The EU has proposed a new Directive on Administrative Co-operation to be called DAC8.

It is expected that DAC8 will introduce uniform disclosure requirements for e-money and crypto intermediaries to ensure tax authorities across the EU have increased visibility in respect of the evolving digital economy and crypto assets in particular. DAC8 is likely to impose significant mandatory reporting requirements on e-money and crypto intermediaries in respect of their customers.

Why is DAC8 needed?

DAC8 has arisen due to the significant growth in the digital economy as well as crypto assets and e-money in recent years. DAC8 is being introduced to enhance tax compliance in the digital economy and to assist tax authorities identify circumstances where tax may be due from persons deriving income and gains from crypto assets and e-money.  The fact that crypto assets can be used for payment as well as investment purposes makes their classification and related tax compliance more challenging.

There is a perceived lack of information on the part of tax authorities in respect of crypto assets and e-money. Given the decentralised global nature of these assets, as well as the current lack of a sufficiently robust regulatory framework, there is a risk that this may be resulting in a loss of tax revenue across the EU.

Rather than individual EU member states introducing standalone domestic legislation to assist tax authorities gather information in respect of crypto assets and e-money, one of the objectives of the DAC8 proposal is to facilitate better cooperation across EU tax authorities and keep the inevitable additional compliance costs for intermediaries to a minimum by providing a common EU reporting standard.

What will DAC8 look like?

Similar to previous EU mandatory reporting requirement such as DAC6, DAC8 is expected to introduce uniform disclosure requirements, possibly in the form of a new annual reporting obligation for e-money and crypto intermediaries with an EU nexus (e.g. intermediaries tax residents or with a place of management or a permanent establishment in the EU).

In order to avoid inadvertently creating a competitive advantage for intermediaries operating outside of the EU, the nexus rules could be broadly drafted to capture any intermediaries providing services to EU based customers even if such intermediaries operate exclusively from foreign territories seemingly beyond the reach of European regulators.

Intermediaries will likely be required to file returns containing details of their customers’ acquisitions, disposals and income earned during a period. The exact form and regularity of the reporting requirements under DAC8 is still to be confirmed, as are the intermediaries subject to DAC8 reporting.

Additionally, DAC8 may also impose significant information gathering requirements for e-money and crypto intermediaries as the information to be reported on any DAC8 filing might extend beyond that currently held by these intermediaries. Any requirements on intermediaries within the DAC8 regime to hold further personal information on their customers may also give rise to additional data protection considerations for intermediaries. Given the relatively nascent nature of the crypto industry, whether the ultimate DAC8 obligations will prove too onerous or otherwise for some crypto intermediaries remains to be seen.

Similar to previous DACs, it is expected that penalties will apply to intermediaries who fail to operate DAC8 if required.

In respect of e-money and crypto intermediary customers who are discovered not to have complied with existing tax reporting obligations, existing civil and/or criminal penalties for the non-payment of taxes are expected to apply. Whether or not tax authorities will provide any leniency to such people, especially those whose non-tax compliant status arises due to lack of knowledge, remains to be seen.

When will this happen?

The public consultation for DAC8 closed in June 2021 and feedback from the consultation process is expected in late 2022. It is unclear at present when the DAC8 reporting requirements will become effective but further details are anticipated later in 2022.