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Uber’s Solution to Taxing the Digital Economy

David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week your tax proposal will arrive in 3 minutes. As the OECD and policymakers around the world grapple with the question of how to update tax rules to address the challenges of the digital economy, Uber, the San Francisco company known for its ridesharing platform, has offered its own proposal on taxing digital companies. Joining me now by phone is Uber's vice president of finance, tax, and accounting, Francois Chadwick. Francois, welcome to the podcast.

Francois Chadwick: Great to be with you. Hope you're having a good day.

David Stewart: Thank you. Now actually before we get started, could you tell me a little bit about yourself? How long have you been with Uber?

Francois Chadwick: So actually, I've been doing tax for over 25 years and I've been with Uber for nearly four years, three and a half years. But prior to actually being an FTE, I was one of their advisors so I've actually been with Uber in some shape or capacity since May 2011. So I've seen a lot of change and I've seen a lot of growth here at Uber.

David Stewart: Now we're going to get into this proposal that you've written about, but before we get there I'd like to discuss for background purposes a little bit about how Uber itself is structured using the current international tax rules.

Francois Chadwick: Yeah absolutely. So, we are actually in over 63 different countries right now. In every country that we operate in we actually do have some form of physical presence. We have offices there and people there, so we do have an actual presence in every single country. We do actually file tax returns in every single country. We have a principal holding company in the Netherlands that actually is fully operational, which owns our intellectual property for the rest of world. There's over about 1,000 employees in there in the Netherlands so it's a fully functioning principal global holding company, operating company, and subsidiaries around the world. Those subsidiaries are compensated in various different ways depending on their operations. Some of them are compensated on sort of a standard cost-plus markup with others also being compensated on some form of operating margin, so we have a bit of a mixed bag across the world.

David Stewart: Now the concerns about how companies in the digital economy are being taxed are widespread and varied. What do you see as the main concerns that need to be addressed by the OECD and other policymakers?

Francois Chadwick: Well, I think the main concern sort of stems from the notion that a business is able to operate in a country without any form of physical presence and the whole way of doing business has become much more digitized. And the current tax spring work, which is based on principles, but has some catching up to do with the way digital businesses and digitized businesses work. I think the current framework doesn't address currently the notion that you can enter a market without having some form of physical presence in that and there is a belief that that leads to some form of maybe non-taxation for having market access rights to get to individuals in a particular jurisdiction. And I think that is what the OECD is looking to address to be able to maybe say placate some of those political concerns about having access to a market with no taxing rights attached to it.

David Stewart: Now, the OECD is due to produce its final report in 2020. Are you seeing any ideas from the OECD’s proposal that might improve on the status quo?

Francois Chadwick: Yeah, I actually do. I think the OECD is pushing along at a steady pace as well and bringing in numerous policies to talk about it. You have the 129, I think maybe 130, 129, 130 member countries that are actively being involved in this and they're all coming to the table, but you're also starting to see a lot of commentary and input from various different companies, ourselves included. And I do believe there is enough of a momentum to at least push forward the discussion and hoping that we get to some global consensus within 2020 on a path forward.

David Stewart: Do you see any chance that the ultimate path of the OECD might create more issues than it's solving? Or do you think that this will get to an improvement overall?

Francois Chadwick: Well, I think there's going to be multiple issues that are going to need to be addressed along the way. As you look at any of the proposals that are out there, including our own, there's numerous design features that are going to have to be addressed, both in the calculation and also looking at the double tax treaties and things like that. So, we can't avoid a situation, in my mind, we cannot avoid a situation where the design details are going to have to be addressed. But at the same time, the hope is and the need is to come up with a solution that can stand the test of time going forward and doesn't just create another round of issues such that we can avoid a BEPS 3.0 as we work through this BEPS 2.0.

David Stewart: And I guess another sort of issue that that's out there at the moment while the OECD is trying to come up with a consensus solution are countries moving forward with unilateral measures. Lately in the news, France's turnover tax of 3 percent has been widely discussed. Are these unilateral measures from member countries helping or hurting the efforts of trying to find a consensus?

Francois Chadwick: I would say with respect to the unilateral measures, I do believe that they actually create a lot of uncertainty and a lot of complexity for the various companies around the world that get caught by these rules. And that can create some level of whether you wish to call it confusion or frustration. Our belief is that countries should continue to work closely with the OECD to find a global consensus approach.

David Stewart: Now, as we were preparing to have you on, we posted out to Twitter and asked people if they had any questions for you and I think this question fits in sort of with this line of discussion. Tom O'Shea asked about your thoughts on the EU's approach using a digital presence concept for permanent establishment.

Francois Chadwick: Yeah, so I can understand that notion of the digital presence and it sort of captures my earlier thoughts about the need for this new form of international taxation where there could be no physical presence in a country. If we go and look back at the article that Uber offered and you look at step four where we're talking about allocating some form of taxable market intangible profit, we do talk there about determining a market source net revenue and how to determine nexus. In the actual article, we use a figure of €25 million, so if there's some market-sourced revenue to a particular market jurisdiction that in our example is greater than €25 million, then that we would propose creates that presence. Looking at the EU proposal, I think they have sort of three types of digital presence. One they use something similar to what I think it's a lower figure than €25 million, but some dollar figure that has attributed into a market where you have no presence and then that would create a significant digital presence. They also use a couple of other formulas, including number of uses or number of contracts. I think those ideas would have to be dug into a little bit more because you'd want to know if those activities are actually creating some form of revenue and if they are, then maybe that is another way forward. Those are things which I view as sort of the detailed pieces of how to create nexus. The one thing that we always must ground ourselves in is that any form of taxation in any new regime should be based on sort of a taxable profit and no taxation should be created just by virtue of having some form of presence that's not creating a profit.

David Stewart: Alright, now you alluded some of the concepts in the article that you wrote in your proposal, so let's turn to that and tell us the basic structure of your proposal work.

Francois Chadwick: So, at a high level, this is a sort of a type of a reallocation tax. So the first step and the one that's very important to understand is the current arm's length standards and transfer pricing rules and regimes, they should stay in place. So, you should still look through the current process to understand what each entity within a company should be allocated based on current transfer pricing rules. You then take this new set of rules that we are proposing, further, you have to look at this on your worldwide audited financial statements, so we're doing all of this based of global numbers, not country by country numbers. And what you do from that is you look at that and you work out your worldwide profit. From that, you strip out an amount of routine profit and we've used 4 percent of sales or 15 percent of appreciable assets. We say that that's routine and that should not be reallocated anywhere. After we've done that, what we've done is we sort of inversed the calculation. We said with what's left, which is the residual profit, from that strip out what we call the product and tangible profit. And we're saying that should not be reallocated because any sort of profit attributable to the PIP, the product intangible profit, we're arguing should stay in the location where those activities are actually being undertaken and we came up with a table that shows how to calculate the PIP. But at a high level, it's based on the more R&D that you do, the greater the amount of PIP. So we undertook, and I should say we undertook for every number that's in our proposal, we undertook benchmarking analysis and looking at various comparables to come up these numbers. So, once you've stripped out your routine profit, once you've stripped out your product intangible profit, we're saying you're left with the marketing tangible profit. But then we take a pause there and also said well, not all of our market intangible profits should be reallocated to the market jurisdiction because you still have DEMPE functions in various places that are going to create some of that marketing tangible profit and that should only be allocated to the place where those DEMPE functions are being undertaken. Now in order to simplify the mechanism what we then said instead of doing some other form of transactional transfer pricing work on that, we just then did an analysis on franchise type agreements to look at within those agreements what range of profit is allocated to market jurisdictions. Under the benchmarking from those franchise arrangements, we found a midpoint of around 20 percent was allocated to market jurisdictions. So, in a simplifying measure, we then said, once you've stripped out your routine profit, once you've stripped out the product intangible profit, we’re saying you're left with your market intangible profit and then allocate 20 percent of the market intangible profit to the market. And if we just stop there, and as I mentioned before, you would allocate that market intangible profit about 20 percent to the market jurisdictions based off the nexus thresholds that are in the article. But if you just stopped there, you would end up with some form of double taxation, so you have to take it that next step further and have some countries be the surrender countries. They're the ones that would look to be able to get a deduction for the amounts allocated to the market jurisdictions and at a very high level, we're saying that the countries that have any form of residual profit under the current transfer pricing regimes over a particular percentage point, those are the ones that would actually be the surrender countries. Such that you would avoid this double taxation. And that's set at a very high level. And there's a lot of nuance in the document, but hopefully that's able to convey it in four or five minutes.

David Stewart: Yeah, that's a great explanation. Now, do you have any concerns that, let's say this proposal were adopted, if it doesn't shift enough taxable profit to market jurisdictions that we'll be right back talking about this again in a couple of years?

Francois Chadwick: I think that is a question that could be asked of any proposal and that is one where I believe we've got to have the policy and the political will to come to the table and understand that when you do need a principle-based approach, you do need something with a point to that has underlying grounded principles. And address what is the current concern and understand that there will be companies and countries – some will gain, some will not gain – but this should be a step in the right direction. And what we want to avoid, and I think I mentioned earlier, is a BEPS 3.0 where we're just using arbitrary figures to address something in BEPS 2.0 and countries decide that they don't like that and then we'll fall in and start to make additional changes. So, I think grounding something in principle in this round of discussions it is the most important thing.

David Stewart: Now is there any assistance to, say, developing countries who currently already have some difficulty administering transfer pricing rules since this seems to lay on top of existing transfer pricing rules?

Francois Chadwick: Understandably, it does. I think one of the things that we've been able to do with our proposal is run it through and capture it all in an Excel spreadsheet and once you've actually digested this a little bit more and go through it, it is pretty simple to undertake. It is formulaic and the hope is, as it's so formulaic, they're still grounded in principles. It is formulaic. It should be somewhat easy to adopt companies and countries to be able to comply with.

David Stewart: Now, I guess the other question that springs to mind from this as a proposal coming from a digital company, how would you respond to people who might say that your structuring of this proposal could be self-serving to Uber's arrangements?

Francois Chadwick: Yeah, I mean this proposal and what we've put forward reflects the company's desire to lean in and to work constructively with stakeholders, and that's governments and the business community alike. And what we're looking to do is modernize the current system for the realities of business in the 21st century. And understandably, we know our business very well and we understand from all the discussions we've had with policymakers and politicians what they're looking to address. And we believe that this does address those concerns at the same time as sticking with a number of current principles around transfer pricing and the arms-length standard and is formulaic. So, we have spent a lot of time looking to thread a needle to address all input and concerns from the various constituents around the globe.

David Stewart: Your proposal was published on August 19. Have you received any feedback on it since then?

Francois Chadwick: Yeah. I received and we received quite a lot of feedback, but prior to even publishing this article, there were numerous meetings we had with various policymakers, politicians, governments, authorities, Ministry of Finance, and other companies. And we actually took a lot of feedback prior to actually publishing this article into consideration as we were designing this proposal. And also subsequent to the publication last week or so, we received a lot of feedback as well. And I would say 99 percent of it as being positive. A lot of people have digested the article, they understand it, and sort of the recurring theme and the sort of the positive feedback that we've been receiving is the fact that this is one of maybe the more detailed articles or thought pieces on how a proposal could actually operate. And this is one of the things we really want to try to do is move it from the theory into something that could be operationalized.

David Stewart: Alright and lastly, I have one question. It’s a little bit separate from the main issue here, which is about income taxes. I wanted to ask about consumption taxes, including value added taxes and such. A lot of jurisdictions have been grappling with how to treat platforms like Uber and marketplaces where you have one provider connecting a bunch of individuals, service providers and customers and not being able to collect consumption taxes for maybe threshold reasons. Does Uber have a position on efforts to change consumption tax rules to make the platform like Uber responsible for collecting consumption taxes?

Francois Chadwick: So, what I would say with respect to that is we've been having for the last four plus years numerous discussions with policymakers and ministries of finance around the world as they actually do look to implement various different VAT rules or consumption tax-based rules. And quite often, what actually happens is we are spending a lot of time explaining how the platform works, explaining how the business works. So that as they look to introduce particular new tax regimes or tax rules, that they're able to recognize how we operate, such that their rules can actually meet our expectations. So, we actually do lean in on those discussions as well and I'll just round that out as well by saying we're also having various discussions with the OECD about data exchange and being able to provide information such that both our tax liabilities and tax responsibilities, but also other people who are on our platform and looking at how we can bring everything into the next round of compliance. Both for, like I said, for us and for everybody else. So, we're very open and we do lean into those discussions.

David Stewart: Have the discussions included basically aggregating the individual service provider's threshold? So that for example, if one driver doesn't meet the VAT threshold, they don't have to collect VAT, but collectively, the group does meet the threshold. Has Uber been discussing maybe changing the rules so that Uber's threshold matters rather than the individual drivers?

Francois Chadwick: We have been having those discussions and the one thing that we always do point out though is that there's no reason for that to be any specific Uber-type legislation. What we look for is legislation or changes in rules that would apply across industries and when we have those discussions, both tax jurisdictions and Treasury functions to understand that you cannot have, and you should not have, specific company rules. But you can have rules that could address a broader group of companies or a population of companies.

David Stewart: Well, Francois, this has been a fascinating discussion. I thank you very much for being here.

Francois Chadwick: Very much appreciated, thank you.

David Stewart: If you want to learn more about Uber's proposal, you can find a link to Francois's article in our show notes. And now, coming attractions. Each week we preview commentary that will be appearing in the Tax Notes magazine. I'm joined by Content and Acquisitions Manager Faye McCray. Faye, what will you have for us?

Faye McCray: Thanks, Dave. In Tax Notes Federal, Peter Merrill, Karl Russo, and Aaron Junge analyze the legal and economic questions around implementing a unilateral or multilateral foreign minimum tax. David Michaels contends that the IRS's per account interpretation of the FBAR penalty provisions does not hold water given the plain language of the Bank Secrecy Act. In Tax Notes State, Dan Bucks discusses Wisconsin's subsidy deal with the international tech giant Foxconn. Alysse McLoughlin and Kathleen Quinn focus on the New York state tax department's proposed sourcing of receipts from investment advisory or investment management services provided to passive investment customers. In Tax Notes International, Emilien Lebas discusses the European Commission’s state aid investigation of McDonald's and assesses the effect of subsequent Luxembourg and U.S. tax measures and U.S. holding and financing branch structures. Members of Ulhôa Canto Advogados argue that Brazil's long-standing income tax exemption for donations and inheritances remain in force for both resident and non-resident recipients. And on the Opinions page, Robert Golder examines Uber's proposal for a new international tax system and Nana Ama Sarfo looks at whether aviation eco-taxes make sense.

David Stewart: You can read all that and a lot more in the September 2nd edition of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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