New rules for the sharing and gig economy? The new normal in international tax
Contributed by Richard Hendriks, Toby Eggleston, Richard Vann, Manuel Makas and Andrew Howe, Greenwoods & Herbert Smith Freehills
In early July 2020, the Organisation for Economic Co-operation and Development (OECD) released the “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy”, which provide a framework to be enacted in domestic law to enable collection of information from digital platforms on the sellers of accommodation (think Airbnb), transport (Uber), food delivery (Uber Eats) and other task- or time-specific services. Through automatic exchange of information among countries where necessary, the information will find its way to the tax administrations of the country of residence of the seller of the services, as well as of the country where rental accommodation is situated if different, and will be used to check whether the income has shown up in a local tax return or be used to pre-fill the relevant tax return.
The Model Rules were approved by the virtual meetings of the Inclusive Framework on Base Erosion and Profits Shifting (BEPS) and G20 Finance Ministers in July. Although not a binding international standard, it is expected that the rules will be implemented in many countries promptly, which in international tax terms means two to five years. The European Commission is already moving to implement them by a Directive amendment in the European Union and the OECD is working on devising the model competent authority agreement and other work (such as an XML schema) necessary to enable automatic exchange of the information among countries.
This project brings together the two main streams of OECD international tax work in the last decade, international exchange of information and BEPS. The focus of BEPS up to now has mainly been the avoidance of corporate tax by multinationals, which continues through the current work on the Two Pillars and was also moved forward by the recent virtual meetings.
Apart from corporate tax, the 2015 BEPS deliverables produced the recent changes globally to GST/value added tax (VAT), including in Australia, on sales of digital services and goods on the internet. The sharing and gig economy has been enormously expanded by global digital platforms and presents significant risks of tax evasion as many workers move from being employees to independent contractors. The Model Rules are an extension of the ideas in the GST area to income tax on the non-employee sellers of services in the sharing and gig economy via digital platforms.
In the case of the income tax on the sellers, it is not necessary to change the substantive tax law, unlike GST, just to ensure that tax administrations capture the information, which is where the recent developments in automatic exchange of information such as the Common Reporting Standard on financial account information and country-by-country reports provide inspiration for the new regime.
The Model Rules define a platform operator to be a person providing a digital platform to connect sellers and buyers of relevant services. Platforms that solely aggregate other websites (eg in travel and accommodation), advertise services or facilitate payments are excluded and there is also an option for countries to exclude small start-up platforms and non-profit peer-to-peer sharing websites.
Relevant services are provision by individuals or entities for consideration of rental accommodation and task- or time-specific services performed by one or more individuals excluding services by an employee and ancillary services, for example, delivery by the seller of goods. Although the OECD gives the impression in its general explanation that the main targets are rental of private accommodation, taxi-type services and meal-delivery services, the definition is much broader which is reflected in the explanation of the Rules referring to “manual labour, tutoring, copywriting, data manipulation as well as clerical, legal or accounting tasks” (think TaskRabbit, Airtasker, Fivver, Envato Thumbtack, 99Designs, etc).
The task/time idea is designed to draw a line between specifically requested services and walk-up standard services such as buying a ticket online for a scheduled bus or train service. Certain large providers of services are excluded from the sellers covered because they represent a low compliance (evasion) risk: large hotels, members of a listed company group and government entities.
The platform operator is required to undertake due diligence and collect specified identification information about sellers on the platform by the end of the year in which the seller signs up to the platform (with some leeway in transition to the new system). The platform operator then has to provide to the tax administration in its country of residence the seller’s identification information, calendar year sales information for the seller broken down into quarters and specified identification information on itself by 31 January of the following year. That tax administration then identifies what information is relevant to itself and what information is relevant to other countries (ie sellers resident in other countries and rental accommodation in other countries) and exchanges it with the other countries to the extent they are party to the automatic exchange mechanism. The information is designed to be sufficient to enable the recipient administration to identify the taxpayer deriving the income.
Although in many cases the seller and the buyer will be in the same country, for the technology giants in the sharing and gig economy the platform operator will typically be offshore for most countries including Australia, which is why the international information sharing mechanism is necessary. The brief description here does not deal with the many complexities that the Model Rules seek to deal with, for example, the fact that the same platform will often be used by several companies in the platform corporate group which will all be platform operators.
While income tax is the main target, it is recognised by the OECD that the information generated by the new system may be relevant to other taxes such as GST. Whether the recipient country will be able to use it for other taxes will depend on the international instruments under which information exchanges occur. For the time being, the regime is confined to services and does not cover sales of tangible goods but there is discussion of using regulation making powers down the track to expand coverage. The Model Rules also foreshadow a future information system provided by countries called a Government Verification Service designed to assist platform operators in their due diligence on sellers.
There will doubtless be difficulties in implementation of the Model Rules by countries. Attempts to avoid or evade the new rules can be expected as occurred for the Common Reporting Standard. Adapting the Model Rules to fit with existing third-party information rules in countries’ tax systems will also raise issues, for example, in Australia the fact that the Australian Business Number is publicly available but not compulsory in many cases, while the Tax File Number is mandatory but the taxpayer can refuse to disclose it to third parties.
The Model Rules on the sharing and gig economy are an ambitious project which is likely to be well received by the Australian Government given its recent efforts to deal with the black economy. It also represents a broadening out of the new normal in international tax where problems are sought to be solved by coordinated international action leading to changes to domestic tax law and effective international enforcement mechanisms with much less reliance on tax treaties apart from their facilitation of international exchange of information.
The new system in many cases will be dealing with small Australian business operators and landlords transacting wholly with domestic customers via digital platforms — far removed from hiding money by the wealthy and tax avoidance by multinationals which were the previous focus of the information exchange and BEPS projects.