## Box 1. The Peer-to-Peer Economy in Developing Economies ............................................... 30

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*Source: wp17187 - Box 1. The Peer-to-Peer Economy in Developing Economies ............................................... 30*

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### Box 2. Current Tax Treatment of P2P Businesses

### Introduction and policy questions
- Main concerns and questions:
  - Perception that the digital P2P economy is less regulated and taxed than other business types.
  - Do P2P activities warrant special tax treatment?
  - Are current tax policies sufficient or do they enable greater avoidance?
  - Can platform-held information improve tax compliance at low cost?
  - Should governments consider alternative or simplified taxation to capture value created?
- Conclusion in source: distinguish tax policy issues from tax administration issues; a separate tax regime is not immediately justified.

### Definition, features, and revenue models
- Definition: virtual marketplaces connecting buyers and sellers through digital platforms; transactions can be exchange (sale) or rental (sharing).
- Platform functions: payment intermediation, reputational/feedback mechanisms, transaction histories, advertising/marketing, user-based reviews/ratings.
- Platform control varies from seller-set pricing to platform screening, price-setting, matching, and codes of conduct (e.g., algorithmic management in ride-sharing).
- Commission models: fixed or variable commissions.
  - Reported commission ranges: 1–2 percent for lending up to 20 percent for transportation network companies.
  - Sellers receive over 85 percent of the value of transactions facilitated.

### Scale and selected usage statistics
- Pew Research Center: 72 percent of American adults have used at least one of 11 different shared and on-demand services (Smith 2016).
- Reported users (millions):
  - Airbnb: 100
  - Alibaba: 440
  - Amazon: 300
  - BlaBlaCar: 40
  - DiDi Chuxing: 400
  - Ebay: 170
  - Lyft: 40
  - Uber: 40
- Aggregate estimates:
  - Vaughan and Daverio (2016): turnover on platforms in five key sectors close to €4 billion (0.03 percent of EU-28 GDP) in Europe in 2015; platforms facilitated around €28 billion (0.2 percent of EU-28 GDP) of transactions.
  - Goudin (2016): potential gains from underutilized capacity estimated at €572 billion in annual consumption (4 percent of EU-28 GDP).

### Market dynamics, two-sided platforms, and taxation implications
- Technology lowers transaction costs and minimum efficient scale, enabling many small-scale entrants and role-switching between buyer and seller.
- P2P marketplaces are two-sided markets with network and information externalities; pricing depends jointly on demand elasticities and marginal costs.
- Taxation insights for two-sided markets:
  - An increase in ad valorem tax on one side of a monopoly platform may cause overproduction relative to the social optimum, increasing output on both sides.
  - Specific taxes increase marginal cost and decrease output; specific taxes may be preferable to ad valorem taxes to prevent oversupply.
  - Taxes on data collection can reduce sales volume and indirect tax revenues and may induce platforms to switch business models; ad valorem taxes on advertising revenues may be superior to taxes on data.
- Owners and renters are endogenous; skewed taxation or pricing can create supply-demand imbalances for shared resources.

### Selected empirical findings
- Efficiency and supply: P2P reduces search, matching, and overhead frictions, boosting supply and consumer benefits (lower prices, convenience, variety).
- Labor supply elasticity:
  - Cullen and Farronato (2015) (TaskRabbit): labor supply is highly elastic; increases in demand matched by increases in supply per worker with little or no impact on price.
- Consumer surplus:
  - Cohen and others (2016) (Uber surge pricing): estimated consumer surplus of $6.8 billion for consumers in 2015; consumer surplus approximately 1.6 times consumer expenditures.
- Competitive effects on incumbents:
  - Zervas, Proserpio, and Byers (2017) (Airbnb): Airbnb reduced hotel revenues by around 8–10 percentage points in some segments, mainly lower-end hotels and narrowing seasonal price gaps.
  - Farronato and Fradkin (2016): across major U.S. cities, larger Airbnb presence associated with low opportunity costs of renting spare rooms, high hotel investment costs, and high demand volatility; a 10-percentage-point increase in the size of Airbnb reduces hotel revenue by (text cut off in source).
  - Neeser (2015) evidence: Airbnb may have pushed down prices in Nordic countries.
- Ride-sharing impacts:
  - Indicators of Uber capturing market share at expense of taxi firms: falling price of medallions in New York City; bankruptcies (example: Yellow Cab in San Francisco).
  - Medallion prices in New York fluctuated between about $500,000 to over $1 million over the last five years.

### Labor market effects and participation
- Hall and Krueger (2015): Uber increases wage-earning opportunities and flexibility; driver profile closer to average employee in age and education versus traditional taxi drivers; uncertainty whether drivers displace taxi drivers or re-enter workforce.
- Manyika and others (2016): independent earners estimated between 54 million to 68 million in the United States and 60 million to 94 million in the EU-15.
  - Implied share: between 20–30 percent of the working-age population in the United States and the EU-15 engage in independent work.
- Concerns: contingent work may cause job insecurity and insufficient benefits; decentralized interactions and platform control may weaken worker bargaining power.
- Participation and earnings (Farrell and Greig (2016a)):
  - Highest usage to smooth earnings: 18–24 year-olds, lower-income individuals, people in the Western United States.
  - Repeat usage falls after first month by up to one-third for labor-intensive activities and two-thirds for capital-intensive activities.
  - Anecdotal gross income potential up to $50,000 through ride-sharing in the United States (varies widely).

### Tax-relevant features of P2P activity
- Atomized interactions and dispersed users; many individuals transact over digital platforms.
- Predominant business form: many P2P activities undertaken by self-employed (unincorporated) individuals; incorporation possible and can be influenced by tax policy.
- Nonemployer business trends: marked increase in transportation sector and to a lesser extent accommodation sector over the last five years—growth significantly larger than firms with employees.
- Worker classification issues:
  - Employment status affects withholding and reporting obligations.
  - Reclassifying P2P sellers as employees would shift withholding/reporting burdens to platforms and could change indirect tax liabilities (platform would bear full indirect tax liability on total sales generated).
  - Mixed legal rulings across countries highlight unresolved ambiguity.

### Income, rents, and distributional implications
- Engagement ranges from irregular supplementary income to primary source.
- Anecdotal Airbnb data for three cities suggest annual incomes from accommodation rental are low.
- If income distribution is concentrated at the low end and most sellers are self-employed with little non-P2P income, effective average tax rates will be low given progressivity of personal income tax systems.
- New entrants face significant fixed capital costs; users of personal assets face lower fixed costs and entry risk.
- Sellers incur variable costs including adapting personal assets to commercial use.

### Externalities and policy responses
- Externalities can be positive or negative (e.g., ride-sharing and congestion; property-sharing and tourism spillovers).
- Policy instruments: Pigouvian taxes or subsidies where appropriate.
- Caution: two-sided market feedbacks can complicate policy outcomes.
- In cases of emergent natural monopolies or oligopolies, government could consider stronger intervention (including nationalization) to administer prices and regulate congestion.

### Platforms as data recorders and administrative opportunities
- Platforms maintain digital records of business income and can act as third-party reporters, reducing information constraints for tax authorities.
- Policy options include direct access to platform data and requiring platforms to withhold taxes.
- Combining platform data with other income data could improve tax design and reduce need for thresholds imposed to balance revenues and compliance costs.

### Tax policy choices and guidance (overview)
- General principle: taxes should minimally distort behavior, but governments may target P2P for externality correction or to ease compliance.
- Policy design options include simplified tax policies and cooperation with platforms for information, audit, verification, or withholding.
- Subsections in source discuss:
  - A. Neutral or targeted treatment of P2P businesses
  - B. Tax thresholds
  - C. Cross-border taxation of P2P services
  - D. Treatment of capital and labor
  - E. Presumptive tax system for the P2P economy

### A. Neutral or targeted treatment (key considerations)
- Evidence on economic impact is mixed.
- Small business revenue context: small businesses commonly account for less than 15 percent of domestic tax collections and often much less in low-income countries (IMF 2015).
- Considerations:
  - Many P2P sellers are labor intensive with narrow profit margins; avoid overstating revenue potential.
  - Income misreporting likely due to irregular activity.
  - Taxing only P2P could deter participation because of network externalities or shift activity to informal sector.
  - Platforms can formalize undocumented merchants, reducing unrecorded income.
- Observed policy responses: extending occupancy/tourism taxes and general sales taxes to P2P services; persistent differences in some countries (e.g., taxi license fees not applying to P2P drivers).

### B. Tax thresholds
- Lowering tax thresholds can bring small business activity into the tax system but risks behavioral changes and higher administrative costs.
- Evidence:
  - Figure 4 (source) shows low average annual incomes in P2P accommodation rental, often below indirect tax thresholds.
  - Kanbur and Keen (2014): optimal tax threshold sensitive to size distribution and compliance behavior; higher thresholds advisable where evasion dominates.
  - Keen and Mintz (2004): in VAT context, set lower thresholds on activities with higher value-added to sales ratios (labor-intensive services face relatively low thresholds).

### C. Cross-border taxation
- Many P2P transactions are local nontradable services, but remote work and intangibles increase cross-border activity.
- Risks: double taxation and unintended non-taxation from inconsistent indirect tax application.
- Recommendation: tax final consumption where it occurs (destination principle); OECD VAT/GST guidelines help minimize irregularities.

### D. Treatment of capital and labor
- P2P income blends returns to labor and capital; tax treatment influences investment and growth.
- Theoretical guidance: under specific assumptions, capital income may warrant lower rates than labor.
- Practical determinants of capital taxation differences: organizational form, depreciation rules, financing source, and firm size.
- Revenue risk: incorporation choices by many self-employed P2P sellers can amplify pre-existing tax differentials.

### E. Presumptive tax systems
- Presumptive regimes apply a low, uniform tax rate to gross income to reduce compliance and auditing burdens.
- Examples and trade-offs discussed later in enforcement/compliance section.

### Enforcement and compliance challenges (Section III highlights)
- Atomized P2P sales create enforcement challenges due to many sole-proprietor sellers facing identical compliance burdens as other self-employed businesses.
- Personal asset use complicates expense tracking and fuels a market for P2P-targeted tax advisors.
- Small taxable amounts per seller raise efficiency questions for compliance and enforcement.
- Noncompliance in small businesses often very high; IMF (2015) reports error rates over 40 percent in small businesses, even in advanced countries.
- Sellers often earn from multiple platforms and off-platform activity, complicating income aggregation and liability calculation.

### De minimis thresholds and presumptive regimes
- De minimis tax/reporting thresholds can simplify administration; level depends on administrative costs versus revenue benefits.
- United Kingdom example: new tax-free allowance estimated to affect 700,000 participants in the P2P economy with administrative savings of £20 million per year for individuals no longer needing to file returns or calculate expenses.
- Presumptive options and trade-offs:
  - Italy proposal (2016): platforms to withhold a fixed 10 percent on all P2P transactions.
  - Single flat withholding can be regressive; nonfinal withholding with end-of-year reconciliation preserves progressivity but undermines simplification.
  - Basic income exemptions or multi-tier withholding can introduce progressivity but may incentivize platform-spreading and add complexity.

### Simplifying cost reporting: standardized deductions and safe harbors
- Optional standard deductions from gross receipts possible where platforms share income data.
- United Kingdom: allowance on trading and property income targeted at P2P economy.
- Thomas (2017): optional standardized deduction of 60 percent of workers’ gross receipts in lieu of actual expenses.
- Oei and Ring (2016): suggest safe harbors to define allowable deductions.
- UK construction industry scheme: standardized deductions from payments by contractors to subcontractors count as advanced payments towards tax and social security.

### Platforms as data sources and collection agents
- Platforms record transaction-level data useful for authenticating incomes; cooperation with governments can alleviate information constraints.
- Some countries extended tax authority powers to obtain platform data; United Kingdom enacted legislation extending these powers.
- U.S. reporting examples:
  - Payers of at least $600 to independent contractors must file Form 1099-MISC.
  - Collaborative finance platforms report net interest earnings above $10 on Form1099-OID.
  - “Payment facilitator” classification requires reporting gross earnings for U.S. users who earn over $20,000 and have 200 or more transactions in the calendar year.
- Platforms acting as indirect tax collectors:
  - Airbnb withholds 28 percent of income from U.S. users who do not provide taxpayer information and remits hotel/tourist taxes in four countries.
  - India (2015): legislation requiring digital platforms to charge and remit service taxes due on sellers’ income; India introduced a full-fledged goods and services tax in July 2017.
- Technical issues for platforms collecting indirect taxes: how sellers claim input credits if platforms withhold tax on sales; flat-rate schemes can address input-credit shortcomings.
- For income taxes, platforms lack full information on sellers’ total income and costs; withholding beyond a blunt gross-income instrument is difficult without complete profiles.
- Simplified withholding as prepayments with ex post reconciliation can help but should avoid high administrative burdens on P2P businesses.

### Policy trade-offs and conclusions
- No single definitive approach; choices depend on whether governments seek neutrality or differentiation between P2P and traditional businesses.
- Small business taxation issues are amplified by P2P and two-sided market effects.
- With P2P growth, the number of unincorporated small businesses rises at the lower end of income distribution, potentially displacing larger firms and complicating taxation.
- Policy options:
  - Lower thresholds if distributional shifts make revenue gains justify administrative costs.
  - Special small-business rules may help but can become redundant as P2P norms spread.
  - Platforms offer an opportunity to strengthen enforcement and create connected taxpayer databases linking platform data with withholding systems and taxpayer registers.
  - Platforms as custodians can ease compliance and administration, particularly for indirect taxes; direct tax withholding is more complex due to multiple income streams and platform multiplicity.
  - Simplified withholding plus limited reconciliation is recommended as a pragmatic interim solution.
- Final point: tax treatment of P2P will vary by country based on policy preferences and administrative capacity; platform technology is a valuable opportunity to address administrative and revenue-mobilization challenges.

### P2P activities in developing economies (box summary in source)
- P2P platforms can formalize informal personal services common in emerging markets (taxi drivers, plumbers, cleaners), increasing access, organization, and incomes.
- Use is widespread in countries such as Colombia, Kenya, Mexico, and South Africa, by both foreign and local platforms.
- P2P models help overcome unreliable governance, weak property rights, and capital constraints by using crowd-based ratings to mitigate information asymmetry without large capital or detailed regulation.
- Demand-side obstacles in many emerging markets:
  - lack of knowledge and distrust of collaborative models;
  - underdeveloped secure payment facilities and insurance;
  - limited smartphone penetration.
- Low and concentrated asset ownership can limit capital-intensive P2P services; labor-intensive P2P businesses fare better where decentralized low-skilled labor exists and demand from tech-savvy urban middle classes is present.
- Examples of adaptive solutions: DriverSelect in South Africa allows drivers to rent available cars; some P2P businesses help drivers finance vehicle purchases.

### Direct taxes (key points)
- P2P sellers typically register as self-employed and are responsible for self-reporting; irregular engagement and small scale can remove legal reporting obligations in some jurisdictions.
- Hobby tests (intention, frequency, organization) can exempt activities (example: Australia); resale of second-hand personal items typically not taxed if sold at a loss.
- Some countries require reporting of all P2P income (examples: United States and Canada).
- Income exemptions:
  - U.S.: homeowners may rent out homes for up to 14 days without paying tax on the income.
  - U.K.: “rent-a-room” relief up to £7,500 for owner-occupiers or tenants who let furnished accommodation to a lodger.
  - U.K. introduced two new tax allowances for property and trading income: remove reporting/payment obligations where trading or property income before expenses does not exceed £1,000; individuals above that amount can opt to deduct the allowance instead of actual expenses.
- Deductible items mirror self-employed rules: bringing-to-market costs, operating costs, financing costs, capital depreciation.
- Sector-specific U.S. examples:
  - Car used for business and personal: apportion expenses by mileage; standard mileage rate of $0.54 per mile beginning 2016.
  - Home used for business: option to deduct $5 per square foot for up to 300 square feet.

### Indirect taxes (VAT/GST)
- VAT/GST applies where these taxes operate; certain exemptions may apply (example: long-term residential rental income over one month).
- VAT registration typically required only after a gross income threshold; few P2P participants meet current thresholds given low incomes.
- Liability can hinge on worker classification; India (2015) example: platform liable and required to discharge tax on services provided by sellers.

### Other taxes and sector-specific levies
- Sector-specific taxes extend to P2P businesses in those sectors; platforms at different stages of implementing collection.
- Accommodation: hotel taxes extended to P2P users; Airbnb collects and remits in certain U.S. states.
- Ride-sharing:
  - Traditional taxi license fees typically do not apply to ride-sharing.
  - Examples of ride-sharing targeted taxes/fees:
    - Massachusetts: US$ 0.20 tax per trip ordered through ride-hailing services (2016) earmarked for traditional taxi sector.
    - Washington D.C.: $4 fee on rides to/from the airport using ride-sharing platforms remitted to airports authority.
    - Proposals: Atlanta, Georgia (2017) add 4 percent sales tax to each ride; New York State (2017) proposed 4 percent tax on app-based hails; Hawaii (2017) proposal for 4.75 percent excise tax at point of sale on ride-sharing fares.

### Selected recent international legislative changes (2015–17)
- Australia: 2017 removed the goods and services tax threshold for ride-sharing companies.
- Brazil: February 2017 labor court judge in Minas Gerais ruled Uber drivers were employees.
- Canada: January 2017 government announced plans to redefine ride-sharing firms as taxi companies; lawsuit filed in Ontario seeking US$ 200 million in damages on behalf of drivers since 2012 alleging misclassification.
- Caribbean: 2017 Caribbean Tourism Organization agreement with Airbnb to share data and studies with policymakers.
- China: March 2017 National Development and Reform Commission disclosed government is formulating tax policies and regulations for the sharing economy.
- Estonia: As of 2016, legalized ride-sharing and digitally linked drivers' incomes with the revenue authority.
- France:
  - 2016 legislation increased tax on professional renters using Airbnb—amounts more than EUR 23,000 (US$ 25,200) per year from renting homes on P2P websites considered professional income and subject to income tax.
  - March 2017 court ruled against classification of drivers as employees.
  - French Finance Act 2016 imposed new reporting obligations on P2P platform users residing, selling, or providing services in France.
- India: 2015 platforms required to discharge service tax liability on services provided by suppliers.
- Italy: 2016 bill proposed platforms act as withholding agents and withhold a fixed 10 percent on all transactions.
- Kenya: 2016 Kenya Revenue Authority rules Uber drivers responsible for paying their own taxes.
- United Kingdom:
  - April 2017 introduced GBP 1000 tax-free allowance for property and trading income.
  - Finance Act 2016 expanded HMRC powers to obtain data from digital platforms.
  - 2016 tribunal deemed an Uber driver a "worker" rather than an independent contractor.
- United States (selected state actions):
  - Atlanta, Georgia: 2017 proposal to add a 4 percent sales tax to each ride with each city adding its own taxes.
  - California: 2016 employee misclassification settlement left Uber drivers classified as independent contractors.
  - Hawaii: 2017 proposal for ride-sharing fares to be subject to 4.75 percent excise tax at point of sale.
  - Massachusetts: 2016 introduced a US$ 0.20 tax on every trip ordered through ride-hailing services.
  - New York State: 2017 proposal for 4 percent tax on all app-based hails.

*Source: BOX 2. CURRENT TAX TREATMENT OF P2P BUSINESSES (wp17187).*

### Box 1. The Peer-to-Peer Economy in Developing Economies ............................................... 30

### Box 1. The Peer-to-Peer Economy in Developing Economies ............................................... 30

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*Source: wp17187 - Box 1. The Peer-to-Peer Economy in Developing Economies ............................................... 30*

### Box 2. Current Tax Treatment of P2P Businesses .................................................................. 31

### Box 2. Current Tax Treatment of P2P Businesses

### Introduction
- The digital, peer-to-peer (P2P) economy has attracted scrutiny amid perceptions that it is less regulated and taxed than other business types.
- Concerns include potential distortion of competition and unfair advantage for P2P participants; counterarguments emphasize efficiency gains and pressure on restrictive practices.
- Key policy questions posed:
  - Do P2P economic activities warrant special tax treatment?
  - Are current tax policies sufficient, or do they enable greater avoidance by P2P participants?
  - Can information held by digital platforms improve tax compliance at low cost?
  - Should the government consider alternative or simplified taxation to capture value created?
- The paper suggests that distinguishing tax policy issues from tax administration issues is critical; a separate tax regime is not immediately justified.

### Definition and Features of the P2P Economy
- Definition: Virtual marketplaces that connect individual buyers and sellers through digital platforms; transactions can be exchange (sale) or rental (sharing).
- Terminology notes:
  - Terms like “sharing economy” and “gig economy” refer to subsets of P2P activity; “P2P businesses” and “P2P sellers” denote supply-side entities.
  - “Gig economy” centers on specific jobs or tasks; larger corporations may also use P2P infrastructure (business-to-peer channel).
- Distinguishing features:
  - Not a new form of transaction (bartering analogue) but enabled by technology that reduces transaction costs.
  - Technology functions include payment intermediation, reputational and feedback mechanisms, transaction histories, advertising/marketing, and quality control via user-based reviews and ratings.
  - Platforms vary in control over users: some allow sellers to set prices and market freely; others screen sellers, set prices, match participants, and impose codes of conduct (e.g., algorithmic management in ride-sharing).
- Revenue models:
  - Most platforms adopt fixed or variable commission models.
  - Commission ranges reported: 1–2 percent for lending up to 20 percent for transportation network companies.
  - Sellers receive over 85 percent of the value of transactions facilitated.

### Scale of the Peer-to-Peer Economy
- Global presence with major platforms in Asia and platforms operating across multiple countries; local replications also common.
- Pew Research Center result: 72 percent of American adults have used at least one of 11 different shared and on-demand services (Smith 2016).
- Examples of reported users (millions):
  - Airbnb: 100
  - Alibaba: 440
  - Amazon: 300
  - BlaBlaCar: 40
  - DiDi Chuxing: 400
  - Ebay: 170
  - Lyft: 40
  - Uber: 40
- Selected aggregate estimates:
  - Vaughan and Daverio (2016): turnover on platforms in five key sectors reached close to €4 billion (0.03 percent of EU-28 GDP) in Europe in 2015, facilitating around €28 billion (0.2 percent of EU-28 GDP) of transactions.
  - Goudin (2016): potential economic gains from employing underutilized capacity through P2P activities estimated at €572 billion in annual consumption (4 percent of EU-28 GDP).
- Data availability constraint: platforms closely guard user and income data; statistical agencies (e.g., Office of National Statistics, UK) are exploring better GDP measurement approaches.

### Platform Technology, Market Dynamics, and Participation
- Technology reduces search, marketing, and negotiation frictions, lowering the minimum efficient scale and enabling more small-scale entrants.
- Low barriers to entry allow role-switching between buyers and sellers; participation can be full-time or part-time.
- Sharing is one type of P2P activity; the paper considers all monetary or in-kind transactions, either sale or rental, that generate taxable income.
- P2P rental markets:
  - Increase utilization and can decrease ownership; largest surplus gains accrue to renters.
  - Durable goods that are expensive, infrequently used, and with planned usage are good candidates for rental.

### Two-Sided Markets and Taxation Implications
- P2P marketplaces are two-sided markets with complementarities and network/information externalities.
- Pricing on both sides depends jointly on demand elasticities and marginal costs; skewed pricing strategies can subsidize one side to attract the other.
- Taxation in two-sided markets:
  - An increase in ad valorem tax on one side of a monopoly platform may cause overproduction relative to the social optimum, increasing output on both sides.
  - Specific taxes increase marginal cost and decrease output; in two-sided markets, specific taxes may be preferable to ad valorem taxes to prevent oversupply.
  - Taxes on data collection can reduce sales volume and indirect tax revenues and may lead platforms to switch business models; ad valorem taxes on advertising revenues may be superior to taxes on data.
- Endogeneity of sides: owners and renters are endogenous; skewed taxation or pricing can create imbalances in supply and demand for shared resources.

### Selected Empirical Findings on Competition, Prices, and Labor
- Efficiency and supply:
  - P2P businesses reduce transaction costs (search, matching, overheads), boosting efficiency and supply; consumers gain lower prices, convenience, and greater variety.
- Labor markets and supply elasticity:
  - Cullen and Farronato (2015) (TaskRabbit): labor supply is highly elastic; increases in demand are matched by increases in supply per worker with little or no impact on price.
- Consumer surplus and pricing:
  - Cohen and others (2016) (Uber surge pricing): estimated consumer surplus of $6.8 billion for consumers in 2015; consumer surplus approximately 1.6 times consumer expenditures.
- Competitive effects on incumbents:
  - Zervas, Proserpio, and Byers (2017) (Airbnb): Airbnb reduced hotel revenues by around 8–10 percentage points in some segments, primarily affecting lower-end hotel segments and narrowing seasonal price gaps.
  - Farronato and Fradkin (2016): across major U.S. cities, larger Airbnb presence associated with low opportunity costs of renting spare rooms, high investment costs for hotels, and high demand volatility; a 10-percentage-point increase in the size of Airbnb reduces hotel revenue by (text cut off in source).

_Italic: Source: Box 2, "Current Tax Treatment of P2P Businesses," from the provided IMF working paper content._

### 0.6 percentage points. Neeser (2015) does not find the same revenue effects, but offers

### wp17187 - 0.6 percentage points. Neeser (2015) does not find the same revenue effects, but offers

### Impact on incumbents and market structure
- Airbnb evidence: Neeser (2015) offers evidence that Airbnb may have pushed down prices in Nordic countries.
- Ride-sharing evidence: several signs that Uber is securing market share at the expense of existing taxi firms, including:
  - falling price of medallions in the City of New York;
  - notable bankruptcies (example: Yellow Cab in San Francisco).
- Incumbent advantages that can persist:
  - economies of scale and expertise in minimizing transaction costs (example: single front desk processing check-in for hundreds of guests).
  - P2P rental platforms are investing heavily to replicate these functions.
  - a burgeoning industry provides complementary services to P2P activities.

### Labor market effects
- Hall and Krueger (2015) findings:
  - Uber platform is bringing greater wage-earning opportunities and more flexible work arrangements.
  - driver profile closer to average employee in age and education versus traditional taxi drivers and chauffeurs.
  - uncertainty remains whether new drivers displace existing taxi drivers or represent re-entry to the workforce.
- Manyika and others (2016) estimates:
  - number of independent earners ranges from 54 million to 68 million in the United States and from 60 million to 94 million in the EU-15.
  - therefore, between 20–30 percent of the working-age population in the United States and the EU-15 is believed to engage in such independent work.
- Concerns:
  - contingent forms of work (notably “zero-hour” contracts) may expose individuals to excessive job insecurity and insufficient benefits and social insurance.
  - potential weakening of worker bargaining power due to decentralized interactions and platform control, with implications for wage and inflation pressures.
- Participation and earnings patterns (Farrell and Greig (2016a)):
  - groups most likely to use P2P to smooth earnings: 18–24 year-olds, lower-income individuals, people residing in the Western United States.
  - repeat usage falls off after the first month by up to one-third for labor-intensive activities and two-thirds for capital-intensive activities.
  - anecdotal estimates: possible to earn a gross income of up to $50,000 through ride-sharing in the United States (varies widely by location and demand).

### Key tax-relevant features of the P2P economy
- Atomistic interactions and dispersed users; ease of access and flexibility have increased number of people transacting over digital platforms.
- Predominant business form: many individuals carry out P2P activities as self-employed (unincorporated), though incorporation is possible and tax policy can influence that choice.
- Nonemployer business trends: marked increase in the transportation sector and to a lesser extent in the accommodation sector over the last five years (increase significantly larger than growth in firms with employees).
- Worker classification controversies:
  - employment classification affects compliance and reporting obligations.
  - tax legislation typically distinguishes salaried employees (employer withholds payroll taxes and social security contributions) versus independent contractors (self-employed responsible for filing and paying own taxes and social contributions).
  - transforming P2P sellers into employees would shift withholding and reporting burden to the platform and could change indirect tax liabilities (platform would bear full indirect tax liability on total sales generated).
  - mixed legal rulings across countries illustrate unresolved ambiguity in the P2P economy (examples and outcomes summarized in the source).

### Income levels, rents, and distributional implications
- Engagement varies: irregular/low-frequency supplementary income versus primary source.
- Income concentration and magnitudes:
  - anecdotal Airbnb data for three cities suggests annual incomes from accommodation rental are low (Figure 3).
  - if income distribution is concentrated at the low end and most P2P sellers are self-employed with little non-P2P income, effective average tax rates will be low given progressivity of personal income tax systems.
  - uncertainty about large rents after offsetting costs: new entrants face significant fixed capital costs; those using existing personal assets face lower fixed costs and entry risk.
- Costs: sellers incur variable costs including adapting personal assets to commercial use.

### Externalities and policy response
- P2P activities generate externalities (positive and negative):
  - examples: ride-sharing could increase or decrease traffic congestion; property-sharing could boost tourism and local spillovers; P2P model can bring previously undocumented activity into the formal economy.
- Policy instruments:
  - presence of externalities could call for Pigouvian taxes or subsidies to discourage or encourage certain P2P activities.
  - caution due to two-sided market feedbacks; tax instruments must consider feedback between buyers and sellers.
  - in cases of emergent natural monopolies or oligopolies, government could consider nationalizing platforms to administer prices and regulate congestion and even optimize price-setting to meet social objectives.

### Platforms as data recorders and administrative opportunities
- Platforms maintain a digital footprint of all business income generated by users; can act as third-party reporters and alleviate informational constraints for tax authorities.
- Policy options:
  - direct access to platform data for tax authorities;
  - require platforms to withhold taxes on P2P users and remit to the exchequer.
- Combining platform income data with other income data could:
  - allow better-designed tax systems to ameliorate equity-efficiency trade-offs from imperfect observation of work effort and earnings.
  - reduce need for thresholds imposed to trade off revenue gains with compliance losses.

### Tax policy choices and guidance
- General principle: taxes should have minimal impact on behavior, but governments may target P2P activities to correct externalities or ease compliance.
- Policy design options include:
  - simplified tax policies for P2P users;
  - cooperation with platforms for information, audit, verification, or withholding.

Subsections of policy design discussed in the source:

A. A neutral or targeted treatment of P2P businesses
- Evidence on economic impact remains mixed.
- Small business tax revenue context:
  - small businesses commonly account for less than 15 percent of domestic tax collections and often much less in low-income countries (IMF 2015).
- Key considerations:
  - many P2P sellers are labor intensive with narrow profit margins and likely not generating large rents; avoid overstating revenue potential from taxing them.
  - income misreporting likely given irregular, low-frequency activity.
  - taxing only P2P businesses could deter participation on demand or supply sides due to network externalities and shift activity to informal sector.
  - positive effect: platforms can lure undocumented merchants onto platforms and into the formal economy, reducing unrecorded income.
- Policy responses observed:
  - leveling the playing field between P2P sellers and traditional businesses (examples: occupancy and tourism taxes extended to P2P accommodation; general sales tax extensions to ride-sharing).
  - persistent differences remain in some countries (e.g., license fees in parts of taxi industry not applying to P2P drivers).

B. Tax thresholds
- Governments could lower tax thresholds to bring more small business activity into the tax system, but must consider behavioral impacts and administrative costs.
- Evidence and mechanics:
  - Figure 4 shows low average annual incomes in P2P accommodation rental, often below current indirect tax thresholds.
  - threshold choice depends on size distribution of small businesses and revenue-cost trade-offs.
  - lower thresholds risk increasing administrative costs and noncompliance.
  - Kanbur and Keen (2014): optimal tax threshold sensitive to size distribution and compliance behavior; higher thresholds advisable where evasion is dominant.
  - Keen and Mintz (2004): in VAT context, set lower thresholds on activities with higher ratios of value-added to sales (implies labor-intensive services face relatively low thresholds).

C. Cross-border taxation of P2P services
- Many P2P transactions are local nontradable services, but remote-working platforms and intangibles are increasingly cross-border.
- Risks: double taxation and unintended non-taxation arising from inconsistencies in indirect tax application.
- Recommendation: tax final consumption in jurisdiction where it occurs (destination principle); OECD VAT/GST guidelines help minimize irregularities.

D. Treatment of capital and labor
- Income from P2P activities blends returns to labor and capital; tax treatment affects investment and growth.
- Theoretical guidance: optimal taxation of capital income suggests lower rates than on labor under specific assumptions.
- Practical determinants of capital taxation differences:
  - organizational form (corporate or noncorporate);
  - differences between tax depreciation rules and economic depreciation;
  - source of financing (debt or equity);
  - firm size (small firms may immediately expense capital investments).
- Revenue risk: as more self-employed P2P businesses exist, pre-existing tax differentials between corporate and personal income tax schedules become greater revenue risks if many choose to incorporate.
- Complexity: taxation of capital differs across asset types and between P2P and traditional businesses depending on expensing and financing rules.

E. Presumptive tax system for the P2P economy
- (Section introduction present in source; further details follow beyond provided excerpt.)

*Source: IMF working paper wp17187 (content excerpt).*

### Section III noted how the expansion of atomized P2P sales may give rise to an

### wp17187 - Section III noted how the expansion of atomized P2P sales may give rise to an enforcement challenge for tax authorities

### Enforcement and compliance challenges
- Expansion of atomized P2P sales creates enforcement challenges for tax authorities, given large numbers of largely sole-proprietor sellers facing the same compliance burdens as other self-employed businesses.
- Use of personal assets for business purposes complicates tracking and allocation of expenses and fuels a market for tax advisors targeted at the P2P economy.
- Small amounts of taxable income per seller—though potentially large in aggregate—raise efficiency questions about taxpayers complying with and governments enforcing complex legislation.
- Noncompliance for small businesses is typically very high; IMF (2015) reports error rates of over 40 percent in small businesses, even in advanced countries.
- Many P2P sellers earn from multiple platforms and off-platform activities, making aggregation of income and correct liability calculation difficult for tax authorities and platforms.

### De minimis thresholds and presumptive regimes
- A de minimis tax and reporting threshold for personal income tax can ease and simplify tax administration; the precise level depends on administrative costs versus revenue benefits.
- United Kingdom example: new tax-free allowance estimated to impact 700,000 participants in the P2P economy with an administrative saving of £20 million per year for individuals who either no longer need to file returns or calculate expenses.
- Presumptive regimes for small businesses (already in place in many countries) apply a low, uniform tax rate to gross income to reduce compliance and auditing burdens.
- Italy proposal (2016): platforms to withhold a fixed 10 percent tax on all P2P transactions.
- Trade-offs when selecting flat rate(s):
  - Sellers may earn from multiple P2P platforms and off-platform sources; platforms lack full knowledge of sector profitability.
  - A single flat rate could be regressive; a nonfinal withholding tax with end-of-year reconciliation allows progressivity but undermines simplification.
  - Introducing a simple basic income exemption or multi-tier withholding rates can introduce progressivity but may incentivize spreading activity across platforms and add complexity.

### Simplifying cost reporting: standardized deductions and safe harbors
- Optional standard business deductions from gross receipts are a possibility where platforms automatically share income data.
- United Kingdom approach: allowance on trading and property income targeted at the P2P economy.
- Thomas (2017) suggestion: optional standardized deduction of 60 percent of workers’ gross receipts in lieu of actual business expenses to eliminate the need to track and report expenses.
- Oei and Ring (2016) suggest safe harbors to define allowable deductions.
- United Kingdom construction industry scheme: standardized deductions from payments by contractors to subcontractors count as advanced payments towards tax and social security, designed to minimize evasion among mobile self-employed subcontractors.

### Platforms as data sources and collection agents
- Digital platforms record transaction-level data that can authenticate incomes reported by P2P sellers; cooperation between governments and platforms can alleviate information constraints.
- Some countries have extended tax authority powers to acquire data from platforms; the United Kingdom has enacted legislation extending these powers.
- U.S. reporting examples:
  - Payers of at least $600 to independent contractors must file Form 1099-MISC.
  - For collaborative finance platforms, net interest earnings above $10 are reported on Form1099-OID.
  - “Payment facilitator” classification requires reporting gross earnings for U.S. users who earn over $20,000 and have 200 or more transactions in the calendar year—many P2P sellers are unlikely to meet these criteria.
- Platforms can act as tax-collection agents for indirect taxes: Airbnb withholds 28 percent of income from U.S. users who do not provide taxpayer information and remits hotel/tourist taxes in four countries.
- India (2015): legislation requiring digital platforms to charge and remit service taxes due on sellers’ income; India introduced a full-fledged goods and services tax in July 2017.
- Technical issues remain for platforms collecting indirect taxes, including how sellers can claim input credits if platforms withhold tax on sales; flat-rate schemes are one way to address input-credit shortcomings.
- For income taxes, platforms lack full information on sellers’ total income and costs; withholding beyond a blunt instrument on gross income is difficult without complete income/cost profiles.
- Simplified withholding of fixed amounts as prepayments for income tax can partly resolve difficulties, but ex post reconciliation should not impose high administrative burdens on P2P businesses.

### Policy trade-offs and conclusions
- No single definitive approach; choices depend on whether governments want to minimize differences between traditional and P2P businesses or to differentiate them.
- Issues familiar from small business taxation are amplified by P2P dynamics and two-sided market effects.
- With growth in P2P sellers, the number of unincorporated small businesses rises at the lower end of the gross income distribution, potentially displacing larger firms and reinforcing challenges in taxing many small businesses.
- Governments could consider lowering thresholds if distributional shifts suggest revenue gains outweigh administrative burdens; alternatively, special tax rules for small businesses can help but may become redundant if P2P norms spread.
- Platforms present an opportunity to strengthen enforcement and potentially create a connected taxpayer database linking platform data with withholding systems and taxpayer registers.
- Platforms as custodians for tax administration can ease compliance and administration, particularly for indirect taxes, and help low-capacity countries revisit the revenue-compliance trade-off.
- Direct tax withholding by platforms is more complicated due to multiple income streams and platform multiplicity; simplified withholding plus limited reconciliation is a pragmatic interim solution.
- Ultimately, tax treatment of the P2P economy will vary by country based on preferences and capacity; technology behind platforms offers a valuable opportunity to address administrative and revenue-mobilization challenges.

### Box — P2P activities in developing economies
- P2P intermediated by digital platforms can formalize informal personal services common in emerging market and developing countries (taxi drivers, plumbers, cleaners), increasing access, organization, and income sources.
- Use is widespread in countries such as Colombia, Kenya, Mexico, and South Africa, by both foreign and local platforms.
- P2P models can help overcome unreliable governance, weak property rights, and capital constraints by leveraging decentralized, crowd-based ratings to mitigate information asymmetry without large capital or detailed regulation.
- Demand-side obstacles in many emerging markets include lack of knowledge and distrust of collaborative models, underdeveloped secure payment facilities and insurance, and limited smartphone penetration.
- Low and concentrated asset ownership can limit P2P services that rely on significant capital; labor-intensive P2P businesses are more likely to succeed where large pools of decentralized low-skilled labor and demand from tech-savvy urban middle classes exist.
- Examples of adaptive solutions: DriverSelect in South Africa allows drivers to rent available cars; some P2P businesses help drivers finance vehicle purchases.

*Source: wp17187 - Section III noted how the expansion of atomized P2P sales may give rise to an enforcement challenge for tax authorities.*

### BOX 2. CURRENT TAX TREATMENT OF P2P BUSINESSES

### BOX 2. CURRENT TAX TREATMENT OF P2P BUSINESSES

### Direct taxes
- P2P sellers typically register as self-employed businesses and are responsible for self-reporting income and tax liability; irregularity of engagement and small scale can remove legal obligation to report.
- Activities deemed a hobby (tests on intention, frequency, organization) do not carry tax or reporting obligations in Australia; resale of second-hand personal items typically not taxable if sold at a loss.
- Some countries require reporting of all P2P income (examples given: United States and Canada).
- Income exemptions noted:
  - Homeowners in the U.S. may rent out their homes for up to 14 days without paying tax on the income.
  - United Kingdom “rent-a-room” relief of up to £7,500 for owner-occupiers or tenants who let furnished accommodation to a lodger.
  - United Kingdom introduced two new tax allowances for property and trading income: remove reporting and payment obligations where trading or property income for the tax year before expenses does not exceed £1,000; individuals above that amount can opt to deduct the allowance instead of actual business expenses.
- Deductible items for P2P sellers mirror self-employed rules: bringing-to-market costs (cleaning fees, insurance), operating costs (gasoline), financing costs, capital depreciation.
- Sector-specific deductible rules examples (United States):
  - If a car is used for both business and personal purposes, apportion expenses based on actual mileage; standard mileage rate of $0.54 per mile beginning 2016.
  - For a home used for business, taxpayers can opt to apply a deduction of $5 per square foot for up to 300 square feet.

### Indirect taxes (VAT/GST)
- VAT or GST applies to provision of goods and services in the P2P economy where such taxes operate.
- Certain VAT/GST exemptions may apply (example: long-term residential rental income over one month may not be charged).
- VAT registration typically required only after a gross income threshold is reached; rationale for thresholds: administrative practicality, distribution of firm size, costs of administering and complying with VAT, and empirical observation that a small number of large firms typically account for a large proportion of VAT revenue.
- Small amounts of income generated by P2P participants imply few would be subject to VAT/GST at current thresholds.
- Liability question for transaction taxes linked to worker classification; India example:
  - India’s 2015 Finance Act introduced provisions under which the platform is liable and required to discharge the tax on services provided by the sellers; issues remain on how sellers can claim credits against this liability.

### Other taxes and sector-specific levies
- Sector-specific taxes extend to P2P businesses operating in that sector; P2P platforms are at different stages of establishing payment and collection of such taxes.
- Accommodation-rental sector: taxes applicable to hotel guests now extend to P2P users; largest platform (Airbnb) collects and remits in certain U.S. states.
- Ride-sharing sector:
  - Traditional taxi operations involve regular license fees; these license fees do not typically apply to ride-sharing.
  - New York taxi medallion prices fluctuated between about $500,000 to over $1 million over the last five years.
  - Examples of ride-sharing–targeted taxes and fees:
    - Massachusetts introduced a US$ 0.20 tax on every trip ordered through ride-hailing services in 2016 earmarked for spending on the traditional taxi sector.
    - Washington D.C. imposes a $4 fee on rides to and from the airport using ride-sharing platforms remitted to the airports authority.
    - Proposals noted: Atlanta, Georgia (2017) proposed adding a 4 percent sales tax to each ride; New York State (2017) proposed a 4 percent tax on all app-based hails; Hawaii (2017) proposal for ride sharing fares to be subject to 4.75 percent excise tax at the point of sale.

### Selected recent international legislative changes (2015–17) — principal entries
- Australia: In 2017, the government removed the goods and services tax threshold for ride-sharing companies.
- Brazil: In February 2017, a labor court judge in Minas Gerais ruled Uber drivers were employees.
- Canada: In January 2017, the government announced plans to redefine ride-sharing firms as taxi companies; lawsuit filed in Ontario seeking US$ 200 million in damages on behalf of any person who has driven for Uber since 2012, arguing misclassification as contractors.
- Caribbean: In 2017, the Caribbean Tourism Organization reached an agreement with Airbnb to share data and studies with policymakers about the impact of the sharing economy.
- China: In March 2017, the National Development and Reform Commission disclosed that the government is formulating tax policies and regulations for the sharing economy.
- Estonia: As of 2016, government legalized ride-sharing and digitally linked drivers' incomes with the revenue authority.
- France: In 2016, legislation increased the tax on professional renters using Airbnb—amounts more than EUR 23,000 (US$ 25,200) per year from renting homes on P2P websites are considered professional income and subject to income tax; March 2017 court ruled against classification of drivers as employees; the French Finance Act for 2016 imposed new reporting obligations on P2P platform users residing, selling products, and providing services in France.
- India: In 2015, platforms required to discharge the service tax liability on the services provided by the supplier.
- Italy: In 2016, a bill proposed requiring platforms to act as withholding agents and withhold a fixed 10 percent on all transactions and transfer these amounts to the state.
- Kenya: In 2016, Kenya Revenue Authority rules that Uber drivers are responsible for paying their own taxes.
- United Kingdom:
  - In April 2017, the government introduced GBP 1000 tax-free allowance for property and trading income.
  - The Finance Act 2016 expanded legislative powers of HM Revenue and Customs to obtain data from digital platforms.
  - In 2016, a tribunal deemed an Uber driver to be a "worker" rather than an independent contractor.
- United States (selected state actions):
  - Atlanta, Georgia: 2017 proposal to add a 4 percent sales tax to each ride with each city adding its own taxes.
  - California: 2016 employee misclassification settlement left Uber drivers classified as independent contractors.
  - Hawaii: 2017 proposal for ride sharing fares to be subject to 4.75 percent excise tax at the point of sale.
  - Massachusetts: 2016 introduced a US$ 0.20 tax on every trip ordered through ride-hailing services.
  - New York State: 2017 proposal for a 4 percent tax on all app-based hails.

*Source: BOX 2. CURRENT TAX TREATMENT OF P2P BUSINESSES (wp17187).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17187.pdf_