The Collaborative Economy and VAT/Consumption Tax

Abstract

The tax system cannot keep pace with the rapid expansion of the collaborative economy. Although this modern economy is creating a new labour market, it is at the same time capitalising on traditional businesses and thereby disrupting the level playing field. In the area of VAT/consumption tax, it is very hard for a tax authority to determine how often transactions are made between a provider and a user, or how much money a provider receives from a user, especially in peer-to-peer transactions. Sales amounts for each individual transaction in the collaborative economy are small, but the aggregate sales are not insignificant.

In Japan, the debate on this matter has just begun. In November 2018 the Japanese ruling party announced that it will introduce an inquiry system under which detailed information on the collaborative economy is to be collected from platforms conducting such transactions. However, this inquiry system includes penalties, and it may therefore cause the collaborative economy to shrink; additionally, the system risks infringing on the confidentiality existing between a platform and its customers.

In the EU, the debate regarding fair VAT taxation has been ongoing since the release of the OECD Action 1 Report (2015), and the introduction of a digital services tax has been discussed, with taxation at the rate of 3% of sales (not income) for big tech companies. However, this tax has not yet been implemented owing to strong opposition from Luxembourg, Ireland and, especially, the USA, as many big US-based tech companies operate in the EU. One of the main reasons for the opposition is the risk that a tax imposed by only a limited number of member states would substantially distort the EU market. In this context, the UK government announced in October 2018 that a digital services tax would be introduced in April 2020.

Imposing a new tax on a new business sector is not, however, always an effective measure, and a complex tax system can be expected to prompt tax avoidance. In this sense, a digital services tax may only be a transitional mechanism. In order to ensure fair VAT taxation and “fair-share” tax payments in relation to the collaborative economy, a cooperative relationship between platforms and tax authorities would presumably need to be established.