Taxing the gig economy

Oct 28, 2020
International tax
State tax nexus Pillar two COVID-19 Global tax reporting

COVID-19 is reshaping the traditional way of conducting business. For example, moving away from brick and mortar establishments to online business. Online businesses have now become a major trend as the world is becoming more digital and most of us continue to operate from home. With the technology-enabled operations, the gig economy is gaining popularity across the world.

What is the gig economy?

The gig economy refers to the online economy where sellers operate as independent contractors, temporary workers, or freelancers and provide services to customers through digital platforms. Some of these services include short-term rental accommodation, cab share, online research and drafting services. In the modern digital world, participation in the gig economy is more common than ever. However, digitalization is expected to result in a number of challenges and opportunities for tax administrations. In particular, taxing online market participants is a challenge because activities carried out through online platforms may not always be visible to tax administrations or adequately self-reported by taxpayers. As a result, this growing part of the global economy still remains relatively unregulated.

What steps are being taken to regulate the digital economy?

On July 3, 2020, the Organisation for Economic Cooperation and Development (OECD) published a new global tax reporting framework that would require digital platforms to collect and report information on certain gig economy services offered by sellers. The ‘Model Rules’ were approved by the G20/OECD Inclusive Framework (IF) on BEPS on June 29, 2020. Given this background, some jurisdictions have already introduced reporting measures requiring platform operators to communicate to tax authorities’ revenues received by platform sellers. The OECD identifies several inherent challenges in implementation and enforcement of domestic rules given platform operators are facilitating transactions on a global scale.

The European Union has also published a draft Directive (DAC7) that includes reporting and sharing rules to facilitate the collection and exchange of data from digital platform operators by national tax authorities across the European Union. DAC7 goes a step further and has included the online supply of goods.

In addition, the OECD released Blueprints on the tax digitalisation/globalization project on Oct. 12, 2020. These two blueprints cover Pillar one and Pillar Two in the project framework previously announced.

  • Pillar One aims to provide new methods for profit allocation and revise nexus rules (i.e., change the taxation rights of countries).
  • Pillar Two aims to introduce a global anti-base erosion mechanism ensuring multinational enterprises pay a minimum level of tax.

The Blueprints indicate the degree of current consensus and outstanding issues being pursued in the IF. These Blueprints are now open for public consultation until Dec. 14, 2020.

What is the structure of Model Rules?

The overall architecture of the Model Rules has three dimensions: (i) a targeted scope of transactions to be reported; (ii) a broad scope of platform operators and sellers; and (iii) due diligence and reporting rules. Against this background, the Model Rules are designed as follows:

  1. Section I sets out the key definitions including scope of platform operators and sellers.
  2. Section II sets out the information that platform operators have to collect in respect of the sellers including timelines and frequency for completion of due diligence procedures.
  3. Section III sets out the time and manner of reporting the information about the platform, its operators, its sellers and their transactions by January 31 of each year following the year in which consideration is paid or credited to a reportable seller for a relevant service in the format specified.
  4. Section IV contains the measures jurisdictions could take to ensure that the Model Rules are effectively implemented and are complied with by reporting platform operators.

What are the objectives of Model Rules?

Key objectives of OECD’s Model Rules are as follows:

Timely access to high-quality information

The Model Rules seek to ensure that tax authorities receive timely information on the consideration earned by platform sellers to minimize compliance burdens for tax administrations and taxpayers alike. The Model Rules are designed to help both individuals and entity sellers in preparing their tax return by providing them with an information statement of the amount of consideration they have earned through the platforms, as well as any fees, commissions and taxes paid or withheld by the platform operator.

Promote standardization of reporting rules and information

The Model Rules seek to help platforms comply with reporting obligations across different jurisdictions by allowing them to follow largely similar processes for gathering and reporting information on the transactions and identity of the platform sellers. Further, Model Rules seek to standardize the collection and reporting of information that is of good quality and relevant to the work of tax administrations.

Promote international co-operation between tax administrations

The Model Rules seek to ensure tax administrations get access to information on income earned by resident platform sellers and the platforms sellers that are located in other jurisdictions.

Promote multi-use tax reporting regime

While the primary focus of the Model Rules is to facilitate and enhance compliance of platform sellers with their direct tax obligations, the information reported may also have relevance for other domains, such as indirect taxes, local taxes and social security contributions, e.g., Value Added Tax/Goods and Service Tax compliance in the seller’s jurisdiction.

Promote the development of new technical solutions

The Model Rules foresee the possibility to confirm the identity and tax residency of a platform seller through a so-called government verification service. This approach would permit the direct confirmation of the identity and residence of a taxpayer through an electronic process made available by a government.

Targeted approach

The Model Rules currently focus on the rental of immovable property and personal services, including the provision of transportation and delivery services as these sectors pose certain tax compliance risks in light of their scale, the income they generate and the profile of the sellers involved. However, the Model Rules acknowledge that digital markets are rapidly evolving, which may mean that other types of transactions become relevant on the basis of the above criteria in the future. The development of the market will therefore be closely monitored with a view to assess the need to incorporate further types of services such as the rental of moveable assets and peer-to-peer lending. In addition, a number of countries are interested in further developing the Model Rules to also include sales of goods.

Implications to middle-market online platform providers:

The Model Rules, if implemented in Canada, will allow Canadian tax authorities to access information of platform sellers earning income in Canada which may result in additional tax obligations and compliance in Canada. Although many platform sellers may not have a physical presence in Canada, they may still be subject to tax in Canada on their Canadian-sourced income. This would be a significant shift away from the traditional permanent establishment-based Canadian tax liability analyses.

Similarly, as other countries look to adopting (or adapt) the Model Rules in their domestic legislation, Canadian online platform sellers earning revenues from customers worldwide should consider, and prepare for, the added foreign tax obligations andcompliance in countries where they operate. 

RSM contributors

  • Chetna Thapar
  • Nakul Kohli
    Senior Manager
  • Clara Pham

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