fulfilling their due diligence obligations and minimising risks related to incorrect reporting.

Not validating these numbers could potentially lead to non-compliance, undermine the integrity of the data reported, and expose the platform to legal and financial risks.

The question arises: Why does DAC7 imply validation rather than mandate it?

One possible reason is to provide flexibility for platform operators, allowing them to adjust their due diligence processes to do the best job possible given any limitations they may face based on their specific circumstances, including the size and complexity of their operations.

However, the argument that validating VAT numbers might impose operational challenges should be carefully considered. If a platform operator does not have a place to record either the VAT number or the confirmation code for its validation, it is likely a sign of an inadequately designed system.

This is not a limitation imposed by DAC7 but rather an issue with the platform operator’s own infrastructure. Choosing not to build a robust system capable of recording and verifying VAT numbers, or opting for a cheaper solution to cut costs, reflects poor design choices that could ultimately lead to non-compliance.

It is also important to consider that there may be situations where validating a VAT number is simply not possible.

For example, if the tax authority’s website or electronic interface is temporarily unavailable, the platform operator would have no means to validate the VAT number at that time.

In such cases, it would also be impossible to report that the VAT number had been validated or to record a confirmation code. This highlights the need for platform operators to have robust systems that can adapt to such challenges, ensuring that every reasonable effort is made to comply with the due diligence requirements while recognising the limitations that may be beyond their control.

This also links back to why the authorities behind DAC7 may have chosen not to explicitly mandate VAT validation.

By implying validation instead, the legislation acknowledges that there may be external factors, such as technical issues or unavailability of tax authority systems, that make validation impractical at times. This flexibility allows platform operators to demonstrate reasonable efforts to comply without being held accountable for circumstances that are genuinely beyond their control.

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