The Impact of the Growth of the Sharing and Gig Economy on VAT/GST Policy and Administration

2. Addressing the VAT/GST implications of the growth of the sharing/gig economy: possible steps for a needs assessment and eventual policy action

Abstract

This chapter considers possible steps that a tax authority may undertake when considering its possible VAT/GST policy response to the growth of the sharing/gig economy within its jurisdiction. These steps include:

- Ensuring a good understanding of the size and growth of the sharing/gig economy at national level;

- Assessing the need (if any) for policy action and determining its key objectives (the “why” question);

- Determining and implementing the appropriate VAT/GST policy and administration response(s) (the “how” question).

Jurisdictions’ VAT/GST strategies are likely to differ in light of specific facts and circumstances. They may notably not need, or wish, to go through each of these steps in developing their policy in all cases; and their responses are likely to differ in light of their specific policy needs and circumstances.

2.1. Introduction

This chapter presents a possible framework for the development of tax authorities’ VAT/GST strategies in response to the growth and development of the sharing/gig economy. It recalls the various steps that tax authorities may want to take in monitoring the sharing/gig economy development and its possible impact on VAT/GST policy and administration; the needs assessment for policy action; and the determination and implementation of possible policy responses taking into account countries’ specificities and circumstances. It refers to the sections of this report that provide further detailed discussion and guidance on each of these steps. This framework includes the following broad stages of policy development (see Figure 2.1. below):

Figure 2.1. Possible steps of policy development

Source: OECD analysis

The following paragraphs elaborate further on these broad stages, recognising that tax authorities may not necessarily need to go through all of them as their responses are likely to differ depending on national circumstances and policy objectives.

2.2. Ensuring a good understanding of the size and growth of the sharing/gig economy at national level

To support evidence-based decision making, jurisdictions considering the potential need for VAT/GST action in response to the sharing/gig economy development are likely to need a proper and up-to-date understanding of the size and growth perspectives of this economy at national level. Chapter 1 of this report presents an analysis of the sharing/gig economy, its main actors and sectors, their growth perspectives and the business models they operate. This is aimed at supporting tax authorities in deepening their understanding of the sharing/gig economy within their jurisdiction and in organising their further monitoring of this economy’s development.

Monitoring the sharing/gig economy in further detail is challenging, notably due to the often informal nature of the activities of sharing/gig economy participants, which may often be unregistered or underreport for tax purposes, and due to difficulties related to the classification of activities. National accounts procedures tend to reflect conditions before the emergence of the sharing/gig economy, notably for informal rental and labour activity. Similarly, even though household surveys help to measure the labour activity, respondents often neglect to report gig activities unless explicitly asked about the topic in questionnaires (IMF, 2018[1]) (OECD, 2019[2]).

Monitoring and measuring the sharing/gig economy obviously has a relevance beyond VAT/GST policy. It is therefore beyond the scope of this report to discuss this aspect of government policy in respect of the sharing/gig economy in any particular detail. It would seem obvious, however, as a general consideration, that jurisdictions adopt a coordinated, whole-of-government approach in monitoring and measuring the sharing/gig economy to support a consistent, fact-based, and effective and targeted policy strategy and implementation.

To this end jurisdictions may wish to develop a framework to define and collect statistical data on the sharing/gig economy activities. Imposing data reporting obligations on actors involved in the sharing/gig economy supply chain, notably the digital platforms facilitating those sharing/gig economy supplies (further discussed under Chapter 3 of the report) could allow jurisdictions to make quick progress in improving the measurement of the sharing/gig economy and therefore acquire a better understanding of its size and growth at national level. Of particular relevance in this context is the 2019 OECD report on Measuring platform mediated workers as part of the OECD Digital Economy Papers series by the OECD Directorate for Science, Technology and Innovation (STI) (OECD, 2019[2]). While recognising challenges in estimating the number of platform workers, this report reviews different attempts by private agencies and official statistical agencies to measure platform workers and offers recommendations on how to improve the measurement in the future (i.e. how to use different forms of surveys / how to formulate the survey questions to obtain desired outcomes).

2.3. Assessing the need (if any) for policy action and determining its key objectives (addressing the “why” question)

The main motivation for possible VAT/GST policy action in response to sharing/gig economy developments is likely to differ across jurisdictions, but will generally relate to securing revenues and addressing risks of competitive distortion. The main drivers for possible VAT/GST measures are likely to include the size and growth of the sharing/gig economy or specific sectors of this economy in a given jurisdiction, the pressure it creates on the VAT/GST base and revenues, and on the competitive position of the economically equivalent traditional sectors.

VAT/GST pressures caused by sharing/gig economy growth will vary depending on the economic sector(s) involved and on the specific features of jurisdictions’ VAT/GST design, such as the presence and level of registration and/or collection thresholds. Sharing/gig economy growth typically involves growing activity by potentially large numbers of new economic actors and/or non-standard workers that may qualify as VAT/GST taxpayers under existing rules. In a jurisdiction with a relatively high VAT/GST registration or collection threshold, which applies to all economic activity or specifically to the sector in which the sharing/gig economy growth occurs, this sharing/gig economy growth is likely to cause VAT/GST pressures of a different nature than in a jurisdiction with no or a low VAT/GST threshold. In a jurisdiction with a high threshold, the revenue and competitive impacts of new sharing/gig economy actors (e.g. occasional gig workers) entering a given market sector may be limited as the existing traditional economy actors in that sector may generally be below the threshold as well. On the other hand, revenue and competitive consequences may be significant when sharing/gig economy growth results in activity shifting from a relatively small number of large traditional operators that are above the VAT/GST threshold to a large number of small sharing/gig economy operators that are generally below the threshold given its relatively high level (e.g. hotel activity vs. short-term vacation rentals). In a jurisdiction with no or low threshold, the growth of the sharing/gig economy sector(s) may create pressure on tax administration as a large number of small businesses may enter the VAT/GST system, perhaps with limited compliance capacity and knowledge of their tax obligations.

A jurisdiction’s main objective may not necessarily be to bring all sharing/gig economy activities within the VAT/GST net. A jurisdiction may for instance wish to start by monitoring sharing/gig economy development to ensure a proper assessment of any potential risk of VAT/GST base erosion and/or competitive distortions so as to allow rapid and targeted policy action when considered appropriate. The choice of the most appropriate VAT/GST measures in response to sharing/gig economy growth and the design of these measures is heavily dependent on the policy objectives that tax authorities wish to pursue through their policy action. Chapter 1 discussed the main pressures that sharing/gig economy growth may cause for VAT/GST policy and administration. In response to these pressures, Figure 2.2. below recalls the main motivations for VAT/GST policy action.

Figure 2.2. Addressing the VAT/GST implications of the sharing/gig economy – Often (a mix of) diverse key policy objectives in practice

Source: OECD analysis

Given the diversity of the sharing/gig economy landscape and its constantly evolving nature, jurisdictions’ need for policy action and its objectives are likely to vary depending on the sectors of the sharing/gig economy that are active in their domestic market, on their relative size and growth and on their impact on existing economic activity. Depending on the outcome of their assessment of sharing/gig economy developments within their jurisdiction, tax authorities may opt for a sequenced strategy focusing their policy action first on the dominant sharing/gig economy sectors that may create the most immediate risks to VAT/GST revenue and/or competitive neutrality (e.g. ride-sourcing, short-term rentals), while continuing to monitor the other (emerging) sectors to ensure early identification of further needs for policy action.

A clear understanding of the objective(s) of VAT/GST policy action in response to sharing/gig economy developments in a given jurisdiction is critical for identifying the most appropriate policy response and for determining the design of this response. If the objective is to purely monitor sharing/gig economy developments, then the introduction of data reporting requirements on platforms and other sharing/gig economy actors is likely to be part of the policy response. However, such a reporting requirements could also be aimed at supporting VAT/GST collection and compliance, for instance, by pre-populating VAT/GST returns of gig economy workers, or to detect non-compliance and/or support compliance through risk analysis.

2.4. Determining and implementing the appropriate VAT/GST policy and administration response (addressing the “how” question)

There is no one-size-fits-all solution for addressing the VAT/GST implications associated with the growth of the sharing/gig economy. A tax authority’s policy response to sharing/gig economy developments in a given jurisdiction will depend heavily on the various possible motivations for its policy action, as outlined above, which will in their turn be dependent on the specific aspects of the sharing/gig economy activity in that jurisdiction and their impact on VAT/GST revenues and on the competitive position of traditional economic activity.

The design and implementation of measures can therefore be expected to reflect the differences in policy and legislative environments, tax authorities’ distinct challenges and priorities and the diversity of sharing/gig economy business models. It is for individual jurisdictions to determine which measures are most appropriate for their particular circumstances. This report aims at assisting jurisdictions by analysing the main available policy and administration options and identifying a number of aspects that jurisdictions may wish to take into account. These options are discussed in detail in Chapter 3 of this report. The remaining paragraphs of this Chapter 2 discuss a number of overarching policy aspects and design principles for jurisdictions to consider in their policy decision process.

2.4.1. Is there a need to review normal VAT/GST rules in response to sharing/gig economy developments?

There may be no good reason or justification, in principle, for a different VAT/GST treatment of sharing/gig economy activities compared to similar or identical activities in the traditional or broader platform economy, only because sharing/gig economy activities are facilitated via a different (digital) channel. This observation is not only based on competitive neutrality principles but also on the findings of this report suggesting that sharing/gig economy activities and sectors are increasingly merging with traditional and other digital activities and sectors (e.g. traditional actors and or e-commerce marketplaces creating their own sharing/gig economy platforms or connecting with existing ones). A sharing/gig economy-specific policy response introducing specific measures that deviate from normal VAT/GST rules may then not be the most appropriate response, as it may cause undue complexity and require continuous updating. On the other hand, bringing the sharing/gig economy within the application of normal VAT/GST rules, may require adjustments to these rules to address the specific challenges that the specific features of this economy may create for VAT/GST policy and administration.

Whether a jurisdiction decides to opt for the adoption of broader changes to its VAT/GST system or for more targeted measures will notably depend on the jurisdiction’s VAT/GST system and the pressures that the sharing/gig economy growth creates for VAT/GST policy and administration. In a jurisdiction with no or a low registration threshold, for instance, the growth of the sharing/gig economy may create the pressure of having to administer large numbers of new economic actors entering the VAT/GST system, perhaps with limited capacity and knowledge of their tax obligations. This may lead to a need to review this jurisdiction’s threshold policy accordingly and/or consider other alternative approaches to facilitate compliance and VAT/GST collection, e.g. involving digital platforms, presumptive schemes, etc.

Against this background, the natural starting point for jurisdictions in considering VAT/GST policy responses to the sharing/gig economy is to test the application of the existing VAT/GST framework against the specifics of the sharing/gig economy and to consider responses that are consistent with this framework to address any specific challenges where appropriate. Such an approach will serve to avoid overlapping or conflicting obligations that may result from specific measures that may diverge from the existing VAT/GST framework, which could lead to additional complexity and uncertainty and more compliance burdens and administration costs. In other words, jurisdictions may first need to identify any policy and administration gaps in their current VAT/GST framework before being able to determine what type of policy action may be required to address any VAT/GST challenges created by the sharing/gig economy.

Similarly, jurisdictions may also need to consider the potential interaction of their current VAT/GST system with other areas of national law, including labour law, social security legislation and/or the income tax regime. For instance, the treatment of a sharing/gig economy platform as an employer and the underlying providers as employees under a jurisdiction’s labour law, may have an impact on the VAT/GST treatment of this activity. Similarly, the requirement for a VAT/GST registration as a condition to obtain a license to carry out an activity or to take on a certain job, or to be eligible for social security coverage or for specific allowances may influence the VAT/GST response.

2.4.2. Is there a need for sector-specific policies in the sharing/gig economy?

Related to the previous discussion is the question whether or to what extent different policy responses may be appropriate depending on the specific sector of the sharing/gig economy involved. The diversity of sharing/gig economy activities (e.g. asset-based vs. labour-based) and business models (e.g. electronic/web-based payment vs. cash-based payment) can lead to an equally diverse set of compliance and/or administration challenges that may justify a differentiation of policy responses.

In line with what was highlighted before, where a differentiated approach may be considered appropriate, it is advisable to opt for a policy response that is consistent with the general rules and principles of the jurisdiction’s VAT/GST system and to limit the introduction of new exceptions or special regimes. The introduction of specific regimes targeting specific sectors, e.g. through sector-specific thresholds or exemptions, may create additional complexity and uncertainty notably as the constantly evolving nature of sharing/gig economy sectors and their convergence across sectors (which notably results in bundled offerings) may make it exceedingly difficult to delineate the application of these regimes. This may lead to increased compliance burdens and risks of competitive distortion and non-compliance (e.g. from mischaracterisation of activities to benefit from the most attractive VAT/GST treatment). A sector-specific approach may also be less future proof in light of the continuous changes to business models and emergence of new sharing/gig economy sectors quickly gaining significance.

It is recognised that a differentiated policy response may effectively be required and be appropriate in light of the specific features of specific sharing/gig economy sectors. For instance, an effective policy response to the emergence of a sector/gig economy activity that relies on the physical presence of the underlying service providers (e.g. short-distance transport services) could be different than the policy response to an activity that involves the provision of remote services from abroad (e.g. intellectual gig work) or that relies on the presence of assets in a jurisdiction that may be foreign-owned (e.g. real-estate rental). Overall, a response that is embedded in and consistent with the overall VAT/GST framework is likely to be the most effective.

It is recognised that a jurisdiction may decide to adopt gradual policy action. In particular, it may decide to first target dominant sharing/gig economy sectors that create the most pressing VAT/GST revenue risks and/or concerns of competitive distortion. In this context, a jurisdiction may consider running a (voluntary) pilot programme with actors in these sectors, and then further rolling out this across these sectors building on the experience of the pilot programme. Equally, the know-how and experience acquired in implementing a reform targeted at sharing/gig economy sectors that were identified as needing a priority response, are likely to serve as a good basis for further policy action in response to developments in other sharing/gig economy sectors.

Broadening the scope of existing policies to cover other types of sharing/gig economy activities will need to be carefully designed so as to ensure the workability of such policies in light of the diversity of sharing/gig economy business models. This is for example the case when considering broadening the scope of data/sharing reporting obligations for actors in specific sectors to other sharing/gig economy sectors and actors. Determining the reportable information elements on the basis of available information per sector is of particular relevance to ensure an efficient and effective operation of such a regime (see further Annex D that illustrates variations of business models operating even within the same sector and information elements available to the platforms depending on the type of their operations).

2.4.3. Overarching design principles for tax policy and administration approaches to address the VAT/GST implications of the sharing/gig economy.

In principle, an effective VAT/GST system is a system in which policy objectives, legislation, administration, compliance strategies and taxpayer services are carefully aligned. A response that is properly grounded in the overall VAT/GST framework and that is consistent with its overall operation is most likely to deliver on revenue and equity objectives, on compliance efficiency for sharing/gig economy actors and on administrative effectiveness for the tax authorities. A well-balanced response will also prevent that VAT/GST policy create undue impediments to sharing/gig economy development. The Ottawa Taxation Framework Conditions may provide useful guidance in designing such reform, building on the fundamental principles of Neutrality, Efficiency, Certainty and Simplicity, Effectiveness and Fairness and Flexibility.

To conclude, and recognising that there is no such thing as a “one-size-fits-all solution”, this chapter outlines a number of additional overarching VAT/GST policy design principles to further inform tax authorities’ analysis and decision in response to sharing/gig economy developments within their jurisdiction:

• Reach a clear understanding of the intended policy objectives and evaluate potential strategy/policy options against these objectives.

• Ensure equal treatment of various distribution channels in a given market, be they traditional or digital, while accepting that policy action may be needed to achieve such equal treatment for sharing/gig economy activities in light of the specific features of this economy. As the platform economy, including the sharing/gig economy, converges with the wider economy it is essential that channel neutrality is safeguarded between providers operating via platforms and those operating offline.

• Build the design of policy options on a good understanding of the sharing/gig economy actors, their ecosystems and trends so as to ensure their workability in a proportionate and future proof manner. Hence, the importance of tax administrations consulting with the stakeholders involved (i.e. sharing/gig economy actors; traditional economic operators and other third-party stakeholders such as service and IT providers).

• Ensure close co-operation with other government agencies (e.g. labour regulators) to explore opportunities for whole-of-government approaches. These could include providing cross-agency access to VAT/GST relevant information collected by other (non-VAT/GST) national agencies and vice versa; as well as a “one-stop-shop” registration process covering several purposes and governmental agencies/entities/authorities.

• Participate in international dialogue with peers in other jurisdictions to stay informed of global trends and share analysis, experience and best practices. The Global Forum on VAT and the Forum on Tax Administration can play a useful role in facilitating such dialogue.

• Ensure proper communication of policy measures in advance of their introduction – and provide adequate lead-time for their implementation along with clear guidance for all the sharing/gig economy actors involved (providers, users and platforms).

• Safeguard the integrity of the tax system by facilitating compliance and keeping compliance burdens proportionate while mitigating risks of tax evasion and avoidance. To this end, tax authorities are encouraged to adopt a two-pronged approach, whereby, on the one hand compliance is facilitated and encouraged by simplifying procedures and on the other hand creating a deterrent for non-compliance.

• Evaluate on a regular basis the efficiency/neutrality of policies adopted including their (potential) impact on the growth of the sharing/gig economy. Sharing/gig economy is an evolving area. Developments including in the regulatory domain (e.g. labour law related developments that could reshape the relations between the platforms and their provider) and technological landscape (e.g. the potential use of self-driving cars in the future) could transform the scope and scale of the sharing/gig economy rapidly both at national and global level. Hence there is a need to monitor developments and evaluate the efficiency/neutrality of policies adopted at -to the extent possible- regular intervals.

These overarching design principles serve as the evaluation framework for assessing the efficiency and effectiveness of a wide range of policy and administration options including also potential roles for digital platforms further considered under Chapter 3 of the report.

References

[1] IMF (2018), “Measuring the Digital Economy”, Policy Papers, IMF , Washington, D.C., https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/04/03/022818-measuring-the-digital-economy (accessed on 25 February 2021).

[2] OECD (2019), “Measuring platform mediated workers”, OECD Digital Economy Papers, No. 282, OECD Publishing, Paris, https://dx.doi.org/10.1787/170a14d9-en.