When I was modelling...

Tax-data-modelling, of course. What were YOU thinking?

Context

Picking a business model has many implications. It can mean the difference between profit and loss, being first to market or last, and having to share data or not.

Below, I share some experience about the business models used in the sharing and gig economy and explain why understanding them is essential for any in-house tax, TaxTech, and tax policy professional.?

Rob van der Woude and I will host a virtual event (webinar) to discuss this in more detail next week.

Introduction

One slide I shared in recent presentations sparked more curiosity than any other.

And it was not a meme ??

The slide displayed eight common business model structures used by gig and sharing economy platforms. It summarised several policy documents and hundreds of pages of contractual work into a simple, easy-to-consume visual.

The intention?

To show, at a glance, that there are more marketplace models than most people realise.

Why?

• When speaking to in-house tax teams, to illustrate the variety of models in this space and their different impacts on businesses.
• When discussing the topic with in-house tech teams, to demonstrate how business models can evolve and how they can future-proof their tech builds and reduce throwaway work.
• When presenting to tax policymakers, to encourage consultation with the private sector to design tax rules and regulations.

A picture’s worth a thousand… USDs?

Each of the contractual set-ups displayed has different implications. Some of the models had (tax and other) advantages. Some could exert more influence over pricing than others.

Depending on the scale, sector, and market, the model would impact reporting obligations, tax collection, net revenues, data sharing, and often profitability.

At scale, the difference is material.

I should know. Quantifying the tax impact for each model was exactly the work the TaxTech team I was part of supported (read earlier article). The Strategy & Planning team would own the work, but the tax impact would be modelled with us. The output helped our businesses decide which model works best. Tax was not the only factor, but it was never overlooked.

Before anyone mistakenly believes I’m divulging some hush-hush ?? corporate secrets, I'm not. Ensuring compliance and understanding costs upfront is routine in mature multinational organisations.

Moreover, all of the business models shown are publicly available online

...Admittedly, they are scattered and often buried in lengthy documents, discussions, and consultations. Thus making meaningful comparisons and analysis difficult and time-consuming.

Another critical point is that I focus mainly on services marketplaces. This is to dispel the myth that they're simple. I will concede that goods marketplaces have additional layers of complexity, though.

What the slide did: it removed two or three weeks of dedicated work to get that information.

What it didn’t do was provide a comprehensive list of all the impacts of a particular business model, the challenges it posed, and how the latter were overcome.

How many business models are there?

I drew eight, because it was enough to make my point. However, I'm aware of dozens more. The key variables include:

1. Who does the platform charge? (i.e. The seller, buyer, or both?)
2. Are contracts centralised or decentralised? (i.e. Is the platform contracting from one country, or is it onshored and contracting in all countries)??Is it domestic or cross-border sales? The same would be asked of the underlying transactions.
3. Does the platform handle payments? (Or is it done through another service like PayPal, Patreon, Buy Me Coffee etc?)
4. How is payment made? (you may be surprised to learn that it's not "always card" and that cash payments constitute over 70% of transaction volumes in some countries).
5. What is the service classification? (Are the payments discretionary tips, or mandatory subscriptions, education, entertainment, or something else?
6. Additional variables can be added, and then several more depending on the sector (accommodation, ridesharing, digital work, online entertainment, etc).

What’s the impact??

Each of the models creates unique needs, obligations, and expectations from a tax perspective.

Tax identity validation: Confirm the tax identity of your platform sellers and customers. Depending on the model there will be a difference to the lengths you need to go to in order to obtain the tax identity of your platform sellers and customers.        

Tax calculation: Different models have radically different impacts on tax calculation requirements. In some, the platform only takes care of its own supplies. In others, it may also calculate taxes on the underlying supplies - compare pure agent with deemed reseller.        

Tax e-invoicing & DCTR: Reporting transactions to the government and issuing digital tax invoices as a platform AND on behalf of Platform Sellers. In a model that has business customers (food delivery, enterprise marketplaces, etc), doing this accurately becomes key. Business customers (e.g. restaurants and buyers of commercial software licences) require accurate records. Moreover, this has not been a major issue for cross-border transactions yet. However, concrete steps are being taken to extend Digital Continuous Transaction Reporting (DCTR) to capture cross-border trade (e.g., see ViDA in Europe).?        

Data Sharing: Several business models still do not fall within the scope of the EU data sharing obligations (DAC7) or similar obligations in other countries. These have provoked many to consider switching models to fall out of scope of such obligations.        

Control over end consumer pricing: The business model determines the platform's ability to influence the end price. Some platforms will be able to offer direct discounts, while others will need to resort to other means (which are more costly from a tax perspective).?        

Withholding obligations: Depending on the business models used the obligations to withhold taxes from platform sellers is also impacted.        

Filing and payment: In some markets, you must know if your counterparty is compliant with tax obligations. For example, take the countries with so-called “grey lists”, where you must not pay the VAT/GST to the taxpayer who has reneged on their obligations. Instead, buyers must pay this amount directly to the tax authorities. This ties back to the “tax identity” mentioned above.?        

Above are but a handful of examples describing the difference picking one business model can have over another.

Did this ever go wrong?

Yes. Here are some examples:

• Tax Professionals: Platforms entering contractual setups where they are not a platform but a reseller. Businesses also often discover that the way their incentives work to boost demand is incompatible with the business models that they have deployed.
• Tech Professionals: Tech teams spend months building a solution for one model type only to discover that due to government action (legislation change or court case), they were required to implement a completely different model with significant differences from a tax calculation, reporting and compliance standpoint.
• Government Legislators: Government tax legislation is enacted without business consultation and misses the intended sector and targets. The tax authorities introduced legislation targeting cross-border B2C transactions, whereas the whole sector operates B2B.?Six months later, legislation is adapted following business consultation.

Where can I learn more?

I won't spam you, but here are a few sources.

Join our webinar

• Webinar: June 12th, 2024 | 4:00PM BST | 11:00AM EDT | 08:00AM PDT

OECD tax resources (related to business models)

• OECD Doc: The Impact of the Growth of the Sharing and Gig Economy on VAT/GST Policy and Administration (link) ...This one highlights some of the models used by ride-share and accommodation sectors.

Non-tax related Podcast & Book

• Podcast: Marketplace lessons from Uber, Airbnb, Bumble (1hr 23min): (link)
• Book: The Cold Start Problem (link)

If you would like some more sources - connect! ??