DAC8 Enforcement Mechanisms: How Tax Authorities Will Verify Compliance

Understanding how tax authorities will verify DAC8 compliance helps CASPs prepare for the scrutiny they will face. This article examines the enforcement tools available to tax authorities.

Automated Validation

The first line of enforcement is automated validation of submitted reports. Tax authorities apply XML schema validation to check structural compliance, business rule checks to verify logical consistency, TIN format validation to catch invalid identifiers, and duplicate detection to identify repeated entries or overlapping reports.

Reports that fail automated validation are rejected and must be corrected and resubmitted. CASPs should implement their own pre-submission validation to minimize rejection rates.

Cross-Referencing

Tax authorities will cross-reference DAC8 data against multiple sources, including CRS and FATCA reports from financial institutions to identify users with both traditional and crypto accounts, national tax returns to verify that reported crypto income has been declared by taxpayers, data received from other Member States through the automatic exchange mechanism, and information from MiCA supervisors about licensed CASPs and their activities.

This cross-referencing capability means that inconsistencies between a CASP's DAC8 report and other data sources will be flagged for investigation.

On-Site Inspections

Tax authorities may conduct on-site inspections of CASPs to verify compliance. Inspections may cover the CASP's due diligence procedures and documentation, the accuracy of transaction classification and aggregation, the completeness of user identification data, record-keeping practices and data retention, and internal controls and quality assurance processes.

International Cooperation

EU tax authorities cooperate through the DAC framework and through multilateral bodies such as the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) and the J5 (Joint Chiefs of Global Tax Enforcement). This cooperation enables coordinated enforcement actions against CASPs that operate across multiple jurisdictions.

Conclusion

DAC8 enforcement will be multi-layered, combining automated validation, cross-referencing, inspections, and international cooperation. CASPs should prepare for comprehensive scrutiny and build compliance programs that can withstand detailed examination.