Posted by Aqib Aslam and Alpa Shah[1]
Within less than a decade, companies such as Uber, Airbnb, and TaskRabbit have become an integral part of the personal and social experience globally. Services that previously appeared impossible to organize beyond the community level have instead become almost impossible to do without. In this way, peer-to-peer (P2P) activities have seeped their way into everyday functions and therefore the psyche of the consumer.
However, as the digital P2P economy continues its commercial ascent, it has come under increasing scrutiny amid the perception that it is far less regulated than traditional businesses operating in the same sector. Certain sectors such as accommodation rental and ride-sharing bear the brunt of such criticism.
While some argue that putting beneficial pressure on restrictive practices is enhancing efficiency, others view a light government touch as distorting competition and giving individuals and businesses in the P2P economy an unfair advantage. In the price-setting ride-sharing industry, the question of whether drivers are employees or self-employed has been another source of controversy.
Inevitably, questions have also been raised whether P2P platforms in the hospitality and tourism sectors are somehow tax-advantaged compared with traditional businesses, violating the principle of tax neutrality.
If P2P economy users are indeed subject to lower taxation – because of preferential rates or simply underreporting of income – government tax revenues may also be at risk, especially if other, more tax-rich activities are being displaced. Yet digital platforms could also be helping to formalize activities in certain sectors, such as household cleaning services, bringing them within reach of the regulatory and tax authorities.
It is worth pointing out, however, that the P2P model – the transaction of goods and services between individual buyers and sellers – is not a new way of conducting business (think of bartering).
What distinguishes it in recent years are the technological developments that have eliminated various transaction costs associated with running a business, allowing smaller-scale activity to proliferate and collectively challenge incumbent, larger-scale corporate businesses. And with increasing numbers of participants and a growing number of markets in which the P2P provision of goods and services can thrive, interest in the scale, scope, and taxation of the P2P economy is inevitable.
With these developments in mind, our recent paper attempts to examine the implications of the P2P economy for tax policy and administration. If the fundamental economic activity in these new P2P businesses is different from that in traditional businesses in the same sector, are current tax policies sufficient to deal with them? If not, does the current tax structure allow for greater avoidance by participants in the P2P economy? And, if so, can the information which platforms accumulate help improve compliance?
More fundamentally, it is possible that the scale and nature of P2P activities call for an alternative system of taxation – or even a simplification of existing taxes – to ensure that the government can share in the value being created.
Small but Nontrivial
Several of the issues around how to tax businesses in the P2P economy are familiar, while the presence of platforms presents some important new opportunities. In this sense, the emergence of P2P activities does not seem to be driving a radical rethink of the tax system or the principles upon which it is based. Instead, the P2P economy – should it continue to grow – is forcing tax policy and administration to reconsider old trade-offs in a new light.
With the growth in P2P sellers, the number of unincorporated small businesses is increasing at the lower end of the income distribution.
These businesses may displace larger firms and reinforce existing well-known challenges for taxing large numbers of small businesses, especially if formalization adds to the influx. Taxes are usually not only more difficult to collect from small businesses, but can be that much more distortionary given the aptitude some small businesses display at avoidance and evasion.
The presence of even more small businesses is also altering the revenue-compliance trade-off that has determined the choice of tax thresholds in the past. Governments could consider lowering thresholds if distributional shifts suggest revenue gains outweigh administrative burdens.
Special tax rules for small businesses can also help, but the nature of P2P activity could amplify both their behavioral impact as well as their possible benefits and costs. It is unclear how to balance the need for revenue with the distortionary impact of any special tax treatment, and, in time, the P2P economy could grow to such an extent that these special rules might become redundant – or even the norm.
A Role for Digital Platforms
Thankfully, the P2P platforms present an important opportunity for both tax policy and administration.
As online intermediaries, they record data on the myriad of transactions taking place in the virtual markets they oversee. Governments can cooperate with them to access this data, which would undoubtedly alleviate information constraints and strengthen enforcement and allow better quantification of activity that had previously been misreported or undocumented. Take, for example, the precedent set by Estonia, which has linked Uber drivers to its tax administration.
Platforms can already act as custodians for the tax administration by withholding tax on behalf of sellers, something which seems relatively straightforward for indirect taxes – Airbnb is a case in point. Such arrangements could help ease compliance and administration while raising revenue, particularly in low-capacity countries, and, again, allow tax authorities to revisit the revenue-compliance trade-off.
However, attempting to levy direct (income) taxes through such withholding arrangements is more difficult, as P2P sellers rarely use one platform exclusively and are likely to be mixing many different streams of income from different activities (on and off-platform, self-employment and employment).
The tax treatment of the P2P economy will ultimately depend on each government’s preferences and capacity, and will likely vary by country. Some governments may wish to minimize tax policy differences between P2P sellers and traditional businesses. Others may instead see the rise of the P2P economy as positive and choose to provide tax incentives to encourage it.
What is clear is that while the P2P economy has potentially exacerbated the administrative and revenue-mobilization challenges associated with small business taxation, the technology behind P2P platforms presents a valuable opportunity to eventually solve them.
[1] The authors are both economists in the Tax Policy Division of the IMF Fiscal Affairs Department. This article was originally published at: Aslam, Aqib and Shah, Alpa, “Sharing the Burden: Taxation of the Peer-to-Peer Economy”, Austaxpolicy: Tax and Transfer Policy Blog, 8 February 2018, Available from: http://www.austaxpolicy.com/sharing-burden-taxation-peer-peer-economy/
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
