Although much of the tax world has been focused on the Organisation for Economic Co-operation and Development’s two-pillar framework for addressing the tax challenges arising from the digitalization of the economy, a separate OECD effort with a potentially even broader reach is well underway.
On February 19, 2020, the OECD released its public consultation document, “Model Rules for Reporting by Platform Operators with Respect to Sellers in the Sharing and Digital Economy” (hereafter “the Model Rules”). The Model Rules follow a 2019 report prepared by the OECD Forum on Tax Administration, titled “The Sharing and Gig Economy: Effective Taxation of Platform Sellers,” which made recommendations for further work in the area, including the development of model rules for compliance and information sharing. The Model Rules, and similar efforts in the United States in the wake of the Supreme Court’s decision in South Dakota v. Wayfair, Inc.,1 will have a direct impact on the obligations of platform operators and participants on online platforms. These rules could indirectly affect all taxpayers engaged in cross-border transactions by eroding current barriers to the extraterritorial reach of tax administrations.
This article discusses briefly the general tax considerations leading to specific tax proposals for the gig and sharing economy. It also discusses existing federal rules in the United States that impose information-reporting obligations on platform operators. Finally, the article tackles how the Model Rules propose to address tax considerations related to the gig and sharing economy, and what companies can and should do now in anticipation of further developments with respect to the taxation of platform companies and their users.
Taxes and the Gig and Sharing Economy
The “gig and sharing economy” is a term generally used to refer to transactions that take place directly between users of an online platform. The platform operator provides a service by connecting purchasers of goods and services with sellers, for which the platform operator receives a fee.2 Well-known examples include ride-sharing apps, such as Uber and Lyft, and property-sharing services, such as Airbnb and Vrbo. A distinct feature of transactions in the gig and sharing economy is that the platform provides only a service to sellers and purchasers. For legal and tax purposes, the company is neither the seller nor the purchaser of the products and services sold on the platform.
The gig and sharing economy significantly expands opportunities for small businesses to sell products and services, and it tends to shift roles historically performed by employees to self-employed persons. The Model Rules recognize that this shift in roles also affects tax administration. Historically, tax administration has relied heavily on employee withholding and information reporting, tasks generally imposed on employers. Because platform transactions occur directly between sellers and purchasers, these transactions may not be visible to tax administrations under existing rules, particularly if the transactions cross borders. The expressed concern is that if platform transactions are not subject to reporting, taxpayers may reduce the taxable income they declare, distorting competition in the marketplace.
U.S. Federal Reporting Obligations for Platform Transactions
Concern about tax reporting of platform transactions is not new. In 2008, Congress enacted Section 6050W of the Internal Revenue Code of 1986, as amended (hereafter “the Code”). Section 6050W imposes information reporting obligations on certain “payment settlement entities,” which are generally persons that receive and transmit payments on behalf of other parties pursuant to contractual obligations.3 Applying a series of definitions in the statute, most, if not all, platform companies should be treated as “payment settlement entities” subject to the information reporting rules of Section 6050W.4
Under Section 6050W, only payments to “participating payees” must be reported by the payment settlement entity, and even then only if the total transactions reported as paid to a participating payee exceed $20,000 and the aggregate number of transactions exceeds 200. As a practical matter, this means that platform companies must obtain U.S. tax forms (e.g., Internal Revenue Service Forms W-9 and W-8BEN-E) from sellers on the platform in order to ensure their ability to satisfy information reporting obligations. Where proper documentation cannot be obtained from sellers, U.S. backup withholding tax may apply.
The Section 6050W rules specifically are not targeted to platform sales by non-U.S. persons. Under regulations, payments made to a payee with a foreign address are not required to be reported if the payment settlement entity has documentation supporting the determination that the payee is a foreign person.5 The rules depend on whether the payee has an address outside the United States.
Although the definition of participating payee generally excludes foreign persons, as to the payor the information reporting rules are applicable to all domestic and foreign payment settlement entities.6 This means that non-U.S. platforms facilitating payment transactions with U.S. sellers are subject to the information reporting rules of Section 6050W. In the case of a platform company with no contacts with the United States, these obligations may be difficult to enforce directly, but increasing coordination and information sharing by international tax authorities, as the OECD is contemplating, could have an impact in the future.
The Model Rules and Cross-Border Platform Transactions
Specific objectives of the Model Rules include standardizing information reporting with respect to platform transactions and promoting international cooperation with respect to the sharing of information on platform transactions.7 The proliferation of differing information reporting models across multiple jurisdictions results in increased taxpayer burdens and inconsistent information. To this end, the Model Rules propose due diligence and reporting procedures that would be uniform across jurisdictions. This allows platform operators to report transactions with all payees, domestic and foreign, only to the jurisdictions in which the platform operators reside. Relevant information with respect to payees could be shared among tax authorities, without imposing additional burdens on platform operators.
The approach outlined in the Model Rules is broader than the rules of Section 6050W in that it requires information reporting with respect to all payees, not just domestic payees. The approach is narrower than existing U.S. rules, however, in that it would not require reporting to the IRS by platform operators organized outside the United States. Instead, the IRS would receive information with respect to payments made by foreign platform operators through information sharing.
There is helpful precedent for a collaborative approach on information reporting in the Foreign Account Tax Compliance Act (FATCA) provisions in Sections 1471 through 1474 of the Code and in the subsequent adoption of similar rules by other jurisdictions. The FATCA rules address extraterritorial application of U.S. tax information reporting requirements by subjecting to U.S. withholding tax any payments of U.S. source income to noncompliant financial institutions. But, in jurisdictions that have entered into an intergovernmental agreement (IGA) with the United States, the local rules apply instead of U.S. tax rules. The Model Rules form the foundation for arrangements with respect to platform transactions that are akin to the IGAs for reporting financial accounts.8
The approach contemplated by the Model Rules benefits platform companies and their users in establishing a uniform approach to collecting and sharing information. The OECD’s efforts come at the same time that taxpayers in the United States are grappling with inconsistent rules for the remote collection of sales tax following the Supreme Court’s decision in Wayfair. In the wake of Wayfair, small businesses have been asking Congress to regulate interstate commerce and to limit the number of taxes that can be imposed by a single jurisdiction as well as to provide for a single filing point for all jurisdictions.9
The Model Rules would standardize the information that must be collected from sellers and reported to tax authorities. This approach, if broadly adopted, benefits small businesses and addresses some of the complaints that have been leveled against states implementing sales tax collection obligations post-Wayfair. In addition, the ability to report all information to the platform operator’s jurisdiction of residence minimizes the burden on taxpayers of reporting to multiple jurisdictions, which is a specific complaint about post-Wayfair sales tax rules.
Although platform operators would report solely to the jurisdiction in which they are resident, it is contemplated that the reporting would identify the jurisdictions in which the seller is tax resident. Tax residence for this purpose is defined initially by reference to the seller’s primary address, each jurisdiction of issuance of the seller’s taxpayer identification number (TIN), and each jurisdiction in which the seller provides non-incidental “local services” during any 183-day period in the course of the year.10 How platform operators will be able to determine what are local services, and where such services are performed, are questions the Model Rules do not clearly address.
Active Participation by Gig-Economy Participants Is Key
The Code of Conduct in the Model Rules contemplates that tax administrators and platform operators maintain a collaborative relationship regarding reporting responsibilities. Thus, there is explicit and implicit recognition in the Model Rules that tax authorities stand to benefit from information available in the gig and sharing economy through more efficient tax administration. But this means working collaboratively with platform companies, and their users, to minimize administrative burdens to reporting companies.
Platform companies should be considering what information they have available now and what systems may be needed to implement the mandates of the Model Rules. For example, if there are practical or legal limitations on the ability of platform operators to collect information otherwise required for reporting, those limitations should be identified now so the drafters of the Model Rules (and any implementing legislation) can make appropriate modifications. Platform operators and participants in the gig and sharing economy also need to start considering appropriate thresholds for reportable transactions. A de minimis exception similar to the one in Section 6050W may well be appropriate to limit the administrative burden on platform operators and tax administrators.11 Other exceptions may be appropriate, but they would need to be balanced with the ability of platform operators to confirm eligibility for the exception. Creating multiple categories of exempt recipients, as has been done with the FATCA rules, can increase administrative burdens on platform participants to identify the appropriate exemption.
What types of transactions the Model Rules should cover also need to be considered. As drafted, the Model Rules are narrower than existing rules that cover platform transactions for goods and services. The Model Rules’ approach, to address only service transactions, may give rise to uncertainty for taxpayers as to whether specific transactions involving sales of goods and services must be reported. Without general uniformity in the transactions covered, platform operators will continue to find themselves subject to multiple information reporting regimes, and the administrative benefits of the Model Rules will be eliminated.
Notably, the Model Rules broadly define platform companies so as to include companies that may provide software or services with respect to a platform (e.g., payment processing services). There is recognition that this may result in multiple parties being subject to the information reporting rules. Consideration needs to be given to how companies will address allocation of responsibility in practice, particularly for companies that are not operating platforms directly and may not have access to all information needed for reporting.
Sellers on marketplace platforms also need to consider the rules regarding tax residence, particularly the rule for determining tax residence in the case of local services. The inclusive definition of residence means that a seller may be resident in multiple jurisdictions for reporting purposes. This condition may give rise to duplicate reporting and could result in tax inefficiencies and increased cross-border audits for sellers engaged in cross-border transactions on platforms, particularly if “local services” is not clearly defined.
Even for taxpayers not directly engaged in the gig and sharing economy, the Model Rules give a preview of what might lie ahead for all cross-border transactions. The centralization of information reporting with the tax authorities in the payer’s jurisdiction can reduce the burdens on taxpayers to comply with multiple sets of rules, subject to there being appropriate limits and protections on the sharing of information among the relevant tax jurisdictions. The need for increased certainty is a constant refrain among taxpayers and tax administrations, and efficient information sharing may well facilitate that objective.
Robb Chase is a partner at Eversheds Sutherland (U.S.) LLP.
- 138 S. Ct. 2080 (2018).
- In addition to providing an online platform or app for sales, many platform operators offer ancillary services, such as payment processing, guarantees, and foreign exchange services.
- See generally Internal Revenue Code Section 6050W(b) and Treasury Regulations Section 1.6050W-1(a)(4).
- The definition of payment settlement entity includes a “third-party settlement organization.” Section 6050W(b)(1)(B). A third-party settlement organization is a central organization that has a contractual obligation to make payment to participating payees of “third party network transactions.” Section 6050W(b)(3). Third-party network transactions are transactions that are settled through a “third party payment network.” Section 6050W(c)(3).
A third-party payment network is any agreement or arrangement that 1) involves the establishment of accounts with a central organization by a number of unrelated persons who provide goods or services and have agreed to settle transactions for the provision of such goods or services; 2) provides for standards and mechanisms for settling such transactions; and 3) guarantees that persons providing goods and services will be paid for providing such goods and services. Section 6050W(d)(3).
- See IRC Section 6050W(d)(1)(B) and Treasury Regulations Section 1.6050W-1(a)(5)(ii).
- See Treasury Regulations Section 1.6050W-1(a)(4)(i).
- See introduction of the Model Rules, paragraph 10.
- The Model Rules are the first of three “building blocks” in the OECD’s overall policy framework for the gig and sharing economy. A framework for the automatic exchange of information is the second building block, and the development of technical solutions to support information exchange and the due diligence required by platform companies with respect to their users is the third.
- See Stephen Cooper, “Wayfair Aftermath Threatens Small Business, Lawmakers Hear,” Law360 Tax Authority (March 3, 2020), reporting on testimony before the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access.
- Local services are services that require the seller to be present at the customer’s location, such as cleaning services.
- The Model Rules narrow the scope of reportable transactions by eliminating large commercial sellers from the scope of the rules. Specifically, the rules exclude sellers that facilitate more than 2,000 immovable property rental transactions as well as publicly traded companies and their affiliates. This is also a departure from the U.S. tax rules in Section 6050W, which exclude sellers with a limited number of transactions or payments, but do not generally exclude large sellers. The rationale for the limitation is that large sellers should be in a position to understand their tax reporting obligations.