Tax authorities have long eyed marketplaces with frustration arising from these marketplaces having helped to create the huge gig and sharing sectors. However, this frustration is mixed with the tax authorities’ relish for the opportunity to co-opt the marketplaces as unpaid tax collectors.
This blog is part of series from an article first published in British Tax review. VAT Calc’s Advisor andAuditor services can help on determining and reporting the correct VAT or GST on gig and sharing economy transactions around the world. This includes the 1 July 2021 marketplace deemed supplier rules.
The opportunity: data and automation attractions
Aside from believing that the onus is upon the marketplaces to assist in the enforcement of VAT obligations, tax authorities believe increasingly that marketplaces have the data and automation skills necessary to help with ease, because:
- The marketplaces hold background and tax transactional data in relation to the suppliers, and therefore possess the individuals’ details and information on how much to levy for VAT and income taxes. The marketplaces often challenge the latter assumption (see below).
- To some degree, marketplaces have attracted the existing informal cash economy market, and therefore represent a channel to tax these long-missed traders in addition to the new entrepreneurs of the gig or sharing economies.
- The digitisation of transactions and payment processes by marketplaces needing the ability to scale their business models means that they have deep data lakes, which can be mined with increasingly sophisticated analytical tools. This puts tax determination on a mass scale within easy reach and avoids having to educate or empower individuals with little or no expertise.
The next question then becomes: in what guise could the marketplaces extract the VAT—as intermediary withholders of VAT; or as VAT principals? Both guises would require major legal changes and would impose colossal reporting infrastructure requirements on the marketplaces.
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Withholding VAT/split payments: a tough calculation cracked in the US
A preferred route to VAT collections from the authorities’ perspective would be live tax calculation, with splitting or withholding of the VAT by the marketplace. This would then be remitted directly to the tax authorities. The historical VAT return could then be used to reconcile differences and missed transactions. Withholding VAT is similar in principle to PAYE income tax deductions from salaries.
See the section “Marketplaces as the deemed supplier: a question of control” (below) for marketplaces’ objections to this regime.
South American countries are major exponents of withholding VAT regimes due to the major fraud issues which exist in these countries. Often the withholding is forced onto the credit card issuers. Argentina is the latest example of such a regime, imposing the obligation to withhold VAT on payments by consumers subscribing to non-resident streaming media and other electronic service providers. Mexico has recently imposed income tax deduction obligations on ride-sharing platforms. It has, so far, not included VAT.
Europe has struggled to come to terms with withholding VAT. In December 2017 the EU Commission ruled out Split Payments as cumbersome and expensive to implement. The UK is currently running a payment provider industry consultation on the practicalities of implementing awitholdingVATregime.
The major challenge of withholding VAT is the complexity of calculation. Varying thresholds for individuals and reduced VAT rates mean that it may only be possible to impose the standard VAT rate on all transactions and then leave it to the taxpayer to try to true-up the position in their VAT return. Issues like refunds and credits, plus bad debts would also need to be accommodated.
In the sharing economy, the US may have much to teach the rest of the world about the flexibility of automation to solve these problems. The US has imposed sales tax collection obligations on marketplaces in most states (Supreme Court ruling in South Dakota v Wayfair) to lighten the burden of tax collections. When an individual signs up to Airbnb, HomeAway and other sharing platforms, the accommodation tax compliance (rentals are sales tax-free) is automated for them. This is achieved either by: the marketplace deducting and remitting the tax; or electronic files with transaction-level tax calculations being uploaded into tax declaration software. The individual then just logs on, reviews the return and presses “file”.
Airbnb has many other accommodation tax agreements in place in jurisdictions that have imposed the turnover tax on hotels and home-rentals. These jurisdictions include: France (Paris); Bermuda; Brazil; and Canada (goods and services tax (GST)). Argentina has a preventative withholding mechanism in place for taxpayers who cannot prove they have sufficient financial resources. If they fail to prove that they have such insufficient resources, they must prepare special invoices where the VAT is declared but is withheld by the customer.
Marketplaces as the deemed supplier: a question of control
As an alternative to withholding VAT, the marketplaces could be placed in the role of tax principal.
Currently, marketplaces are largely treated as agents in the gig or sharing economies. This makes them responsible only for the VAT on the introductory fees charged by the marketplaces in relation to the transactions between the individual seller and the customer. The preferred solution of the tax authorities would be to put the marketplaces in the position of the deemed supplier or principal (responsible for charging and collecting VAT under its own VAT number for the services of the individual). This would be simplest administratively for both the tax authorities and individuals.
Understandably, the marketplaces have a number of objections to this solution (and to the withholding VAT model discussed above) for the following reasons:
- It imposes VAT liabilities on marketplaces which they have to track, and which are not built into their business models or pricing.
- Marketplaces claim that collecting any further information from individuals for tax often deters them from the signing-up process and undermines their own growth.
- Many of the largest and most successful marketplaces are built and valued on the hugely scalable freelance model. Imposing VAT obligations could severely curtail or even terminate their activities.
- Individuals earn income from multiple sources to which the marketplace has no access for tracking registration thresholds.
- It would require a major investment in accounting, Enterprise Resource Planning (ERP) and related IT to capture and process VAT calculations and reporting.
- The measure puts smaller marketplaces and new entrants at a huge disadvantage given the costs, and so may solidify monopolies for the well-established players. It is challenging to allow exemptions for smaller marketplaces since tax evaders may then migrate to them to exploit tax differences.
- It would also place individuals using participating marketplaces at a disadvantage to their offline, self-employed counterparts. The latter would still be in a position to avoid or evade VAT. This would distort the development of the new economy.
- Cross-border transactions, an increasing part of the gig economy, would he highly challenging to assess and report upon properly given the lack of information and access to the individuals.
- Confidentiality laws restrict marketplaces handing over wholesale data to the tax authorities, so major legislative changes would be required. Internationally, gaining unanimity on this would be highly challenging with countries such as Germany being resistant to data exchanges. This could draw in GDPR modifications.
Legally, in order to force the marketplace from the role of a mere agent into that of the VAT principal depends on the level of control the marketplace has over the transaction. If the level of control is limited, then the individual remains responsible. The relevant HMRC rules list a range of determinates such as price-setting and being able to vary the terms of the service. Tax cases, such as the Supreme Court’s decision in Airtours Holidays Transport Ltd (Appellant) v HMRC (Respondent ) show clearly that if a nother party controls the terms and conditions of a service, then they take over the VAT.
For the gig and sharing economies, it is likely that tax authorities over the next few years will, where they can, push VAT liabilities onto the marketplaces based upon the criteria being adopted by the 2021 EU electronic interfaces (marketplaces) deemed supplier obligations for e-commerce goods. These obligations make the marketplaces liable for VAT when they “facilitate” the transaction between customer and seller.
For the gig and sharing economies, the criteria listed below could be referred to in order to identify those transactions for which the marketplace would be responsible:
- the platform has control over the general terms of the sales contract;
- the platform directly or indirectly controls the price of the service (indirect control could be exercised via the marketplace ranking individuals according to their price levels);
- the platform charges for payment on behalf of the individual;
- the platform participates in the ordering, fulfilment or delivery of the service; and
- platforms which merely list services, with no participation by way of provision or collections, would be excluded.