The Sharing Economy Part 1:New Business Models +Traditional Tax Rules Don't Mix

WHAT IS THE SHARING ECONOMY?

The current international tax system was established on principles dating back to the first half of the 19th century, when the internet did not exist and the economy mostly consisted of brick-and-mortar stores. Back then, a foreign entity would generally have a taxable presence in a host country if the entity had a certain level of physical presence in that country to which income generation could be linked. Such taxable presence is referred to as a "permanent establishment." But with the advent of the internet came the rise of the digital economy, and what has evolved is a mix of brick-and-mortar and online stores.

As the purchase of services and goods was gradually dematerialized and internet giants such as Google or Microsoft appeared, governments struggled to keep up. The growth of digital economy brought increased scrutiny of tax structures1 set up under laws designed for brick-and-mortar stores. Most recently, governments around the world have shifted their focus to a relatively new part of the digital economy called the "sharing economy." The I.R.S. describes it as follows:

The sharing economy typically describes situations where the Internet is used to connect suppliers willing to provide services or use of assets — apartments for rent, cars for transportation services, etc. — to consumers. These platforms are also used to connect workers and businesses for short-term work.2

Well-known examples of companies that utilize the sharing economy are Uber or Airbnb.

Uber is an electronic platform that is linked to an app. This app connects independent drivers with potential customers, by enabling customers to request a car and using geolocation to pair them with nearby drivers. Once a driver accepts the request and completes the ride, the customer's bank card, which is registered on the application, is immediately charged.

Like Uber, Airbnb is also an electronic platform linked to an app. Customers can use both the app and the Airbnb website to find a host who will rent them an apartment, room, or other accommodation to use while they are travelling. Hosts receive payment for the accommodation through the Airbnb platform.

Both Uber and Airbnb have worldwide operations and use a similar international tax structure. And both companies are dipping deep into the market shares of traditional businesses in the transportation and hospitality industries, respectively.

THE CHALLENGE OF TAXING THE SHARING ECONOMY

The Uber Structure

Uber's structure is comprised of a dense worldwide network of holding companies, limited partnerships, and local operating companies. Since Uber's is a privately held company, details of the exact structure are not publicly available. To the extent it is understood, the international structure can - in a simplified form - best be illustrated as follows:3

Uber Technologies Inc. ("Uber U.S.") is a Delaware corporation with over 135 direct or indirect subsidiaries, both inside and outside the U.S. Among these subsidiaries is Uber International C.V. ("Uber C.V."), an entity with no employees, formed in the Netherlands, that has its headquarters in Bermuda. It is not considered taxable in the Netherlands, and Bermuda has no corporate income tax. Uber C.V. holds the non-U.S. subsidiaries of Uber U.S.4 As of 2014, these local operating...