The Rise of the Platform Economy: Anticipating the needs of today & the future

?We are moving to a future in commerce that goes beyond what we are used to today. That future is the platform economy where we will have access to everything, everywhere, all at once.?

While the multiple Oscar-winning movie of that name flows between different universes, consumers will flow between different platforms as well as platforms on platforms.??

Indeed, the seeds of that future have been planted and it is proving to be a very fruitful business model. Today, four out of five of the most valuable companies in the world are platforms. You may not think it, but Apple, Microsoft, Google, and Amazon are all platforms.?

According to a recent FT.com article: “The pandemic has meant that more consumers are used to looking online for goods and services. The medium offers flexibility to both users and providers.”?

The strength of the platform economy is how it brings groups together: if you need a holiday home, if you need a taxi, if you need a handyman - there is a platform there for you and the provider.??

The model also streamlines the workflow chain where the platform will look after every aspect of a transaction from advertising, checkout, sale, billing, and refund. Today, platforms help businesses to generate more revenue.?

According to a recent PYMNTS article quoting platform economy research “87% of merchants that leverage them report increased revenue. With this increased revenue come more significant tax complications, however, and many merchants feel that marketplaces are not helping them enough in this department."?

This is a common theme; success brings additional burdens and obligations. Combine this with the fact that platforms now have direct access to an unheralded amount of data, according to the FT.com article: “Data from digitalised products can also offer opportunities to even the most traditional industries.”?

Enter the tax collection industry, a traditional business that is always chasing technological advances. The platform business models have been so successful that tax authorities now see them as the perfect vessels where they can place the obligation on tax collection. Why? Well, because the platforms have access to all the relevant data needed. They know the status of the seller and the buyer; the transaction amount, the location of the end customer, or the transport destination of the goods sold. In short, tax authorities now see platforms as agents whose business models they can leverage so that the correct amount of tax is collected on each online sale.??

In short, platforms are becoming the tax collectors of the future. All the relevant taxes, from everywhere, all at once.??

First, let's get our terminology correct: is a platform the same as an online marketplace??

From a VAT/GST/Sales Tax perspective the concept of a platform is broader than just an online Marketplace.??

An online marketplace is a platform, but a platform may not necessarily be an online marketplace. The Organisation for Economic Cooperation and Development (OECD) is making this distinction in a policy paper on customer protection. In addition, the OECD has recommended that for the role of tax collection, a platform should be defined broadly. We see this, for example, in the E.U. where an electronic interface can be an API, or in the U.S. where some States have introduced broad definition of marketplace facilitator.?

Lots of countries are following the OECD recommendation that says to be a platform liable for indirect tax one should focus on some key factors and the capacity of a platform to access key data information.?

The role of platforms as the tax collector, where did this idea come from??

There has been a shift in approach over the last 20 years towards ecommerce and online sales. This change has been accelerated by the Covid Pandemic. By 2025, almost a third of the world’s population of 8.2 billion will shop online.??

There was a need to level the playing field with local providers but also have a simpler way of collecting tax. It was recognised that it can be too much of a burden for foreign sellers selling through platforms to comply, but also for tax authorities to manage those foreign sellers.? The EU was the first jurisdiction to introduce an obligation on Platforms back in 2015. This approach has been followed by almost all jurisdictions when they amended their legislation. It follows the recommendation from the OECD to give the platform a central role in the collection of tax. The OECD presents this shift of obligation as a key pillar for successful reform.? For example in Australia, following the first three years of their rules, 42% of the tax was collected by five platforms while more than 80% of the revenue came from 30 taxpayers, including 11 platforms.

What is the exact scope of collection from the platform??

In the U.S., it is simpler if your product is subject to sales tax, and you are selling through a marketplace facilitator: the marketplace will likely be liable for the sales tax.??

In the rest of the world, it is key to distinguish four categories:?

1. Digital services?
2. Services?
3. Physical goods?
4. Gig and sharing economy?

1. Digital services and Services?

Digital services were the first category in the scope of new VAT/GST rules, starting back in 2015 in the E.U.??

In many of these VAT/GST rule changes the role of the platform collecting tax on digital services quickly extended to all countries that shifted the tax obligation on such services at the place of consumption.?

However, the definition and the exact scope are complex. The key focus for companies should be on the definition of the services that are within the scope of the various rules. The E.U. rules only covered digital services, but countries like Australia, New Zealand, Egypt, Canada, and Turkey adopted a broader definition of services – one that includes other types of services, such as professional services. We can expect countries introducing such legislation in the future to adopt a similarly broad definition. It is recommended by the OECD in its VAT toolkit for Africa.

Singapore, India, and Norway have also broadened their definition as of January 2023 and we can expect more of those changes. From 2025, the E.U. will also tax other services at the place of consumption.?

2. What is the scope for physical goods??

The treatment of physical goods is the most complex one.??

In practice, collection at the place of consumption already existed. However, the collection is done through parcel carriers on the delivery of goods that are above a certain value.??

There was the need to remove the low value goods exemption as it was distorting competition with local sellers, and it was also creating fraud opportunities with parcels indicated at a value below the real price.?

When removing such exemptions countries also placed the obligation to collect VAT/GST on low value goods on platforms.?

However, there is no uniformity between countries. The threshold value is different per country: it is €150 in the E.U. while it is AUD1,000 in Australia. The calculation can also be on a per parcel basis such as in the E.U. or Australia, or on a per-item basis which is the case in New Zealand and Norway. In addition, the location of the seller can have an impact, platforms are liable no matter the value when goods are located in the EU or in the UK and the seller is based outside the EU, UK. One can note then that the location of the goods is needed too. However, sometimes it is not known like with drop shipping or multiple warehouses. The mode of delivery can also have an impact? as is the case in Singapore.??

The complexity is? increased as those determinations need to be made at Checkout in real time without disturbing the customer journey. For the same basket, there are possibilities to have different taxpayers.

It is the perfect example of the importance of the software you are utilizing so that it can track all these different rules that have such an impact on daily business activities and it can also adapt to the changes of legislation. The EU, for example, has just published a proposal to remove the € 150 threshold.

3. Gig economy??

Finally, the gig economy, and those obligations have made the headlines recently with the VAT in the Digital Age (ViDA) proposal, with additional obligations that should come in 2025 in the EU.?

However, this is not new as similar rules already exist in India, Mexico, and Canada. New Zealand is also going to introduce such rules in 2024. We can see that this will become a trend and that more rules will bring additional obligations for marketplaces.

What is interesting is that at the beginning the collection of tax through marketplaces was focused on collection from foreign sellers as it was considered harder. However, in this case, it is on the domestic sellers. The idea is to level the playing field between the sellers with VAT registration obligations and the ones still selling below the threshold of registration for VAT.??

It is also an attempt to simplify tax collection for the tax jurisdictions as they will have fewer taxpayers to manage.??

There are going to be nuances to maintain the concept of neutrality of VAT. For example, in New Zealand (GST at 15%), the tax remitted by the Platform on behalf of the homeowner will be only 6.5% and the remaining 8.5% of the GST charged will be paid back to the provider of the accommodation as a flat rate credit to respect the principle of GST neutrality.? While these rules bring fairness they also bring complexity that only a good system can solve.?

This is an evolving concept and the platform will need to be able to apply a different treatment depending on the registration status of the customer.?

Such a new trend is also illustrated with Argentina with the South American country having just introduced new rules on platforms in this sector where Argentina originally relied on financial intermediaries to collect the VAT due on such sales.?

If changing my business model to a platform one, what should I focus on and what do I need to review???

There is a need to focus on the basics of customer location determination and the resulting tax calculation. However, those basic needs that we are used to are not enough anymore and they are going to evolve when multiple parties are benefiting from the platform. This means that multiple transaction flows will have to be assessed. A friend of mine is calling this the three legs of the stool.??

First leg – the end customer:?

The end customer leg is where you need to understand when you are liable and the implication of such a liability on invoicing, B2B validation, or foreign exchange (FX) implications. Interestingly, this liability can depend on the product; its value; the location of the seller and or product; the registration status of the seller for the gig economy, and even the way the goods are sent, as is the case in Singapore. This, remember, also needs to happen in real-time at the checkout page of an online transaction without disturbing the customer journey to avoid any shopping cart abandonment issues.

Second leg - the seller:?

The seller leg: here you will have the same as the above but in addition the tax on the fee that you charge to your seller; the invoicing that can be for the fee, or the need of a back-to-back invoice with self-billing; the validation of the B2B status, or the additional taxes that the transactions you charge create such as Digital Service Taxes (DSTs).?

Those obligations are not only tax collection ones, but there are also obligations to educate the seller, have control processes in place, inform them of their tax obligations as well as give them clear reports or send them email notifications about what is shared with the tax authorities.?

Third leg - the tax authority:??

This obligation is first collecting VAT/GST/Sales tax and it also means registering, filing, remitting tax and managing audits...

New obligations are now added in terms of withholding tax to compensate income tax on local sellers as is the case in Mexico and India and is being discussed in the Philippines.?

Finally, you are helping with the audit by sharing information on your seller and not only on their transactions but also their personal information so that they can be identified. Those obligations are extended as they are part of the OECD model rules on sharing of information by platform and it is part of the first setting stones of tax administration 3.0.?

What trends do we foresee??

The obligations on platforms around digital services are now mature, we recently had the first case law from the European Court of Justice with the Fenix case. Such obligations will continue to be implemented but we should expect broader definitions to include professional services while the legislation already in place will also be updated.

The obligation on low-value goods and the gig economy will extend to cover the same territories where the obligations exist today for services. Kenya, Nigeria, and Malaysia have already announced new obligations that will come around low-value goods. It is also possible that those threshold will be removed. The EU announced plans to remove such threshold from 2028 and in New Zealand under certain conditions you can opt out of this threshold.

The obligations in African countries will develop fast, the OECD has just published a toolkit and tax authorities across the continent are developing their systems.?

Egypt is a perfect example with new obligations starting in June 2023. There will be an online portal to register, clear FAQs and guidelines, as well as a broad definition of platforms and services that are within the scope of the rules.?

The sharing of information also exists between certain African tax authorities. For example, the Kenya tax authorities recently shared with their neighbouring Tanzanian counterparts the names of non-resident digital businesses registered in Kenya. This new surge of obligations, in countries where the volume of sales is generally low will create challenges for companies and technology will be needed.

Elsewhere, the Philippines is also expected to update their VAT rules in the second half of 2023. The authorities there are also proposing to add a withholding tax obligation on platforms as well as an income tax obligation for products sold by sellers on platforms.?

Other key points to track are the evolution of existing legislation on the sharing of information.?

DAC7 was introduced this year in the E.U., but Canada, the U.K., and New Zealand all intend to introduce similar rules from 2024. More countries will add these rules as they are within the scope of the OECD model rules on sharing of information from platforms.??

One crucial point on this particular topic is to keep in mind that any data that is shared with the tax authorities also needs to be shared with the seller.?

The aim is to keep selling everything, everywhere, all at once?

It would appear that tax calculation and remittance is not necessarily the sole aim of these developments. The end goal from a tax authority perspective is the sharing of information and data in real-time, or at the end of the tax year. This is all part of the development of a long-term vision of the tax administration 3.0 where the taxation process should be moved into the taxpayers’ natural systems.

Finally, the level of obligations and requirements placed on platforms may in actual fact strengthen the position of the largest ones, those with the capacity to manage, and create additional difficulties for smaller platforms. However, we don’t foresee that those rules will have a significant impact on smaller platforms, as they will be able to develop and grow with the support of key partners and technology tools. There are lots of challenges ahead, but the move to build more connections will evolve fast and more companies will move to the platform business model.

Tax authorities will continue to look towards the business models of the platform economy as being vessels for tax collection and remittance. As stated, the platforms are victims of their success in this instance however competition should not be an additional victim. We already live in a world where four of the five largest businesses are platforms. We need to focus on nurturing other platforms so that consumer choice is protected. With more and more obligations placed on the shoulders of platforms, this will be more and more difficult: technology can ease these burdens.?

The platform economy needs to maintain fairness. Without fairness there is a risk of monopolies, this is where technology can help to level the playing field so that everyone can sell everywhere, all at once.?

This article has been written with the support of Yolande Nieman and Jp McCarthy

Disclaimer: The views, statements or opinions expressed in this article are solely those of the author and do not represent tax advice and are not to be designated to be the views, statements or opinions of any other person, group, association or company.???