On February 19, 2020, the OECD published a draft policy document called "Model rules for Reporting for Platform Operators with respect to Sellers in the Sharing and Gig Economy" (the "Model Reporting Rules"). The 'sharing' and 'gig' economy largely takes place via digital platforms. According to the OECD, the Model Reporting Rules were designed to provide jurisdictions with a framework to adopt uniform legislation aiming at the collection of information on transactions and income realized by those who participate in the sharing and gig economy by providing certain services through such platforms (e.g. rental of houses, personal services, delivery services, etc.). The OECD refers to these service providers as "Sellers". Although the Model Reporting Rules are set up to collect information on Sellers, the administrative burden is carried by entities that contract with those Sellers, the so called "Platform Operators". A broad scope of Platform Operators are subject to the Model Reporting Rules. In essence, all accessible software that allows Sellers to connect to other users to offer their services may qualify as a platform. Associated services, such as payment processing service providers, are also explicitly listed as targeted platforms.
When finalized and adopted by member countries of the OECD, these Model Reporting Rules may have a huge impact on the tax administration of the platform operators. Tax authorities are already increasingly focused on these platform operators because they are a great source of information to them and these Model Reporting Rules will stimulate tax authorities to focus even more. Platform operators will be scrutinized and should be prepared for that by maintaining a proper tax administration along the lines of local regulations supplemented with additional guidance that differs per jurisdiction. On the other hand there is also the commercial interest of the platform operator to maintain attractiveness and assure the privacy of the Sellers.
In this Dentons Tax Alert we provide you with (i) a brief background, (ii) what's new and (iii) key take aways.
In the view of many governmental institutions, platforms are a large depository of information relevant for audit purposes, in particular because digitalization has brought transactions previously often carried out with cash onto these platforms. The sharing and gig economy is booming, but governments are struggling with the taxation of the participants in this new era, as a result of which this part of the economy still remains relatively unregulated, in the area of taxation. In February 2020, the Dutch government proposed legislation on rental of immovable property, dubbed the 'Airbnb-law'. To avoid a great variation in local rules and regulations in different jurisdictions, the OECD aims to develop standardized frameworks that can be adopted by countries to convert it from 'soft law' into 'hard law. The Model Reporting Rules are the first (out of three) deliverables stemming from the 2019 report on the effective taxation of Sellers.
In addition to tax returns, tax authorities currently already have various methods of information gathering at their disposal. In the Netherlands specifically, Dutch tax law provides tax authorities with the ability to request information about Dutch taxpayers from third parties (e.g. platform operators). Internationally, tax authorities exchange information based on amongst others:
- The Directive on Administrative Cooperation ("DAC") international agreements;
- The EU VAT directive;
- Information exchange covenants;
- Information clauses in tax treaties;
- Tax Information Exchange Agreements.
Information is exchanged either automatically, spontaneously when one government considers the information relevant for another jurisdiction, or upon request of a foreign authority. Taxpayers should have access to internationally exchanged information, but tax authorities are in practice reluctant to share information received from tax authorities in other countries. This makes it very hard for taxpayers to keep control over their international tax administration.
The Model Reporting Rules focus on two types of relevant services:
- rental of immovable property, such as residential property but also commercial properties and parking spaces; and
- personal services, such as the provision of transportation and delivery services.
Both type of services should be interpreted broadly. The overall architecture of the Model Reporting Rules aims at increasing transparency on the revenue earned by Sellers and provide tax authorities with standardized information. This may result in an increase in information exchange with foreign tax authorities. In addition, the Model Reporting Rules could even provide a reporting regime that may be useful for the reporting and/or monitoring of other tax areas (e.g. VAT).
In order to report accurately on Sellers, Platform Operators must perform investigations annually to gather the required information from their Sellers. Only Platform Operators that are in the start-up phase or with a revenue of less than €100,000 are excluded. Platform Operators can refrain from due diligence if the Seller is a government entity, an entity that facilitates over 2,000 relevant services for the rental of immovable property or a (related) entity with stock that is regularly traded on an established securities market.
The due diligence process requires Platform Operators to collect a lot of information on Sellers: amongst other things, addresses, identity and tax residency information should be collected. The Model Reporting Rules suggest the development of technical solutions for this purpose in the form of a 'government verification service'. Sellers' information can then be exchanged with tax authorities in other jurisdictions on a uniform basis.
This provides tax authorities with far reaching access to sellers' personal information, which can be exchanged with other jurisdictions. From a data protection perspective (under the General Data Protection Regulation, GDPR), this would require a clear foundation in EU or member state law. The Model Reporting Rules as such do not qualify as (EU or member state) law. If the legal obligation is in place in (EU or member state) law, Platform Operators can use this as the legal basis as required by the GDPR to collect and retain the required data, and share it with the tax authorities. The scope of the data collection for this purpose would be limited by the scope of the relevant legislation. Platform Operators would also have to inform the Sellers that they collect and share this data with the tax authorities to meet their legal obligations.
The fact that each jurisdiction may determine the scope of this government verification service complicates the situation further. Platform Operators would be obligated to integrate a different verification service for each jurisdiction they operate in. Alternatively, one international verification service may be time consuming to develop and lack the agility to adjust to changes in different jurisdictions.
Key take aways
- The Model Reporting Rules will increase the administrative burden for Platform Operators. Platforms should develop strategy documentation that helps their Sellers understand their tax obligations to avoid mismatches in reporting to the tax authorities.
- In addition to the new regulation following from the Model Reporting Rules, tax authorities currently already have the ability to obtain certain information from third parties. It is important from both a commercial and legal perspective to determine in advance which information must be shared with the tax authorities upon request.
- It is key for internationally operating platforms to understand their obligations on privacy and fiscal administration in the different jurisdictions and stay up to date with changes in national and international regulations around these topics. Full compliance with administrative rules and regulations helps to avoid conflicts with local tax authorities and may reduce the commercial impact once seller data must be shared.
Over the years we have gained experience with the impact of these type of regulations on platforms operating in multiple jurisdictions and we were able to develop international strategies to meet fiscal obligations and control commercial and privacy risks. We will gladly answer any questions you may have, so please do not hesitate to contact us.
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