How online platforms are - and should be - taxed are hot topics. In part it’s because online platforms don’t comfortably fit the mould of a traditional multinational in terms of how their profit is generated and where value sits, meaning there’s a perceived inability to tax platforms in jurisdictions where they have significant user bases. In part it’s because they facilitate the gig and sharing economy and other forms of e-commerce, which are more difficult for tax authorities to police than traditional models.
The principal/agent model
There isn’t a one size fits all approach when it comes to platforms. However, they’re often structured in line with a so-called principal/agent model. The intended analysis is that the platform is not providing the underlying goods or services – it is just acting as an intermediary bringing together sellers and buyers of goods or services. The platform receives a fee (usually from the seller) for making the platform available.
The nature of their models means that online platforms can often supply digital services to the users of its platform without stepping foot in the relevant market – so-called “scale without mass” . Existing international tax rules usually require some level of physical presence in a jurisdiction as a basis for imposing corporate tax there, and so platforms may well not create a taxable presence in the traditional sense in those jurisdictions. Even if they do, many of the traditional drivers of value (e.g. the valuable IP) will be located elsewhere. All of this means that corporation tax bills for platforms may be low (or non-existent) in places where they have significant user bases.
VAT and employment taxes
As well as potentially low corporate tax bills, the principal/agent model can reduce the amount of VAT that’s payable. Because the supplies are made by the platform users, not the platform, this may mean VAT registration thresholds are not met and so VAT does not need to be charged on the underlying supplies of goods or services (or, in some cases, on the platforms’ fees). The intended analysis will also be that sellers using the platform will not be employees of the platform (which has both employment and tax law implications).
User tax compliance
Tax reporting is a further thorny issue for both tax authorities and online platforms. Tax authorities need access to information to test the tax status and tax liability of individuals conducting business on the platform. But online platforms need to be sure that in providing this information they are not breaching confidentiality obligations under contract or data protection legislation. There is also a compliance burden for online platforms so it’s important the legislation offers a level playing field, across jurisdictions and as against competitors.
Change on the horizon?
Online platforms face a picture of rapidly changing and (in some cases) quite incoherent laws.
On the corporate tax front, the level of corporate income taxes paid by some digital businesses in the user jurisdictions has prompted calls to change the system: the perceived issue being that user participation is contributing to the businesses’ value but without the user jurisdictions getting a slice of the tax pie. To date, there’s been a lack of international consensus about what these changes should be. Some of the proposals are ambitious – they aim to fundamentally change how the international tax system operates. At an EU level there is support for the introduction of a ‘virtual’ taxable presence concept as a longer term solution; however, there are real challenges in reaching agreement on the detail. In the interim, the European Commission and the UK have suggested ‘digital turnover taxes’ on revenues of companies attributable to the supply of certain digital services.
At the same time, tax authorities are also considering how to improve users’ tax compliance. Various options are on the table, from increased real-time reporting by platforms to tax authorities, to proposals for withholding taxes or joint and several liability. In the UK Budget 2018, the favoured approach seemed to be a greater use of data to support sustainable compliance but proposals are still developing.
We recently considered these issues in detail in an article in Tax Journal published on 26 October 2018 which is available here. Since this article was published, it has been confirmed that the UK will introduce a digital services tax – see our blog post here for further details on this announcement.