Platform Economy

Key Takeaways

There are two major type of platform economies: Transaction platforms such as Amazon.com, and Innovation platforms such as Apple’s developer platform.

Governments main concerns regarding platform economies are taxation, data privacy, and unfair competition.

Governments are tightening tax avoidance rules for digital platforms starting with imposing value-added tax and stricter reporting mechanisms.

The platform economy refers to economic and social activities facilitated by platforms, which are typically online sales or technology frameworks. These platforms play a significant role in today’s world, controlling an increasing share of the global economy and sometimes disrupting traditional businesses.

There are two main types of platform economies:

Transaction Platforms (Digital Matchmakers): These platforms connect buyers and sellers, acting as intermediaries for transactions and exchanges. Examples include Amazon, eBay, Airbnb, Uber, and Baidu.

Innovation Platforms: These provide common technology frameworks upon which others can build. For instance, Apple and Microsoft’s platforms serve as a foundation for many independent developers.

The rise of platforms has sparked both enthusiasm and concern both for consumers and governments. Advocates believe platforms can improve productivity, reduce costs, create new markets, and provide flexibility for workers. However, critics argue that they may worsen unemployment, contribute to precarious employment, reduce tax revenues, and harm communities.

Governments have expressed two primary concerns regarding the platform economy:

Global Platforms and Tax Avoidance: Many global platforms, especially those based outside the EU, manage to evade taxes or operate within tax structures that result in minimal or no tax payments. This raises concerns about fairness and equity in the tax system. The European Union (EU) has taken steps to address the issue of platforms that pay little or no taxes. For example, the EU aims to expand the Value Added Tax (VAT) digital platform rules. Effective from July 1, 2027, platforms facilitating short-term accommodation rentals or passenger transport services via an electronic interface will be considered to have received and sold those services themselves. This means they will be liable to collect and remit VAT unless the service provider provides their VAT identification number (VAT ID) and declares their intention to charge any VAT due. The EU is also working on the One Stop Shop (OSS) simplification mechanism, applicable to providers of B2C digital services, allows taxpayers to register in one member state and declare VAT owed across the EU in a single return. As to reporting, the EU proposes a new real-time digital reporting system based on electronic invoicing (e-invoicing) for businesses operating cross-border within the EU. This system enhances transparency and tax compliance.

Canada has taken steps to address the tax implications of foreign digital news platforms operating within its borders. In June 2022, the federal government enacted a digital services tax, retroactive to that year. Under this measure, foreign tech giants are required to pay a three percent levy on revenue generated from Canadian users. The tax aims to level the playing field by ensuring that these platforms contribute their fair share to the local economy and support Canadian journalism.

In parallel, California’s proposed legislation, Assembly Bill (AB) 886, shares similarities with Canada’s approach. AB 886 targets internet platforms with over 50 million monthly users or annual revenues exceeding $550 billion. It would require them to pay a “journalism usage fee” to digital news providers, determined through mandatory arbitration. While the bill has faced opposition from large media platforms and search engines, it highlights the global trend toward taxing digital news services. Canada’s digital services tax serves as a relevant precedent, demonstrating the growing importance of regulating foreign digital platforms in the realm of journalism and revenue generation.

Ensuring Fair Competition: Policymakers aim to strike a balance between promoting innovation and ensuring fair competition. They want to prevent multinational platforms from gaining an unfair advantage over national businesses while still supporting start-ups and smaller-scale initiatives. Governments globally are concerned that the platform economy may create an unlevel playing field. Large technology intensive platforms with lower overhead and employee headcount can dominate markets, potentially stifling competition and harming smaller brick and mortar players.

National Security and Privacy: The rapid growth of the platform economy has also raised significant concerns among governments regarding privacy and national security. The case of TikTok, a popular Chinese social media platform, exemplifies these issues. The U.S. government has expressed apprehensions about the potential for data misuse and surveillance, given TikTok’s Chinese ownership and the stringent data localization laws in China. These concerns have led to calls for stricter regulations and even potential bans to safeguard national security and protect citizens’ personal information. As digital platforms continue to proliferate, balancing economic benefits with privacy and security remains a critical challenge for policymakers worldwide.

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