In the engine room of nation states, ie the tax departments, the coming battle with platform providers is taking shape. Uber, airbnb, facebook, linkedin, ebay, jobseek, and a myriad of specialised platform providers facilitate micro-trades that are largely untaxed by the authorities. In stead, the platform providers themselves take a cut, partially via advertising and partially via a direct fee for their services. They have taken over an activity that has mainly been provided by governments in the past: places to trade. The town square, the stock exchange, public infrastructure, and the unemployment office are relics of a past where governments were market providers that facilitated trades. Now, it is largely private companies with tax-avoidance structures that have taken on this role on the internet. That role is set to expand hugely.
This is a crucial battle that, so far, the tax authorities are losing because they have not yet grasped the magnitude of the shift. They lack the key new power that they must attain: the power to deny the operation of a platform provider in their country.
At the moment, tax authorities around the world, lead by the Scandinavians whose tax needs are high, are going the usual ‘reporting route’. They are trying to get Uber, Airbnb, and all the other ones to report the trades and the value of the trades that they have facilitated. Understandably, these companies are refusing to play ball because they of course are taxing the same trades themselves in a different way. They are competing with national tax authorities and hence their business model depends on tax evasion, so of course they refuse to help their competitors. Their lawyers make millions from refusing to play ball. The horror example for these companies is the 2015 data on Uber that had to be released to the Dutch tax authorities and that was subsequently shared with Denmark which promptly went after the drivers for added tax payments. This reflected the circumstance that the administration of Uber was in the Netherlands at that time, which allowed the Dutch to force Uber to hand over some of their data, a mistake Uber wont make again. The others too will have learned a salutary lesson from that episode.
Frustrated, the tax authorities are turning to pretty hopeless measures, such as new international treaties on the reporting of micro-trades by private entities. In a race to the bottom between countries trying to attract large companies, that is just a hopeless avenue where the authorities will always be many steps behind the tax-advisers of the big trading platforms.
What are the next moves we might then see when the tax authorities get up to speed? I think two developments are likely: full internet observation by national agencies and government-lead internet firms.
Full internet observation follows the model of China, which now has the capacity to track most of the internet activity of most of the population. That allows it to observe the trades facilitated on internet platforms, which in turn can be used for tax purposes. Those observations can be used to directly go after individual traders or can be used to go after the platform providers, simply by making their activities illegal if the platforms do not assist in tax observations. Adopting the China route would spell the end of internet privacy, but it probably works. And tax is such a key part of the nation state that it in the end trumps privacy concerns.
The second possibility is for the government to re-enter the market for platforms and set up its own internet firms for micro-trades and social media. It can simply copy the best examples on the internet for how to set these things up. Again, China shows the way with Alibaba competing with Amazon for trading platform business. In a settled market, the transition to new government platforms will come with losses, but authorities can appeal to national pride to get support from their populations and companies cannot compete with that. For micro-trades within a country or tax region (the US and, in the future, the EU) that should work. For international trades, one should expect more difficulties because government-backed firms from different countries might then directly compete with each other, which in turn might lead to competency battles and new dispute resolution mechanisms.
I think the former is more likely, but perhaps dressed up to look like privacy concerns have been considered and protections put in place.
I’d guess the next major move in Australia is for the ATO to mandate business reporting all transactions as opposed to the totals in BAS or the annual return. It sounds hard, but most companies keep this data anyway and then the transactions can be cross referenced by ABN to identify misreporting or the small businesses that claim it’s too hard to comply.
The governments could simply encourage bitcoin and similar tools of universal surveillance, and I suspect many of the platform companies would fall for it. Come up with something like that that’s fast and cheap (which current cryptocurrencies can’t be) and push it out there. Or wait until someone else does then repurpose it.
Think of it like burner phones – initially they were completely unregulated, anyone could buy a prepaid SIM and a cheap or second hand phone, then bingo, anonymous phone calls. These days that’s harder, and where governments have decided to clamp down they’ve been fairly successful. Bitcoin + registered address = every transaction is tracked.
It’s not clear to me that giving the government full control of the internet is really such a great idea given many countries are moving towards more authoritarian states (although at least you use the worst case of China as an example — a government so paranoid it even censors SBS Chinese radio!).
One alternative would be to allow the government to lodge monitoring requests — this way they could monitor sites with large numbers of transactions, and forget about everyone else. I can only randomly guess how many would be necessary, but I suspect a few thousand sites are responsible for most of the problems you are talking about.
I find it quite bizarre that countries haven’t sorted this thing out ages ago. One can simply say to AirBnb “we want your data (in so far as it’s relevant to tax on certain transactions) and if you don’t give it to us we’ll come after you using all the tools at our disposal, including full internet surveillance which (under the legislation we’ve just passed) is obtainable under a warrant on proof of refusal to cooperate”.
Uber is a bit messier, but platforms are big, conspicuous things – if they’re small they’re not successful platforms. They’re easy targets in the same way that big businesses are ultimately easy targets. It’s not practicable for them to keep two sets of books or any of that malarky that could operate at lower scales.
If what you are saying is true, how have national governments been able to keep so much online gambling money onshore to tax when gambling doesn’t leave physical traces as the new platforms do.
Does seem strange that no country has tried some of these approaches. Hard to see any Treasury Tax office being happy about missing out on a lot of revenue, so could there some technical problem that we are missing?
One of the tools is gaol. The threat of two years in gaol for the CEO and directors might be a strong incentive to comply. We just need to make sure that we can extradite them from wherever they are, or might be visiting.
I agree with Nicholas except that I would take an even more draconian approach if I was running the ATO/federal government: “Give us all the data with full details of operations and income of all Australian/based Uber/Airbnb etc providers or we will ban your platform from Australia”.
My second comment is that there has never been, isn’t now and should never be any right to privacy to facilitate tax evasion. That goes for both the drivers/accomm providers and the platform operators. If drivers can’t make a reasonable income without evading tax, then Uber will need to reduce its commission percentage or increase prices to something a bit closer to taxis. If that makes their business model unviable then it never was in the first place.
My third comment is that “gig economy” platform providers (and other foreign companies) should be taxed on a deemed rate of return/profit on their turnover and a deemed reasonable ate of interest on their genuine business borrowings related to their Australian operations (just as age pensioners are on their interest earnings) so they can’t evade tax by various international transfer pricing arrangements designed to export profit to an offshore tax haven. I don’t accept that any of this is impossible or even especially difficult, there is simply a general lack of political will.
If these measures result in Uber etc deciding not to operate in Australia, who cares? Other competing operators will be prepared to trade here under such terms, and if not the government itself can provide gig economy platforms (as others have already said).
Look at it from the public’s viewpoint’ She solution is for the state to set up an independent authority that offers these services free, collects the data, but is allowed to use it only to provide the tax authorities with such information as it may need to collect the relevant taxes.
It could easily be made an international service, except perhaps in thegreat plutocracy.
The platforms may need to get right into political party donations, an alternative to paying tax for plenty of other corporations.
Yes, I didn’t mean to suggest anything more timid than Ken’s response. Governments can do these guys a huge amount of damage – even if they may not be able to fully close them down. I also agree with imposing some deemed turnover (if necessary by turnover of bits) on them in the event they won’t cooperate. The platforms are in this strange position of great, but fragile power. They’ll go to great lengths to resist a single country’s government – including no doubt sending the US Ambassador out after us to tell us that we’re dooming the whole of capitalism and the alliance – because of the precedent value of that single country, but once a country is prepared to fight dirty their market can be replaced in a few months by competitors.
I’d also through into this mix access regimes etc. As I wrote in this post
Fortunately the Australian Government’s official economic advisors in the Treasury and the PC for instance and its unofficial advisors in the Australian and Fin Review economics columns are all over this – and raise it at every opportunity … or perhaps not.
One further point, these platforms are very dynamic and came to dominate rivals because of their nimbleness in figuring out how to engage users. Of course, as we’re discovering now, that’s not all good. But it does mean that it’s not straightforward to just get the government to provide the service. If it did that it would, even if it were up to the task of replicating what’s there already, also freeze the service and introduce very different ways of deciding on and executing changes to the platform over time.
I get the impression that it’s not easy for government to identify the platforms, let alone make intelligent decisions about regulating them. Sure, you can look at Amazon, Google, Uber and the other big ones, but being that selective risks simply churning the market. Viz, every time a platform gets “too big” the government regulates and taxes it, the owners fold up and go home, but meanwhile a new set of platforms is competing for the next generation view of the same market.
Should patreon be taxed? Givealittle? Sharehood? There are a lot of little platforms and many of them don’t have the money to comply with even the existing regulations, let alone registering ever y member signup with the tax office. We’d need the government to provide a platform specifically for automated compliance with whatever regulations are in place, otherwise they wipe out even the possibility of a DIY startup. You’d need a million dollars in the hand just to get started but 90% of those things never turn over a million dollars, let alone make that in profit. Things like sharehood and cat are explicitly non-profit (but cat paid the bills by hosting slit which was explicitly commercial (and speaking of regulations, bob help you if what your site does comes to the attention of the censors)). The gap between “I can afford $10/mo for hosting” and “I can afford to spend 10 hours a month on compliance” is huge.
Sounds dubious to me Moz
Firstly little operations are not a problem
As they get bigger, they get brought into the net.
They’re already running their affairs to comply with basic accounting ideas, including standards and they must comply with tax law. They’re doing it on Xero. There’s a good case for government to negotiate some bulk purchase of Xero or a competitor to provide its services for free to businesses – certainly small ones.
Doesn’t seem like a problem at all really – or if you like – since I was in the minority of people who thought the GST would reduce economic welfare because of transactions costs, let’s just say that the transactions costs involved would be in the same order of magnitude – though they should be able to be piggy backed on quite a lot of the accounting for a GST.
(Just for clarification, I was arguing that the Sales Tax regime had much lower transactions costs and accordingly it was the more efficient means of raising revenue and should be rationalised and extended. Even though Peter Dixon modelled this argument, it got nowhere as the GST ‘eyeballs’ better in a textbook. And just as possession is nine tenths of the law, in our go ahead post-reform, post-excuses world, eyeballing is nine tenths of a policy argument. Here, where the alternative is tax avoidance, it’s worth a minor ramping up of transactions costs to stop it – and to give the potentially recalcitrant sector a reason to cooperate in rationalising the method of tax collection to get a good, low cost outcome)
Where exactly the thresholds kick in is critical. You are probably registered for GST and operate through a company structure, but most people aren’t. Being registered as self-employed was an enormous PITA for me, and having a registered company or trust was unlikely to be worthwhile (taxable income under $50k, but typically earned in one quarter).
I’ve rented stuff out through sharehood, but didn’t declare the income (and the platform didn’t declare their cut), nor treat the assets shared as depreciable for tax purposes. If I had to I’d likely drop out of sharehood. Adding “obtain an ID from the ATO, enter that into sharehood and sign off on the resulting log as part of my tax return”… yeah, nah. For a few hundred dollars a year most of which is in-kind it’s not worth while. For 100,000 people like me… it might be worth while for the ATO.
Here’s a quick summary article of those platforms: http://www.greenvillages.com.au/access-not-assets/
Thinking more, another argument is that the speed of scaling is faster than the speed of government. I suspect that if necessary the bigger platforms will move to a “new front end every financial year” model because that’s easy for them to do. The same ease that allows me to set up a new phone app and backing website in a day allows Alphabet to implement their platform-du-jour the same way.
But for genuinely new platforms scaling fast is a goal, and can be explosive. The whole benefit of the internet is that you can leap from “my friends like this app” to “10M users worldwide” in a couple of months. But “my friends” doesn’t let you fund compliance costs for even one country, let alone 100 of them.
Big companies would likely exploit consumer protection systems by using a meta-platform “competitive market” to facilitate transfer of users between rotating platforms. Viz, if the ACCC demands a “generic taxi app” where providers register, that makes it easier to phoenix a taxi company.
Uber is already operating in a “we have 1000s of contractors who each make less than the tax threshold, and we don’t really operate a business in Australia” model (I believe each Uber driver has to register for GST but almost none of them do. If every platform-worker did, would that DDOS the tax office?).
Also, how do you distinguish Gumtree/Backpage from a platform? I note that the USA has decided that Backpage is a platform (for prostitution) while Gumtree tries to avoid sellers of “legal but” stuff (except stolen goods, obviously).
You also have https://stackoverflow.com/jobs competing with Seek and Whirlpool but I expect they “don’t operate in Australia” {cough}. Is that a platform?
nick,
yes, it is odd that tax regimes haven’t yet figured this out, and I agree that one reason is the international row they will then have with the backer of the platform provider. The right to personal information seems a reasonable stepping stone to taxability, and I agree that it will not be that simple to replace these companies. They are not just nimble, but in many cases (eg facebook), one is talking about a web of relations that is international, making it harder for any country to say its citizens will pull out of that web. The loss will then mainly be borne by the own citizens, which means the government will have to mobilise them by talking up their patriotism.
Charging GST on the trades is a nightmare on these platforms, and the proposed new rules by the EU will go nowhere as I described here some time ago. It is just too easy for the platform providers and the traders to have the supposed actual trade take place anywhere they want, involving arbitrary nationalities. To really make the tax stick, governments will have to impose trackability to the internet activities of their citizens. Not easy.
This issue wont go away though because tax is vital to the nation. They have to figure it out.
“Charging GST on the trades is a nightmare.”
There may be some situations where it is, but I can’t see why it’s a nightmare for the big ones I know of – Uber and AirBnb.
Together with whatever legislation might be necessary, Uber and AirBnb get a letter informing them that it has been deemed that their services physically delivered in Australia (car rides and home stays), including their margin are GSTable. They’ll be required to remit it, and if they don’t they will be in breach of the Share Economy Tax Act and the government will do everything it can to close them down. It will also be doing everything it can to help legitimate competitors who do meet the requirements into the market.
And can anyone tell me why domestic online gambling – heavily taxed by government – is still as healthy as it is?
Uber and Airbnb will, and do, argue that they do not supply services in this country at all. They provide spaces on the internet, not Australia, for others to meet and do business. What business they do and where it happens, is not their responsibility.
I agree with your essential message though, which is the same as mine: “[The tax authorities] lack the key new power that they must attain: the power to deny the operation of a platform provider in their country.”.
This quote is a little oblique but related. It’s why the problem will only get worse if not addressed.
from
The Market Logic of Information
Philip E. Agre
Department of Information Studies
Knowledge, Technology, and Policy 13(3), 2000, pages 67-77.
Economic theory holds that economies of scale are limited, and that their magnitude determines whether the natural structure of the market is fragmentation, oligopoly, or monopoly. Economies of scale are a longstanding challenge to those who believe that the natural, unregulated state of the market is one of efficiency, because a sufficiently large oligopolist or monopolist can develop market power and extract economically inefficient rents. A rhetorical emphasis on technologies that reduce transaction costs tends to alleviate this embarrassment by presenting a plausible scenario by which the electronic economy can transcend industrial-age concentration. The argument, however, is mistaken. No Coasian analysis of the electronic economy is complete until we assess the impact of distributed information technologies on organizing costs and economies of scale. And in both cases the picture is clear. Simply put, distributed information technologies make it vastly easier to capture economies of scale and coordinate a large firm.
The particular economies of scale that matter most here are the ones that derive from fixed costs in information. Because information can be duplicated very cheaply, nearly all of the costs associated with it are fixed. And firms experience many fixed costs of information, including software, policies, forms, regulatory filings, public relations and advertising, market research, and product designs. Computer networks can easily distribute these information objects or their inputs and outputs throughout a far-flung global corporation without regard for the number of operating units that have to be served. The key is that the operating units should all do the same thing. Information technology rewards scale, but only to the extent that practices are standardized.
That is a major reason why companies merge: to capture economies of scale by laying off the information-producing head-office workers of the acquired firm. And that is also why companies sell, spin off, or outsource non-core activities: to eliminate activities that do not enjoy economies of scale because they are different from the core activities that do. Transactions are complex beasts, embedded as they are in a matrix of longstanding relationships and practices (Hodgson 1988). It is hard to reduce transaction costs. Organizing costs, however, are regularly reduced by large percentages, simply by capturing economies of scale. And so, quite to the contrary of the “friction-free” model, it is altogether plausible that information technology is a primary contributor to ongoing global wave of industrial concentration. Nor is it even necessary to argue on a “macro” level that economies of scale are increasing faster than transaction costs are decreasing. A pattern of falling transaction costs and rising economies of scale will tend, other things being equal, to bring about the combined picture of outsourcing and concentration. Every firm will concentrate in a particular activity, outsourcing all others, and all firms that engage in the same activity will tend to merge.
This wave of concentration, to be sure, is not all bad. Economies of scale are still economies, and an industry that captures more such economies will pass them along to the consumer so long as the market remains competitive — that is, until market power emerges. Conventional economists were largely unafraid of market power because they believed in diseconomies of scale: the various factors that limit economies of scale in practice. Economies of scale require homogeneity, but the world is not homogeneous. Consumers’ tastes differ, as do cultures, legal systems, media, technical standards, and other features of the market environment. As globalization proceeds, however, all of these types of diversity are being reduced. English is spreading as a global language and technical standards are converging on a global basis, in each case because of the benefits of cross-border compatibility. Trade treaties are harmonizing many institutions, and economies of scale are driving a global homogenization of mass media.
As diseconomies of scale are destroyed, it becomes more and more practical to run a globally integrated firm — indeed, a global monopoly — provided, again, that the firm maintains a strong focus, picking one activity and doing all of it for the whole world. The picture that results is a large collection of focused monopolies, each of them taking a precision “slice” through the world economy by means of global computer networks and by the grace of the increasingly homogenized world that it both depends upon and helps to create (Bryan, Fraser, Oppenheim, and Rall 1999).
yes, somewhat apt, though this author is thinking more of production monopolies, such as for cars and mobile phones. Countries then have a few world monopolies in particular sectors and larger countries have more monopolies. That kind of world is easy to tax.
The monopolies the post talks about are somewhat different in that they are platforms for internal goods, as well as local and non-tradeable services. They are market platforms, not producing anything themselves but connections between consumers and producers. The difficulty in taxing that is far harder because the actual production and consumption does not take place by the companies involved or their platforms.