Citizens who earn money through online platforms, such as Airbnb and Uber, often do not pay taxes on this income by themselves. To combat this fraud, governments are imposing increasingly strict reporting rules on platforms. Sometimes they even have to collect tax from sellers. Are these rules proportional, effective and enforceable, and what do they mean for the fundamental rights of platform owners and users? PhD student Juan Manuel Vazquez focuses his research on these questions.
Governments around the world are losing a lot of tax revenue because of the platform economy. Some of the services and products that people sell through e-commerce platforms are difficult for tax authorities to see. Moreover, many taxpayers fail to declare their income from work via e-commerce platforms. This is especially true when sellers use foreign platforms, Vazquez explains.
For example, a teacher of Dutch as a second language, let’s call him Frank, in addition to his job at a school, can also teach Dutch online to African students through Teaching.com – a platform based in the United States. If Frank does not declare that extra income himself, there is little chance that the tax authorities will discover it.’
Governments can’t track
The general rule is that you pay income tax in the country where you reside or where you provide a particular service, and you pay VAT in the country where the services or products you sell are used or consumed, Vazquez explains. ‘The problem is that under the current rules, governments can’t discover and can’t track who is providing what services or products through platforms, and how much revenue is generated from those transactions. It is also impossible for traditional intermediaries such as banks to track how and where Frank earned that amount of money in his bank account.’
Verify identity of sellers
For this reason, governments have begun requiring platform operators to report information about their sellers’ transactions and income. Furthermore, they often have to do due diligence. This means they must verify and report the identity and other key information of sellers and service providers. Some jurisdictions even require the platforms to collect and remit taxes instead of their sellers.
Purpose does not justify all rules
Of course, it is of great public interest that everyone pays their taxes fairly, and platforms can ensure that this happens because of their privileged position, Vazquez believes. But all those uncoordinated rules for platforms also raise concerns. ‘The purpose does not simply justify all the rules. The rules should not infringe on the privacy of taxpayers and should not hamper the competitiveness and innovation of platforms.’
Large administrative burden for platforms
Vazquez is investigating whether, how and under what conditions governments should impose these kinds of rules on online platforms to combat tax fraud. ‘Platforms often operate in many different countries, each with their own rules. So the administrative burden became very large,’ Vazquez explains. ‘To solve this, the European Union (EU) and the Organization for Economic Cooperation and Development (OECD) are now trying to harmonize the rules.’
In his research, Vazquez looks mainly at the obligations that EU rules and OECD guidelines impose on platforms in terms of reporting, due diligence and the collection of both VAT and income tax. In March 2021, the European Council adopted the sixth amendment to the EU Directive on ‘Administrative Cooperation (DAC) in the field of taxation’. This so-called DAC7 includes new rules to increase tax transparency in the digital economy and will take effect in 2023. Platforms from within and outside the EU will then be required to identify income from sellers on their digital platforms and exchange this information with tax authorities. The OECD has also already published several guidelines.
Not asking for more data than necessary
Vazquez stresses the importance of looking closely at whether the rules imposed on platforms do not conflict with fundamental rights, such as privacy. Before the DAC7 was adopted, it was submitted to the European Data Protection Supervisor. ‘The first draft stated that platforms had to provide “any other identifying information” about their sellers. That violates the data minimization requirement of the General Data Protection Regulation. You’re not allowed to ask for more data than necessary. The regulator said this should be limited to financial information and DAC7 was amended. In some developing countries, the data protection standards are not as good, so there the risks of privacy violation are higher and we have to be extra vigilant.’
Juan Manuel Vazquez‘s research is part of the research project ‘Designing the tax system for a cashless, platform-based and technology-driven society’ of the Amsterdam Centre for Tax Law, for which he is also coordinator. He is starting the second year of his PhD research.
Juan Manuel Vazquez holds a bachelor’s degree in law (summa cum laude) from Universidad Nacional de Tucumán (Argentina), a master’s degree in tax law from Universidad Austral (Argentina) and an LL.M in taxation, with a certificate in international taxation from Georgetown University Law Center (United States).