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Financial Planning > Tax Planning

The sharing economy doesn't share the wealth

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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.

The Australian Senate called local managers to testify alongside Uber in November at a public hearing on corporate tax avoidance. Sam McDonagh, Airbnb’s country manager there, testified that taxes never motivate the company’s strategic choices. “The No. 1 reason we located ourselves in Ireland was for access to great talent,” McDonagh said. The response from one of the senators: “Come on!”

Whatever Airbnb’s motivation, the result is tax-minimizing options unavailable to traditional competitors. While Airbnb doesn’t own the properties rented on its site, it lists about 2 million rooms — as many as the Wyndham, Hilton, and Marriott chains combined. Those three hoteliers averaged a combined annual profit of $2.3 billion from 2013 to 2015, according to their Securities and Exchange Commission filings, and paid hundreds of millions of dollars a year in U.S. federal taxes.

Uber processes payments for rides outside the U.S. through the Netherlands, a company official testified at the hearing in Australia. Last fall, Fortune reported that, according to presentations to investors, Uber had assigned its IP to the tax haven of Bermuda, leaving less than 2 percent of its net revenue taxable by the U.S.

Outside the U.S., there have been a few recent attempts to crack down on corporate tax avoidance. In January the U.K. instituted the “Google Tax,” a 25 percent levy on any profit deemed improperly diverted, and Ireland began eliminating some loopholes, including the infamous “Double Irish,” last year. Google says it’s not subject to the Google Tax, and accountants are already pitching comparable alternatives to the Double Irish in Malta and the United Arab Emirates.

The Organisation for Economic Co-operation and Development is crafting more technical ways to block profit shifting. “We can debate whether most of the value of a platform is created in Silicon Valley, where it was developed, or in Ireland, where it is managed, or wherever the service is delivered,” says Pascal Saint-Amans, director of the OECD Tax Centre. “You cannot reasonably argue that value is created in the tax haven where the platform’s only presence is a shell company.”

As home to most of the big companies involved and the only major country that taxes its multinationals’ worldwide income, the U.S. likely has the most at stake. In deadlocked Washington, the Obama administration’s proposals have included a minimum tax of 19 percent on U.S. corporations’ global earnings, regardless of whether the money ends up in the U.S., as well as stricter limits on deferral of overseas income and use of corporate structures that leave some income untaxed by any country.

“At some point, something has to be done,” says Reuven Avi-Yonah, an international tax professor at the University of Michigan Law School. “We just have to hope that it happens before too much revenue is lost.”

The bottom line: Airbnb’s more than 40 subsidiaries may help the company lower its tax bill in the U.S. and other countries.

See also:

The rise of the 1099 economy

Infusing the future into your strategy

The new “gig” deal for financial reps

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