United States: The Sharing Economy Part 2: Governments Strike Back

Last Updated: December 5 2017
Article by Alev Fanny Karaman and Beate Erwin


The current international tax system was established at a time when the sharing economy did not exist and was not foreseeable. As business models evolve, gov­ernments are struggling to keep up using laws designed for brick-and-mortar stores. Ultimately, tax laws must be updated to account for the new economic realities.

Sharing economy companies, like Uber and Airbnb, use the internet to connect sup­pliers with consumers. The combination of new technology and careful cross-border structuring allows these companies to enhance the old brokerage business model to generate substantial profits while paying very little tax.1

With sharing economy structures cutting deep holes in a source jurisdictions' tax revenues, how do local governments try to obtain their fair share?


Governments around the world are taking various approaches – to more or less suc­cess – to tackle the challenges of the digital economy, in general, and the sharing economy, in particular. These approaches fall into one of three categories:

  1. The Income Tax Approach:

This approach involves (i) imposing a penalty tax in case of diversion of prof­its, (ii) introducing withholding tax on digital services, and (iii) redefining the concept of Service permanent establishment ("P.E.") (so as to create a tax­able presence without a physical presence).

  1. The Indirect Tax Approach:

Here, business models are qualified based on the ultimate services provided (e.g., transportation or hospitality services, as opposed to internet (platform) services), thereby creating liability to V.A.T. and sales tax.

  1. Regulatory Crackdown:

Under this approach, governments use regulatory rules to crackdown on new business models that are outside the scope of taxation.

The Income Tax Approach

Thus far, the income tax approach has successfully generated revenues from online businesses. However, it has not been particularly effective in tackling issues related to the sharing economy.

The U.K. Diverted Profits Tax

The diverted profits tax ("D.P.T.") was implemented in the U.K. in 2015 in an effort to crack down on multinational companies engaged in tax avoidance by shifting profits generated in th U.K. Originally, the main target was Google, hence its nickname, the "Google Tax."

For most taxpayers subject to D.P.T., a punitive 25% tax is imposed on diverted profits (compared to the standard 20% corporate tax rate for 2016), plus interest.2 The D.P.T. regime is focused on two key scenarios where a diversion of profits may arise: (i) lack of economic substance and (ii) avoidance of a U.K. P.E.3 A broader aspect of D.P.T. is that it targets profit stripping by U.K. companies that have previ­ously been more profitable and, perhaps, owned I.P. before being integrated into a carefully planned supply chain.

The amount of tax collected under the regime and due to related changes in be­havior has been impressive.4 Yet, some initial targets may ultimately "escape" the Google Tax, as companies that could be subject to D.P.T. can often amend transfer pricing arrangements to ensure profits are not diverted. This result is not entirely unintended, as one of the key aims of D.P.T. is to influence taxpayer behavior.

Somewhat ironically, Google has itself avoided being "caught" by the Google Tax. In January 2016, Google settled a long-running transfer pricing enquiry with the U.K. tax authority to the tune of £130 million. In a statement, Google declared that it would apply revised transfer prices from 2015 onwards.

Sharing economy giant Uber also seems to have escaped these rules. In 2015, Uber's U.K. tax liability was reported to amount to only £411,000 while the revenues of the same year that ended up in the Netherlands reportedly reached $520 million, yet no D.P.T. was due.5 Since then, Uber has not made headlines in connection with D.P.T., but its U.K. activity has been targeted on other fronts, in particular, as it relates to V.A.T. and employment law, as described below.

The Australian Diverted Profits Tax

Not long after D.P.T. came into being in the U.K., Australia introduced its own ver­sion of the regime. On March 27, 2017, the Australian Parliament enacted a D.P.T. labeled as the most expansive cross-border tax change in more than a decade.

The Australian D.P.T. is even more punitive than its U.K. equivalent: a 40% penalty tax (compared to the Australian corporate income tax rate of 30%), plus interest, on profits diverted offshore through related-party arrangements. This regime applies to tax years starting on or after July 1, 2017, irrespective of whether the particular arrangements were entered into before that time.

The broad impact of this D.P.T. relates to the fact that any Australian cross-border arrangement, including financing transactions (which are excluded from the U.K. re­gime), is affected provided that two criteria are met: (i) At least one foreign associate taxpayer is involved, and (ii) total group-wide global income (broadly, revenue) is at least A$1 billion (approximately $750 million). The only exemptions apply to certain investment vehicles.6

The D.P.T. regime is incorporated into Australia's existing anti-avoidance rules. These rules require an objective conclusion that there was a tax purpose associat­ed with the arrangements under examination. The D.P.T. regime adopts a "principal purpose" test, clearly an intentionally lower hurdle compared to the "sole or domi­nant purpose" test within the "original" Australian general anti-avoidance provision. Significantly, principal purpose is determined not just on the basis of a principal purpose to obtain an Australian tax benefit but also to obtain both an Australian tax benefit and reduce foreign tax liabilities.

Because the Australian D.P.T. has a retrospective element and can apply to ar­rangements entered into before July 1, 2017, it will impact existing positions that may have even been considered and accepted by the Australian Taxation Office ("A.T.O.") (e.g., through a tax ruling, Advanced Pricing Agreement, or tax audit).

Another consequence is that recourse to double tax relief under Australia's tax trea­ties or arbitration mechanisms anticipated by the O.E.C.D.'s multilateral instrument are not available to challenge assessment of the tax. The only avenue for objec­tions (beyond the A.T.O.) is the Australian Federal Court.

A D.P.T. assessment can be issued at any time within seven years of the original income tax return assessment. The harshness of the rule is aggrevated by the fact that taxpayers are required to pay a D.P.T. assessment in full before the assessment can be contested or a settlement reached with the A.T.O. Similar to the U.K. model, the Australian D.P.T. is designed to deter taxpayers from shifting profits. When faced with the threat of D.P.T. and its upfront tax collection process, it is assumed that taxpayers will more readily provide to the A.T.O. with information regarding earnings and taxation across global value chains.

Overall, the Australian D.P.T. is extremely broad and has the potential to affect a significant number of multinational groups. The Australian government estimates 1,600 entities must asses their D.P.T. exposure and 130 taxpayers are high risk.

Withholding Tax on Online Services

In accordance with the O.E.C.D.'s B.E.P.S. recommendations on taxing the digital economy, the Indian government introduced an equalization levy on Indian-source online advertising revenue earned by nonresident companies. The provisions are effective as of June 1, 2016, and provide that Indian residents and nonresidents with a P.E. in India must withhold a 6% tax on amounts paid to nonresidents who do not have a P.E. in India, for specified services. The specified services include online advertising, any provision for digital advertising space, or any other facility or service for the purpose of online advertising.

While targeting the digital ecomony, this approach does not capture business mod­els that operate via local subsidiaries, as in the cases of Uber and Airbnb. This approach also raises the question of whether a withholding tax on services can be justified if, at the same time, the sale of goods is typically not subject to a similar tax.

Service P.E. Without a Physical Presence

In a recent case involving a U.A.E. L.L.C., the Bengaluru bench of the Indian Income Tax Appellate Tribunal (the "Tribunal") reached an interesting conclusion: Physical presence in the source state is not necessary to constitute a Service P.E. in India.7 Moreover, the services can be rendered through virtual presence. Noting the 183-day threshold under the India-U.A.E. tax treaty, the Tribunal held that services ren­dered for more than 183 days in a 12-month period can constitute a Service P.E. in India, even if the company does not have physical presence there.

Although the existence of a Service P.E. without the physical presence of employ­ees in the source country is an enormous deviation from generally accepted interna­tional tax standards, it is not totally unheard of. The U.N. Committee has acknowl­edged this minority view, and in 2016, it was formally adopted in Saudi Arabia. The question remains, how can multinational businesses operating via local subsidiaries be captured under these rules? At this time, they are definitely outside the scope of virtual P.E. rules and able to play their "tax games."

The Indirect Tax Approach

The common element found in jurisdictions using the indirect tax approach is the attempt to tax sharing economy businesses (i.e., brokerage businesses) based on the character of the ultimate service provided.

Governments have had greater success using this approach to tackle the sharing economy, as can be seen in the cases of Uber and Airbnb – whose activites are being reclassified as transportation and hospitaltity services, respectively:

  • Taiwan deemed Uber a transportation company and asserted in 2016 that Uber (together with other e-commerce businesses) was subject to a 5% sales tax. As a result, Uber briefly suspended operations there from February to

April 2017,8 and re-entry into the Taiwanese market came at a cost: Uber was allowed to hire only licensed commercial drivers.

Uber subsequently announced that it is an internet-based technology compa­ny that will partner with licensed transport companies. In response, Taiwan's highway bureau announced that it welcomed the move but would continue to supervise Uber's operations in Taiwan to ensure it did not pair up with unlicensed individual drivers.

Allegedly, Uber's fines were an estimated T$328.59 million (approximated $10.57 million) of which only T$68.25 had been paid, according to a February 2017 statement by the Ministry of Transportation and Communications.9 A later quote from the National Taxation Bureau of Taipei alleged that Uber had not paid over T$51.24 million ($1.66 million) in business taxes dating back to 2015.10

  • In the U.K., a V.A.T. case is currently pending against Uber to challenge its position that it is not subject to V.A.T. because it merely serves as a agent for self-employed drivers rather than a service provider. Uber allegedly collects an estimated £1 billion a year in U.K. fares, meaning if the company loses, it could be liable for £40 million a year (or more) in V.A.T.11
  • In Berlin and Barcelona, a crackdown on Airbnb resulted in concessions in its business models. Confronted with a parallel market for online private book­ings of €6.1 million and 30.2 million overnight stays in 2015, Berlin introduced a law that would limit the renting of private residences to rooms (as opposed to entire apartments or houses).12 Offenders may face up to €100,000 of fines. In 2016, Barcelona fined Airbnb €600,000 for continuing to advertise unlicensed flats on its platform. Efforts to scrutinize illegal rentals were in­creased, and next year, the team of inspectors will be more than doubled from 40 to 100 persons.13
  • In France, as another example, landlords renting furnished apartments, other than their principal residence, through Airbnb and other online platforms must now register with their municipality before offering lodging.14 This resulted, inter alia, in the collection of tourist taxes in Paris, and in 2016, AirBnB paid back €7.3 million ($8.3 million) in tourist taxes in 2016 to French authorities

Regulatory Crackdown

The third sword being swung by foreign governments seems to be the most efficient in the battle against sharing economy companies that lie outside the tax rules. Reg­ulatory has been effective both on its own and when combined with the (indirect) tax measures discussed above.

Numerous regulatory actions have been taken against Uber:

  • Germany, for example, referred a case against Uber to the European Court of Justice.15 In its brief, Germany argued that Uber was not just an intermediary but was also involved in financial management and marketing for its luxury car-hail­ing business, which would constitute an infringement of competition laws.
  • In another case brought before the European Court of Justice by the Barcelo­na taxi association,16 Advocat General Szpunar concluded that the ride-hail­ing app is providing transportation services and not merely connecting drivers to passengers via technology. Therefore, Uber cannot claim the freedoms provided under E.U. law for digital services. Instead, its operations fall within the scope of transportation, which is governed by national laws.
  • Shortly after his opinion in the Barcelona case, Advocat General Szpunar had to opine on a case brought before the European Court of Justice dealing with criminal law proceedings against Uber France. Uber France was allegedly organizing, by means of the UberPop service, a system for putting customers in touch with non-professional drivers who transport passengers for consider­ation using vehicles with fewer than ten seats. The advocat general took the view that because UberPop is not an information service but rather a trans­portation service, irrespective of whether that service falls within the scope of the directive, Member States may prohibit and punish the illegal exercise of such transport activity without having to notify the Commission of the draft law in advance.17
  • While not binding, it is to be noted that in most cases the judges of the Eu­ropean Court of Justice followed the advocat general's opinion. Only in rare cases was a deviating conclusion reached. Final decisions in these cases are expected later this year.
  • Another argument made by Uber – that its drivers are self-employed – has been rejected by a U.K. employment tribunal.18 The tribunal ruled that the drivers were "workers" and therefore entitled to sick pay and paid holiday. It stated that "the notion that Uber in London is a mosaic of 30,000 small businesses linked by a common 'platform' is to our minds faintly ridiculous."19


1 For more on the sharing economy and the business models used by Uber and Airbnb see "The Sharing Economy Part 1: New Business Models + Traditional Tax Rules Don't Mix,"Insights 10 (2017).

2 Guidance introduced on November 30, 2015, emphasized the government's po- sition that D.P.T. is consistent with the goals of the O.E.C.D.'s B.E.P.S. Project, a position that U.S. Treasury officials have questioned.

3 D.P.T. was initially targeted at I.P. structures. However, it was found to have a much broader impact on entities operating internationally, particularly multi- national groups where the profitable company haves limited functions, such as computing and other support functions (e.g., finance, legal, etc.).

4 In September, the U.K. tax authority released key D.P.T. statistics. From its introduction in April 2015 to April 2017, the government collected £138 million in D.P.T. and an estimated £174 million in additional corporation tax as a result of related behavioral changes. The latter is a low estimate, only accurately reflecting situations already under inquiry. In total, the U.K. tax authority raised

£281 million from D.P.T. and resulting behavioural changes for the year ending March 31, 2017, according to its 2016-17 annual report.

5 See "Uber's Main UK Business Paid Only £411,000 in Tax Last Year," The Guarduian, October 10, 2016.

6 I.e., managed investment trusts, certain foreign collective investment vehicles, entities owned by foreign governments, complying superannuation entities, and foreign pension funds.

7 See in detail "The Changing Face of Service Permanent Establishments,"Insights 10 (2017)

8 "Uber Will Suspend Service in Taiwan After Being Slapped With Over $10 Mil- lion in Fines," Forune, February 2, 2017; "Uber Resumes Ride-Hailing Service in Taiwan After Talks with Authorities," Reuters, April 13, 2017.

9 Id.

10 "Taiwanese Govt Raids Uber Office Over Unpaid Business Taxes," e27, March 17, 2017.

11 "Uber's £40m Tax Loophole: Taxi Firm Registers Each of Its Drivers as a Sepa- rate Business to Avoid Paying V.A.T. on Booking," Daily Mail, June 7, 2017.

12 Zweckentfremdungsgesetz; see "Berlin's Government Legislates Against Airbnb," The Guardian, May 1, 2016.

13 See e.g., "Barcelona Cracks Down on Airbnb Rentals with Illegal Apartment Squads," The Guardian, June 2, 2017.

14 Article L324-1-1 of the French Tourism Code. See the registration mechanism in Paris.

15 German Federal Court (Bundesgerichtshof), I ZR 3/16 (May 18, 2017).

16 Asociación Profesional Elite Taxi v. Uber Systems Spain SL., C-434/15 (May 11, 2017).

17 Uber SAS, C-320/16 (July 4, 2017).

18 Aslam, Farrar et. al. v. Uber B.V., Uber London Ltd and Uber Britannia Ltd., Cases 2202250/2015 and Others, October 28, 2016, as of May 2017 under appeal.

19 Financial Times, "Uber Faces New Pressure from Crowdfunded V.A.T. Case," June 28, 2017. According to the Daily Mail, Uber accounts for 40,000 drivers (supra note 11).

To view the full article please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions