Digital: disruptive business or business disruption?
The sharing economy: disruptive business or business disruption?
Digital is transforming business models. “Digital intermediaries” are enabling online connections on a previously unforeseeable scale between people who want to share their belongings and people who want use them. As a result, businesses involved in the new “sharing economy” have grown from local start-ups to well-known multinationals almost overnight, disrupting many traditional business sectors and attracting high levels of attention from the media, regulators and tax administrations.
These new disruptive businesses are providing local tax authorities and legislators with quite the headache. In many cases, their new and unfamiliar business models seemingly conflict with existing tax legislation and business regulations. The disruptive companies themselves are, however, also struggling. While barely keeping pace with their rapid growth, they are confronted with an endless array of uncertainties not only in the regulatory domain but also in the field of tax.
Key indirect tax issues
One of the main indirect tax issues arising from the sharing economy follows from the very nature of the business concept involved. The sharing economy can largely be defined as peer-to-peer lending against consideration. In most countries, a broad definition of a VAT/GST taxable person applies that covers all persons and entities that, independently, carry out a supply against consideration on a regular basis.
As a result, peer-to-peer lenders will often qualify as VAT/GST taxable persons in respect of their peer-to-peer supplies. Many lenders are, however, not yet sufficiently aware of this fact nor of their resulting VAT/GST obligations. Consequently, these businesses are often not VAT/ GST registered, do not meet local indirect tax compliance requirements (e.g., issuing of invoices) and, perhaps most importantly, do not collect and remit VAT to the local authorities. Small business regimes may apply, but these are often also subject to formalities.
Similarly, as the lenders generally do not perform their supplies on a “professional basis” they may lack specific (regulatory) licenses required to carry on certain types of business.
In turn, the compliance issues that apply to the peer-to-peer lenders also have an impact on the digital intermediaries. As a result, these intermediaries are not only involved in their own indirect tax issues but also in the issues related to the parties they are connecting, e.g., if they prepare the invoices on behalf of the lenders.
Disruptive businesses also face these issues:
Besides the issues outlined in this section, disruptive businesses involved in the sharing economy generally also face several other issues, some of which may also have a significant impact on the indirect tax position of companies concerned:
- Regulatory license requirements
As many peer-to-peer lenders do not carry on their activities on a ‘professional basis’ they may be unaware of or even unwilling to obtain any specific regulatory licenses required for performing their activities. This lack of knowledge or compliance causes significant troubles for the digital intermediary companies whose platforms they use, as they may be considered to be facilitating illegal services. Assuming that the services are not strictly forbidden, VAT/GST legislation should still apply. However, it may be that specific rules (such as the application of a reduced rate or an exemption) do not apply due to the absence of a license. This may also impact the margin of the digital intermediary companies, which generally receive a fixed percentage of the income earned by the lenders.
- Deemed employment
So far, digital intermediaries have taken the position that the peer-to-peer lenders performing supplies via their platform are independent parties and not employees. This position, however, is currently being challenged by groups of lenders in multiple countries. If the lenders must be considered to be employees of the digital intermediaries, this will have a significant impact from a VAT/GST perspective as well as from the perspective of direct taxation.
- Data privacy
In conducting their sharing platforms, digital intermediaries are connecting large groups of private individuals from whom they collect personal data in order to process transactions. Protecting this personal data is a major concern and an issue that can have a severe impact on corporate reputation, as has become clear in the news media in recent years. This data is also of particular interest to tax authorities, as it may help them to identify peer-to- peer lenders who are not paying taxes (in some cases, unknowingly but in many cases deliberately).
- Foreign exchange (FX) restrictions
FX restrictions are a common issue for many international businesses. Due to the centralized set-up used by many digital intermediaries and their limited local activity, these concerns are particularly important, especially, for digital intermediaries that are directly involved in the collection of cash for the supply performed by the peer-to-peer lender on his behalf. Where cash collection is not an option, the business model may require careful consideration.