Wednesday, April 6, 2016

The Sharing Economy and Tax Strategies: "As Airbnb and Uber inch toward profits, tax authorities worry."

From Bloomberg: 

The Sharing Economy Doesn’t Share the Wealth
Every time Ian Haines rents out his spare room in the Australian port city of Albany, Airbnb takes a 13 percent cut. Haines, who’s semi-retired, uses the extra money to supplement his income running a local farmers market. He says he’s careful to pay taxes on the Airbnb money, because the San Francisco company may report the transactions to the Australian government.

For Airbnb, things are different. Because it manages its finances via units in Ireland and tax havens like Jersey in the Channel Islands, only a small part of its share of the revenue is ever likely to be taxed by Australia or the U.S. A review of Airbnb’s overseas regulatory filings shows it has a far more extensive web of subsidiaries than it has publicly acknowledged—more than 40 in all.

This is the challenge that Airbnb, like Uber and other companies in the so-called sharing economy, poses for the world’s treasuries. In the five years since these businesses began their spiraling growth, some cities and states around the globe have fought hard to make them play by the same rules as traditional hotels or taxis and collect various local taxes—often as not, they’ve lost. As the new breed of companies moves toward profitability, transforming larger chunks of the economy, policy experts say the battle is likely to shift to the national level, where billions of dollars a year in corporate taxes could be at risk. (A source close to Airbnb says the company will turn its first profit this year.) Governments have been slow to respond.

“These companies are the future,” says Stephen Shay, a former top international tax lawyer at the U.S. Department of the Treasury, now teaching at Harvard. “The nature of their business and the structure of the companies can allow them to essentially keep all of their profits out of the U.S. Unless the tax systems find a way to deal with this, the lost revenue may be enormous.”

For years, pharmaceutical and tech companies including Pfizer, Merck, Google, and Apple have slashed their U.S. federal tax bills by using offshore tax havens and shifting profits abroad. Airbnb and Uber are starting to extend this strategy across vast new fields: PricewaterhouseCoopers estimates that sharing-economy businesses generated $15 billion in revenue in 2014 and will take in $335 billion in 2025, growing largely at the expense of companies that pay billions in U.S. taxes.
It’s not always a zero-sum game; the newer businesses can expand the overall market. The IRS, which has been depleted by budget cuts and lost several high-profile corporate tax cases, says it hasn’t tried to calculate the potential revenue loss. While Treasury has proposed some measures in recent years to curb tax avoidance by digital companies—on April 4, the department issued rules limiting tax shifting through mergers—partisan division in Congress makes serious changes unlikely.

Airbnb officials declined to discuss tax strategies. “We pay all of the tax that is due in all of the places that we do business,” says spokesman Nick Papas. “When we make long-term business decisions, we act in the best interest of our community.”

Once it makes a profit, Airbnb’s corporate structure will give it an array of options to legally sidestep federal taxes in the U.S. and elsewhere. Two of its subsidiaries are in Ireland, where local tax laws allow U.S. multinationals to avoid both the 35 percent top rate in the U.S. and Ireland’s 12.5 percent income tax.

Money from Airbnb transactions in 190 countries, including Haines’s rentals in Australia, goes directly to a payment center in Ireland. Airbnb collects 6 percent to 12 percent of the rental price, depending on cost, then deducts 3 percent from the host’s take before passing the money along. This lets Airbnb shield most of its profit from the country where the service was delivered. (Airbnb Ireland pays the Australian subsidiary a small fee for marketing in-country, and the subsidiary pays tax on its profits.)

Irish law makes it easy for multinationals to shift profits to tax havens by assigning valuable intellectual-property rights there. Airbnb has two subsidiaries, Airbnb International Holdings and Airbnb 2 Unlimited, on Jersey, which has no corporate tax. Tax experts say that if Airbnb assigns its software IP to a Jersey unit, the company could shift much of the profit to the haven through royalty payments from its Irish subsidiary. Pharma and tech companies have used similar strategies to cut their overall tax rates to the low single digits....MORE