The Sharing and Gig Economy: Effective Taxation of Platform Sellers

Chapter 3. Considerations for effective taxation of platform sellers

59. The nature of the sharing and gig economy is such that a significant number of individual platform sellers may not be fully aware of their tax obligations. This is for a number of reasons, in particular:

• tax obligations might not be clear, with more focus needed in terms of guidance than for traditional forms of employment and self-employment

• some of the activities may be entirely new, or may be an expansion of previously untaxed or non-taxable transactions such as occasional short-term rental or even hobby sales

• for some platform sellers, these might be second or third incomes, and the activity may be of an occasional nature or spread across different platforms.

60. In addition, where there is knowledge that information on the transactions may not be visible to tax administrations, some platform sellers may decide not to report even if they are aware of possible tax obligations. Where tax is not paid, whatever the motive, it can have impacts on competition and, at scale, on public revenues. Further evidence and analysis is required to better understand the risks to tax compliance and the potential for those risks to continue and to grow. Deeper analysis will allow countries to make informed decisions about which options they want to consider to tackle these issues.

61. In order to mitigate the risks, many governments are already now seeking to improve taxpayer education to encourage self-reporting of income. This includes cooperation with platforms in a number of jurisdictions.

62. Some governments are also legislating to require that online platforms operating in their jurisdictions provide information on platform sellers who are tax residents. In some cases, requirements for withholding and remitting tax by the relevant platforms have been put in place. Such legislation may cover individual sectors, a wide range of sectors or even all online platforms.

63. Legislation will generally be effective where platforms operate within a jurisdiction in a legal form (which may be through a branch, subsidiary or agent) or otherwise have access to information on individual platform sellers who are tax residents, e.g. via a data controller. However, there may be some concerns around enforceability and data protection where platforms are based in another jurisdiction.

64. As the sharing and gig economy grows and as individual platforms mature, it will become more likely that there will be an increasing number of platforms operating across borders for reasons of cost efficiency. Where a platform seller makes income through a platform wholly located in another jurisdiction, then enforceability of legislation for the provision of information or withholding may become increasingly more difficult and complex without enhanced international cooperation.

65. Taking into account that platform sellers may operate through platforms located in their jurisdiction of tax residency or through platforms located in another jurisdiction, there are three main options (which are not exclusive or exhaustive) that tax administrations may wish to consider in implementing strategies for tax compliance:

(i) improving self-reporting by individual platform sellers

(ii) introducing legislation applying to platforms which provide services in the jurisdiction of the tax administration. Such legislation could require the reporting of information, and may be based on a standardised model, or reporting combined with withholding of tax; and

(iii) multilateral agreements for the exchange of information held by platforms on platform sellers tax resident in another jurisdiction. (This would be restricted to information that is foreseeably relevant for tax purposes.) This could either be on the basis of information available under existing powers to gather information or under new legislative requirements, including for standardised reporting.

3.1. Improving self-reporting by platform sellers

66. Many tax administrations are already undertaking a range of activities to improve taxpayer education including through guidance, social media and wider publicity. The impact of such activities is likely to vary greatly between and within jurisdictions, particularly outside of the most well-known platforms where there will often be extensive media reporting and greater public awareness.

67. Where such activity is carried out by the tax administration, it will inevitably be largely impersonal and targeted at a group rather than an individual. While strategies can be informed by the use of behavioural insights, it will remain the case that the information will only have an effect if the person actively accesses the tax administration website or pays attention to general information put out through the media.

68. The source most likely to receive greater attention from individual platform sellers is information that they receive from the platform itself or information that they are required to provide to the platform, such as tax identification numbers. This is because they are actively accessing the platform to undertake activities; they are receiving information in accessible electronic form; and contact will usually be personal in the sense that it will be addressed to the individual platform seller.

69. A number of tax administrations have reported that cooperation with individual sharing and gig economy platforms on engagement with platform sellers can be effective in increasing compliance. Tax administrations which are not yet working with platforms in this area, may wish to consider whether it would be beneficial for them to do so. However, it can also be resource intensive for tax administrations to negotiate with an increasing number of platforms individually, particular where they are based in other jurisdictions. This may result in the focus being on a relatively small number of platforms.

70. An alternative to negotiations with individual platforms can be to set out general expectations of what platforms should do to engage with, and to prompt platform sellers as to their potential tax obligations. This could be delivered, for example, through legislation on minimum requirements or through tax administration guidance.

71. Given the increasing cross-border activity facilitated by sharing and gig economy platforms, it could be useful to seek to agree a model Code of Conduct at a multilateral level. This could be either voluntary or mandatory in participating jurisdictions. While this may be adapted in its application in individual jurisdictions, the more it is used, and used consistently, the more it will reduce burdens for platforms compared to complying with multiple different requirements. If used by a large number of jurisdictions and platforms it could also help to deliver a high degree of standardisation as regards information collected by platforms and the due diligence undertaken.

72. Annex A contains a draft model Code of Conduct which has been subject to some discussions between tax administrations. The main proposed elements are:

• Communication on possible tax liabilities with platform sellers in general and on a jurisdiction-specific basis

• On-boarding procedures to ensure that information relevant to tax authorities is collected and is capable of being exported in searchable format when required under law or by agreement of the taxpayer

• Minimum expectations of due diligence

• Annual statements of income to be available to platform sellers

• Annual reporting to tax administrations, on a confidential basis, of the aggregate numbers of sellers and income on a country-by-country basis (to facilitate analysis of compliance). This would of course be subject to existing legal limitations.

3.2. Legislation applying to platforms providing services in a jurisdiction

73. A jurisdiction can place a range of legislative obligations on platforms if the platform has sufficient activity in the jurisdiction in question. Among other things, such legislation can require platforms to provide information to its users; to provide tax relevant information on platform sellers to the tax administration; and to withhold on behalf of the tax authority and remit payments.

74. Legislation would need to meet proportionality and public interest tests, including as regards data protection and privacy considerations. However, there ought to be no difference in principle as regards these tests between information exchange and withholding arrangements which also involve information transfer.

3.2.1. Withholding

75. Withholding can potentially bring about effective compliance with low resource costs for the tax administration. Withholding tends to act in real-time, or close to real time, and presents an opportunity to move compliance upstream to address behaviours including error, evasion, fraud or non-payment.

76. Collecting tax due at the earliest point in the payment chain tends to decrease collection costs for tax administrations, gives more certainty of the revenue flow and significantly reduces the risk of it being unpaid when tax is due. Depending on the design, withholding can also streamline debt collection activities by reducing the number of parties to be pursued for monies owed. It also provides a better understanding of cash-flow and business performance for both the tax administration and the business. There are good reasons to think that having a continual understanding of tax liabilities and being up-to-date with payment also affects people’s attitudes to tax and their propensity to take risks to reduce their liability.

77. Withholding can create burdens, though, both on the tax administration and on platform users as well as sharing and gig economy platforms. These can vary depending on the design of the system, including the rates of withholding compared to any final liability, and the application of thresholds and marginal rates. For example, where there is over-withholding a large number of taxpayers may contact the tax administration for refunds, potentially of relatively small amounts. This is particularly the case given that some platform sellers will use multiple platforms and it may not be a primary source of income. Some of these burdens can be mitigated where there is a simplified tax regime, such as a flat rate tax or a threshold, for income derived from the sharing and gig economy.

3.2.2. Provision of information

78. Another possible approach is to require the provision of information, which identifies the platform seller and the payments received without withholding. The sending of such information to the tax administration can by itself have some impact on self-reporting provided that taxpayers are aware of it and of their obligations. Beyond that effect, how successful this is in tackling non-compliance depends on the use that a tax administration can make of the information. This will need to be subject to cost-benefit considerations.

79. In some cases, it may be possible to incorporate the information into pre-filled tax returns. Depending on the tax regime in place, that may still require adjustment by the taxpayer for allowable expenses etc. Where prefilling is not done, then the main alternatives are “nudge” communications to encourage self-reporting and/or the integration of the information into risk assessment models. These models allow tax administrations to decide on appropriate compliance actions and strategies given the amount of tax at risk.

80. To ensure the quality and the usability of the information, legislation would need to specify the identifying information required to enable the tax administration to match it with the relevant person. It would also need to set out the due diligence to be undertaken by the platform to check the accuracy of the information provided (as well as record keeping etc.).

81. It could be useful in this regard to seek to agree a common template at the multilateral level for both the set of information to be provided and the due diligence required. This would allow platforms which operate in a number of jurisdictions to adopt a single process which could be applied across different jurisdictions. This could also facilitate the exchange of information multilaterally (see below). The set of information reported as needed by tax administrations is set out in Annex B.

82. As to how the information is transferred to the tax administration, a number of options are available. This could be done on a periodic basis – for example monthly, semi-annually or annually – with the platform sending or uploading files to the tax administration. Alternatively, the sending of information could be built into the application programming interfaces (APIs) through which users interact with the platform. In that case, relevant identity and income information could potentially be sent direct to the tax administration in real-time, depending on cost-benefit considerations.

3.2.3. Enhanced mutual cooperation to facilitate compliance

83. There might be certain difficulties in enforcing legal requirements, whether for withholding or reporting of information, on platforms which do not have any physical presence in a jurisdiction. Administrative cross-border cooperation could potentially be a viable solution to help facilitate compliance and enforcement in such circumstances, although these would of course need to meet applicable data protection requirements. Examples of such cross-border administrative cooperation could be tax examinations abroad, joint audits and possible enhanced cooperation in relation to assistance in collection of tax claims in the case of non-compliance.

3.2.4. Requiring platforms to have a physical presence in a jurisdiction

84. Another option potentially open to a jurisdiction where there are concerns about enforcement may be to seek to make it illegal for platform sellers to use a platform unless that platform has sufficient physical presence in the jurisdiction so that domestic regulatory obligations can be applied. That is, physical presence (for example the location of a data controller) would be a condition of providing the service in the jurisdiction.

85. Another alternative would be to require platform sellers to register with the tax administration or another agency (which then passes information to the tax administration). An obligation could also be placed on platform sellers that they can only legally use platforms which maintain the registration information, for example a registration number, on the platform seller’s listing page. This would enable easier compliance checking.

86. Both of these options have significant drawbacks and could potentially be difficult to enforce. Requiring online platforms to have sufficient physical presence, or to install a local data controller, would be very expensive and burdensome if required by multiple jurisdictions. This could make it difficult for smaller platforms to grow internationally, either because of high start-up costs or cliff-edges when they reach a certain size. (This might be partly mitigated through the use of thresholds.)

87. A registration requirement can also be expensive to administer – particularly if multiple sectors are covered - and will not, by itself, provide income information to the tax authority. Self-reporting will still be required and checks by the tax administration may involve significant resources given the number of people using such platforms and low average payments.

88. These options may, however, be something for tax administrations to consider if particular platforms do not cooperate on improving tax compliance or operate out of jurisdictions where exchange of information is not supported.

3.3. Multilateral automatic exchange of information

89. A third option for the effective taxation of platform sellers using platforms located in another jurisdiction is the automatic exchange of information between tax administrations.

90. The exchange of information on request is not always an efficient compliance response to online platforms because of the resources required to obtain information and because the average amounts involved may often be small. While group requests could be used, the challenge remains of defining the target of the request sufficiently to meet the requirement, as set out in international standards on exchange of information, that the request in not a “fishing expedition”.

91. Automatic exchange of information could be a more efficient approach for international exchange of information on platform sellers. International standards on the exchange of information for tax purposes require that the information exchanged is likely to be foreseeably relevant. This test would generally be met if the platform sellers are resident in the jurisdiction to which the information is to be transferred and that information is likely to be relevant to determining their tax position or in helping them to determine their tax position (for example by pre-filling).

92. A legal gateway for automatic exchange can be found in some bilateral tax treaties or Tax Information Exchange Agreements (TIEAs) and in the Multilateral Convention on Mutual Administrative Assistance (“the Convention”) in which over 120 jurisdictions participate:

• Article 6 of the Convention provides: “With respect to categories of cases and in accordance with procedures which they shall determine by mutual agreement, two or more Parties shall automatically exchange the information referred to in Article 4.”

• Article 4 provides: “The Parties shall exchange any information, in particular as provided in this section, that is foreseeably relevant for the administration or enforcement of their domestic laws concerning the taxes covered by this Convention.”

93. In order to undertake automatic exchange between jurisdictions the following elements are necessary:

• Conclusion of an international agreement between two or more tax administrations. This would involve the conclusion of a legal instrument (e.g. a TIEA, a tax treaty, etc.) and an implementation agreement which provides the operational basis for the exchanges, such as a bilateral or multilateral competent authority agreement between tax administrations.

• That domestic powers are in place to collect information automatically from a third party. In the case of some jurisdictions, the existence of an exchange agreement, such as a competent authority agreement, may be sufficient to trigger the use of existing powers to collect foreseeably relevant information from a third party. In other cases, it may be necessary to have legislation either to ratify the international agreement and/or in order to impose an obligation on third parties to meet the requirements of such an agreement.

3.3.1. Use of existing powers to collect information

94.  While it may be possible for some jurisdictions to enter into agreements to exchange information automatically using existing powers, such exchange agreements cannot, by themselves, impose new legal obligations on third parties. The major limitations arising from this are:

• The information that can be required is limited to foreseeably relevant information which the platform has in its power and possession. For example if the only information held on platform sellers is name, address and payments made, then that would be all that could be required to be provided and exchanged. Other information such as date of birth could not be required if it was not in the power and possession of the platform without a change in the law.

• Formatting of information can only be required in so far as the tax administration has existing powers which allow it to specify the format. In the absence of that, a platform may or may not be willing to format the information on a voluntary basis for ease of use by tax administrations.

• No additional due diligence could be required of the platform as regards the accuracy or completeness of information beyond anything that already applies under legislation. (There would, though, be nothing preventing a platform from voluntarily enhancing due diligence procedures should it choose to do so.)

95. Depending on the extent of these limitations (which will vary between platforms and jurisdictions), there will be an impact on the ability of tax administrations to match data with taxpayers automatically and much information may go unmatched. However, for business reasons many platforms are likely to keep at least the name and address, email address, bank account and phone number of platform sellers. This could be useful to tax administrations for compliance purposes even if not the full set of information they would ideally like to receive to maximise matching rates. In addition, knowledge that such information is being exchanged between tax administrations could itself to lead to greater self-reporting.

96. The limitations can also be overcome over time if platforms agree to make changes voluntarily and/or jurisdictions agree to legislate for the full set of tax relevant information to be collected by the platforms and for an appropriate degree of due diligence.

3.3.2. Multilateral standardisation of information and due diligence requirements

97. It is possible that standardisation could arise gradually from further legislation by individual jurisdictions. However, a quicker and more uniform process for achieving such standardisation could be through multilateral agreements reached in the relevant fora. This process could develop a standard reporting model for jurisdictions to use when introducing legislation which could be the foundation both for domestic reporting and for reporting under international automatic exchange agreements.

98. In addition to standardisation of reporting requirements and due diligence requirements, further policy discussions on a multilateral basis could be helpful to identify the scope and modalities of any exchange agreement including:

• the types of platform to be included. For example: those which are payment intermediaries; those which are not intermediaries but hold information on payments made; those which are not intermediaries but have identity information on those who have entered into contractual arrangements etc.

• size thresholds in terms of cross-border business

• whether information relevant for personal income tax and corporate income tax as well as value added tax should be collected and exchanged

• defining the information to be exchanged

• setting out the time and manner of the exchange of information, including the relevant schema

• provisions on compliance and enforcement

• confidentiality and data safeguards

• definitions, provisions on commencement, termination or amendments etc.