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 THE DIGITAL PLATFORM ECONOMY AND ITS
CHALLENGES TO TAXATION

Thomas Fetzer*

Bianka Dinger**

Table of Contents

I. TAXATION OF DIGITAL PLATFORMS ................... ........ 31

A. Introduction.................................31
B. Challenges of Taxing Digital Transactions .. ........... 32
C. Characteristics of the Digital Platform Models .............. 33
D. Proposals for Taxation of Digital Platforms . .......... 34
1. Digital Presence Instead of Permanent
Establishment........................35
2. Digital Services Tax........................37
3. Assessment of the Proposed Reforms ..... ....... 39
II. LIABILITY OF PLATFORMS FOR TAX EVASION IN THE SHARING
ECONOMY ..................................... ...... 42
A. Introduction.................................42
B. Taxation Challenges of Provider Transactions .............. 46
1. Sharing Platforms and Contractual Relations...........46
2. Challenges for the Income Taxation of Users of a
Sharing Platform. .................... ..... 47
C. Proposals to Secure Tax Collection of Transactions on
Airbnb ........................ ........... 49
1. Existing Reforms ..................... ..... 49
2. Assessment of the Reforms .......... ......... 51
III. SUMMARY..............................................55

Prof. Dr. Thomas Fetzer, LL.M. (Vanderbilt) holds the Chair for Public Law, Regulatory Law
and Tax Law at the University of Mannheim Law School, Germany. Moreover, he is an academic co-
director at Mannheim Taxation Science Campus (Mannheim Taxation).
Bianka Dinger is a Ph.D. candidate at the University of Mannheim Law School and a junior
member of Mannheim Taxation.

29
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 30

THE DIGITAL PLATFORM ECONOMY AND ITS

CHALLENGES TO TAXATION

Thomas Fetzer

Bianka Dinger

Abstract

Digitalization is transforming many aspects of our everyday lives,

including the global business landscape. One of the most distinct
features of the digital economy is the rise of platforms. Digital
platforms not only change the supply chain in many industries but
also create fundamental challenges for established tax principles.
This paper will cover two of the most imminent challenges.

The first part of the paper is dedicated to the taxation of digital

platforms themselves. According to international tax law, income
taxation shall be linked to the source of the income. The current tax
system assumes that a company will only create taxable income in a
non-resident country, if there is some physical nexus with that
country (e. g. a permanent establishment). However, many platforms
in the digital economy offer their services to customers worldwide
without having any physical presence in countries where the
customers are located. This raises the question as to whether income
taxation of platforms should be linked to the country of residence of
the customers of a digital platform rather than the country of
residence of the platform operator. In this regard, the initiatives of
the European Commission on the digital services tax and the
significantdigitalpresence will be evaluated.

The second part of the paper covers enforcement issues created by

the platform economy. As transactionsbetween different user groups
of a platform, it is oftentimes difficult for tax authorities to
determine tax liabilities. The paper will, therefore, suggest
alternative mechanisms to ensure taxation. The focus will be on the
withholding tax system, which obliges platform operators to deduct
the tax on behalf of platform users. Whether and to what extent the
operatorof sharingeconomy platforms can be held liable remains to
be discussed.
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 31

I. TAXATION OF DIGITAL PLATFORMS

A. Introduction
Following the 'business goes global, taxes stay local' principle,
deficits of international corporate taxation are exploited through
clever tax planning. 1 Large multinational enterprises like Airbnb,
Alphabet, Apple, Facebook or Amazon are being criticized for not
paying adequate taxes. Their innovative digital business models are
challenging the established tax system. 2
International taxation is based on the "taxation at source"
principle. According to this doctrine, international income flows are
subject to taxation in the country where income is derived from

-
regardless of the country of residence of the person achieving that
income. 3 Profits should be taxed where the value is created. 4 In
principle, however, according to the current tax law system income is
only taxed in the source state if the taxpayer has a physical nexus to
that state. Traditionally, the most important nexus for this limited tax
liability is a permanent establishment or appointment of a permanent
representative in a country. 5 In the digital world, the number of
cross-border transactions has been increasing significantly. A special
feature of digital business models is their global activity across

' See Norbert Herzig, Globalisierung und Besteuerung [Globalization and Taxation], 1998 DIE
WIRTSCHAFTSPRUFUNG 280; Adrian Cloer & Cosima Gerlach, Die ,, virtuelle Betriebsstatte": Ein
angemessenes Instrument zur Besteuerung der ,,digitalen Wirtschaft"? [The "Virtual Permanent
Establishment":An Appropriate Instrumentfor Taxing the DigitalEconomy], 100 FINANZRUNDSCHAU
[FR] 105, 106 (2018).
2 See Stephan Eilers & Florian Oppel, Die Besteuerung der digitalen Wirtschaft: Trends und
Diskussionen. Uberblick ilber die Arbeiten der OECD und EU mit kritischer Einordnung [Taxation of
the Digital Economy: Trends and Discussions. Overview of the Work of the OECD and EU with
Critical Classification], 27 INTERNATIONALES STEUERRECHT [ISTR] 361, 362 (2018); Joachim
Englisch, Seminar G: VAT and Direct Taxation of the Digital Economy, 25 ISTR 717 (2016); Marcel
Olbert & Christoph Spengel, International Taxation in the Digital Economy: Challenge Accepted?
WORLD TAX J. 3, 4 (2017).
See DIETER BIRK & MARC DESENS & HENNING TAPPE, STEUERRECHT [TAX LAW] 402 et seq.
(21st. ed. 2018).
4 See European Commission: Commission Staff Working Document - Impact Assessment
Accompanying the Document Proposal for a Council Directive Laying Down Rules Relating to the
Corporate Taxation of a Significant Digital Presence and Proposal for a Council Directive on the
Common System of a Digital Services Tax on Revenues Resulting from the Provision of Certain Digital
Services, SWD (2018) 81 final/2, 8.
See EINKOMMENSTEUERGESETZ [ESTG] [GERMAN INCOME TAX LAW] § 49 (1) Nr. 2 a); Birk et
al., supra note 3, at 410-11; KOLJA VAN LUCK, STEUERRECHT UND DIGITAL ECONOMY.
LOSUNGSANSATZE SACHGERECHTER BESTEUERUNG MULTINATIONALER UNTERNEHMEN DER
DIGITALISIERTEN WIRTSCHAFT [TAX LAW AND DIGITAL ECONOMY. SOLUTIONS OF PROPERTY
TAXATION OF MULTINATIONAL ENTERPRISES OF THE DIGITALIZED ECONOMY] 82 et seq. (2018).
 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

borders regardless of their locations. From the perspective of the

source state principle, this leads to two challenges: First, there is an
increase in the number of direct transactions in which foreign
platforms like Airbnb derive income from doing business in a
country but do not use a physical presence in this country for this
purpose. The question is whether the source principle requires
taxation in the state in which the customers of a digital company are
located. If this is answered affirmatively, the question arises as to
which connecting factor should be chosen for taxation in the source
state.
In order to tackle this problem, the European Commission has
published a proposal for a directive laying down rules relating to the
corporate taxation of a significant digital presence rather than a
permanent establishment 6 and, as a short-term solution, has put
forward a proposal for a digital services tax. 7 Austria and France
have already introduced digital services taxes unilaterally.
B. Challenges of Taxing Digital Transactions
In the internet economy, the number of direct transactions has
increased dramatically. From the perspective of taxation, this leads to
two central problems regarding substantive tax law: On the one hand,
there is a massive loss of tax revenues in countries that are net
importers of digital services, because these services are usually not
taxed in the country of destination if there is no physical presence
like a permanent establishment or a permanent representative there.8
However, digitalization has enabled businesses in many sectors to
access a great number of customers around the globe without having
any physical presence in the countries where the customers are
located. Therefore, some highly digitalized are achieving operational
'local scale without local mass'. 9 This is supported by the fact that
digital business models are dominated by intangible assets.

6 See Proposalfor a Council DirectiveLaying Down Rules Relating to the CorporateTaxation of a

Significant DigitalPresence, COM(2018) 147 final (Mar. 21, 2018) [hereinafter COM(2018) 147final].
7 See Proposalfor a Council Directive on the Common System of a Digital Services Tax on

Revenues Resulting from the Provision of Certain Digital Services, COM(2018) 148 final (Mar. 21,
2018) [hereinafter COM(2018) 148final].
See LUck, supra note 5, at 82 et seq.
See OECD, TAX CHALLENGES ARISING FROM DIGITAISATION - INTERIM REPORT 2018:
INCLUSIVE FRAMEWORK ON BEPS, OECD/G20 BASE EROSION AND PROFIT SHIFTING PROJECT 24
(2018).
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 33

Intellectual property and intellectual property rights are of utmost

importance. Moreover, data and user participation are regularly
decisive factors in digital business models. 10 Therefore, digital
business models are covered 11
inadequately by the applicable
international taxation concepts.
This does not only have a negative effect on the tax basis of net
importing countries but also potentially distorts competition between
digital business models and analog business models if only analog
business models are subject to taxation in the source state. The
European Commission estimates that the effective tax rate for digital
companies such as social media companies, sharing economy
platforms and online content providers is about half of that of
traditional companies - and often much less. On average, digitalized
businesses are facing an effective tax rate of only 9.5 %, compared to
23.2 % for traditional business models. 12 Thus, there is a need for a
new tax framework that is up to date with the innovative digital
business models.
C. Characteristicsof the Digital PlatformModels
Although most digital business models use websites, applications
or similar interfaces to sell their products and interact with 13
customers, differences in their specific features can be identified.
To get a better understanding of the phenomenon of 'digital
economy' and to analyze and create new chargeable events to reform
the tax system, the characteristics of the digital business models must
be outlined first. In general, the enterprises of the digital economy
can be classified in different groups of typical business models with
the multi-sided platforms being the most important ones.14

'o See id. at 23 et seq., at 51 et seq.; Reimar Pinkernell, DER OECD-Diskussionsentwurfzu den
steuerlichen Herausforderungen der ,,Digital Economy" [The OECD Draft Discussion on the Tax
Challenges of the "'Digital Economy"], 23 ISTR 273, 275 (2014); Wolfgang Sch6n,
Intemational/OECD Ten Questions about Why and How to Tax the DigitalizedEconomy, 72 BULL.
INT'L TAX'N [BIT] 378 (2018), https://research.ibfd.org/#/doc?url=/linkresolver/static/bit 2018 04 int
1#bit 2018 04 int 1.
" See Johannes Becker, Seminar C: Besteuerung einer digitalen Prdsenz [Seminar C: Taxation of
digitalpresence], 27 ISTR 634, 635 (2018).
12 See European Commission, Communication from the Commission to the European
Parliament
and the Council: Time to Establish a Modem, Fair and Efficient Taxation Standardfor the Digital
Economy, COM(2018) 146 final (Mar. 21, 2018) [hereinafter COM(2018) 146final], at 4.
"3 See Eilers & Oppel, supra note 2, at 363.
14 See OECD, supra note 9, at 30-31 (2018).
34 TSINGHUA CHINA LAW REVIEW [Vol. 12:29

Multi-sided platforms interact as intermediaries which enable

different users or user groups to interact with each other. Prominent
examples are Airbnb, Uber, Didi, Baidu, and WeChat. These
platforms are oftentimes characterized by indirect network effects,
which means that an increase in end-users on one side of the market
gives rise to the utility for end-users on the other market side.
Illustrated by the example of the online platform Airbnb, which helps
individuals to rent accommodations by linking hosts and guests, this
means: Both types of end-users (the hosts and the guests) indirectly
benefit if there are more end-users on the other side of the market.
Guests benefit from having more hosts to choose from and hosts
benefit from having more potential guests. In this respect, platforms
act as intermediaries between different user groups (customers and
suppliers). In some cases, the platform operators themselves also act
as providers. However, the platform operators' business model is
usually based on the fact that they receive an agency fee when a
transaction occurs. Some platforms are also financed through
advertising by selling their users' data to advertisers or by giving
advertisers access to users. The platform operators generate income
from their users for making the platform available. A second way of
generating revenue is to monetize users' data for advertising. The
difficulty from a taxation point of view is therefore that platform
operators generate income without having a physical presence at the
location of their users. The traditional source taxation principle thus
reaches its limits. This applies in particular when platform operators
monetize user data, i.e. use a resource without being subject to
taxation at the source of this resource (the user's location).
D. Proposalsfor Taxation of DigitalPlatforms
The European Commission's two key approaches for a fair
taxation of digital business models are the introduction of a digital

15 See Marshall W. Van Alstyne & Geoffrey G. Parker & Sangeet Paul Choudary, Pipelines,
Platforms, and the New Rules of Strategy, HARv. Bus. REV. 54, 56 (2016); ANDREW MCAFEE & ERIK
BRYNJOLFSSON, MACHINE, PLATFORM, CROWD: HARNESSING OUR DIGITAL FUTURE 140 et seq.
(2017); OECD, supra note 9, at 29; Karl Ttuscher & Romy Hilbig & Nizar Abdelkafi,
Geschaftsmodelle mehrseitiger Plattformen [Multilateral Platform Business Models], in DIGITALE
TRANSFORMATION VON GESCHAFTSMODELLEN: GRUNDLAGEN, INSTRUMENTE UND BEST PRACTICES
179, 183 (Daniel Shallmo et al. ed., 2017); Feng Zhu & Nathan Furr, Products to Platforms: Making the
Leap, HARV. BUS. REV. 72, 74 (2016).
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 35

presence as nexus for international taxation and the establishment of

a new digital services tax.

1. Digital Presence Instead of Permanent Establishment

In order to tackle the problem of inadequate taxation of the digital
economy, one reform proposal by the EU is the introduction of a new
concept of a digital presence.
Probably the biggest challenge in taxing digital business models
is that they can be operated without any physical presence. At the
same time, international taxation rules require a physical nexus for
taxation. Thus, one proposal implies the modification of the nexus
for taxation. For this purpose, the concept of a permanent
establishment is to be extended to include a significant digital
presence.16 According to the proposal of the EU Commission, a
'significant digital presence' shall be constituted if a business
consists wholly or partly of the supply of digital services through a
digital interface. 17 A 'digital interface' is defined as 'any software,
including a website or a part thereof and applications, including
mobile applications, accessible by users'. 'Digital services' are
'services which are delivered over the internet [...] and the nature of
which renders their supply essentially automated and involving
minimal human intervention, and impossible to ensure in the absence
of information technology'.19 Examples are the supply of digitized
products (e.g. software); services providing or supporting a business
or personal presence on an electronic network (e.g. a website);
providing storage space in the internet (cloud services from);
streaming or downloading of music, films or games (Spotify, Netflix,
App Stores); or the transfer of rights to put goods or services on an
internet site operating as an online market (e.g. sharing economy
platforms like Airbnb). 20
A digital presence is 'significant' in a country if the company
satisfies one of the following three criteria: First, it exceeds a
threshold of 7 million euros in annual revenues from digital services
in a country. Or second, it has more than 100,000 users who access

16 COM(2018) 147final, supra note 6, at 7.

17 See COM(2018) 147final, supra note 6, art. 4 (3), at 16.
See COM(2018) 147final, supra note 6, art. 3 (2), at 14.
See COM(2018) 147final, supra note 6, art. 3 (5), at 14.
See COM(2018) 147final, supra note 6, art. 3 (5), at 14-15.
 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

its digital services in a country in a taxable year. The third category

of a significant digital presence will be if the company creates over
3,000 business contracts for digital services with business users in a
taxable year. 2 1
However, the concept of a permanent establishment alone is not
sufficient to ensure effective taxation of profits in the source state of
the service. The allocation of profits to the digital establishment is of
essential importance.22 Taxation shall be guaranteed in the country in
which the digital activities of the company are concentrated. 23 That
is the place where most user activity takes place.24 In this way, the
traditional understanding of value creation is reversed: While the
conventional view is that value creation takes place where goods and
services are created using means of production, now the place of the
highest demand is relevant for the determination. Therefore, the
focus must be on collection, storage and processing of user-level data
and of user-generated content, the sale of online advertising space
and supply of third-party created content on digital marketplaces. 26
The country where a user's device is used shall be determined by
reference to the Internet Protocol (IP) address. 2 7
Hence, this reform approach addresses two of the main problems
that states encounter when it comes to taxing digital activities: First,
under the proposed new rules, states will be able to tax profits arising
from digital activities that are generated in their territories, even if
these companies do not have a physical presence in that country. A
significant digital presence will allow states to tax profits generated
in their territories. Second, the allocation of profits, which depends
on the companies' value creation, will be based on new factors such

21 COM(2018) 147final, supra note 6, art. 4 (3), at 16.

22 See Francesco Faruggia-Weber, Signifikante digitale Prdsenz und Digitalsteuer - Gedanken zu
den Richtlinienvorschldgen der EU-Kommission zum ,einjahrigen Jubilaum [Significant Digital
Presence and Digital Tax - Thoughts on the Commission's Proposals for a "One-Year Anniversary"],
DEUTSCHES STEUERRECHT [DSTR] 638, 640 (2019); Daniel ZSller, Die Besteuerung der digitalen
Wirtschaft - sinnvolle Reformen oder steuerpolitischer Aktionismus? [The Taxation of the Digital
Economy - Meaningful Reforms or Tax Actionism?], 73 BETRIEBs-BERATER [BB] 2903, 2907 (2018).
23 See Faruggia-Weber,supra note
22.
24 See Albert Schlund, Vorschlage der Europdischen Kommissionfiir eine
Besteuerung der digitalin
Wirtschaft [Proposals of the European Commission for a Taxation of the Digital Economy], DSTR 937,
940 (2018).
25 See Faruggia-Weber,supra note
22.
26 See COM(2018) 147final, supra note 6, art. 5 (5), at
17.
27 See COM(2018) 147final, supra note 6, art. 4 (6), at 17.
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 37

as user data and will thereby better reflect the value creation of
digital companies.

2. Digital Services Tax

Furthermore, the EU Commission proposed a digital services tax
in order to target the most urgent gaps and loopholes in the taxation
of digital activities. It is designed to ensure that activities which are
not currently effectively taxed generate immediate revenues for
states. The aim is to create a level playing field for all businesses,
whether EU or non-EU based, large or small, more or less
digitalized. 28 A number of countries already have a similar tax in
place, including Austria, France, Israel, India and some US states.
The EU proposal for a digital tax essentially proposes a sales-
related special tax on certain digital services. 29 It should only be used
as a temporary measure in order to prevent distortions of competition
until a more comprehensive solution is established. The aim of the
digital services tax is the taxation of digital services, to which the
user makes a decisive contribution to the value creation. Within these
services, the mismatch between the place of taxation of profits and 30
the place of value creation (the user) is typically most obvious.
Digital services which depend on user involvement can be
categorized into two groups: First, services where the main value is
created by user data, either through advertising or by the sale of data
collected by companies such as social media or search engines. This
includes in particular business models of companies such as Google
or Facebook. Second, services of supplying digital platforms that
facilitate interaction between users, who then can exchange goods 31
and services via the platform (such as sharing economy platforms).
Examples are Airbnb, Uber, eBay or Amazon Marketplace. 32 The

28 COM(2018) 148final, supra note 7, at 7 et seq.

29 COM(2018) 148 final, supra note 7, at 7 et seq.; Monika Wtinnemann, Herausforderungen der
Besteuerung der digitalen Wirtschaft im Jahr [Challenges of Taxation in the Digital Economy], 28
ISTR 134, 135 (2019); ZSller, supra note 22.
o COM(2018) 148final, supra note 7, at 16.
31 See COM(2018) 148final, supra note 7, art. 3 (1), at 24.
32 See Johannes Becker & Joachim Englisch, Ausgleichsteuer Ein mangelhafterSchnellschuss [
Countervailing Tax - A Poor Quick Shot], https://makronom.de/ausgleichsteuer-steuern-digitale-
unternehmen-eu-kommission-google-facebook-ein-mangelhafter-schnellschuss-25751; Eilers & Oppel,
supra note 2, at 366; Daniel Rtischer, Vorschlag ffir eine europaweite Digitalsteuer zur Erfassung
digitaler Geschqftsmodelle in der digitalen Wirtschaft [Proposal for a Pan-European Digital Tax to
 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

taxation of platform services is justified by the fact that users make a

significant contribution to the creation of value, especially because of
the network effects they create. 33 However, transactions between
users are not taxed.3 4
The digital services tax shall only apply to large companies and
companies with a significant digital footprint in the EU, and
therefore a company is only subject to taxation if two thresholds are
met: The tax will only apply to companies with total annual
worldwide revenues of 750 million euros and annual EU revenues of
- - 35
50 million euros.
A tax rate of 3% has been proposed, since this is considered to be
an appropriate balance between revenues generated by the tax and
accounting for the differential impact for businesses with different
profit margins.36 The tax rate of 3% could generate an estimated 5
billion Euros tax revenues a year. This uniform rate, once applied
throughout the EU, would help to avoid 'tax shopping' and
distortions in the European Single Market. 37
The tax shall be collected by the states in which users are located,
independent of the location of the company which provides the
digital service. 3 8 This is the place from which users' access the
digital interface with their digital device (IP address). 39 The tax
revenue is distributed amongst the states according to a distribution
key. 40 It depends on how often the taxable event has occurred in each
country.41 In order to avoid double taxation, the digital services tax
shall be deducted as a cost from the corporate income tax base.42 The
interim tax shall be based on a system of self-declaration by
taxpayers. Member States will be able to carry out tax audits to

Capture Digital Business Models in the Digital Economy], 6 MEHRWERTSTEUERRECHT [MWSTR] 419,
422 (2018).
See COM(2018) 148final, supra note 7, at 8.
34 See COM(2018) 148final, supra note 7, at 17.
See COM(2018) 148final, supra note 7, art. 4 (1), at 25.
36 See COM(2018) 148final, supra note 7, at 22.
See COM(2018) 148final, supra note 7, at 22.
See COM(2018) 148final, supra note 7, art. 5 (1), at 27.
See Eilers & Oppel, supra note 2, at 366; Faruggia-Weber, supra note 22, at 642; Matthias Valta,
Verfassungs- und Abkommensrechtsfragen des Richtlinienentwurfs ffir eine Steuer auf digitale
Dienstleistungen [Constitutional and Treaty Law Issues of the Draft Directive for a Tax on Digital
Services], 27 ISTR 765, 766 (2018).
40 See COM(2018) 148final, supra note 7, art. 5 (3), at 27-28.
41 See Eilers & Oppel, supra note 2, at 367; Rtischer, supra note 32, at 419, 424.
42 See COM(2018) 148final, supra note 7, at 20.
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 39

monitor if taxpayers are fulfilling their obligations. A digital portal,

known as the One-Stop-Shop system, will be set up to enable
companies to fulfill all tax obligations at once.43
3. Assessment of the Proposed Reforms
The new proposals would need a unanimous agreement of all
Member States of the EU in order to become law. Until today,
however, the EU Member States could neither agree on a reform of
the permanent establishment nexus towards a significant digital
presence nor the introduction of a digital services tax. Instead, France
and Austria introduced digital services taxes unilaterally. This is
certainly the worst of all approaches, as it creates a patchwork of tax
rules. This runs counter to the interests of the EU Member States as
well as of digital companies. First of all, this creates an inevitable
risk of both double taxation and non-taxation. Both can lead to
considerable distortions of competition not only between analog and
digital business models, but also between digital business models.
Second, a patchwork of legal rules increase compliance cost for
affected companies and decrease legal security and predictability for
them. Thus, there is a need for a prompt multilateral, international
reform that leads to a harmonized approach. The question is whether
the EU proposals provide for an adequate blueprint for such an
international or multilateral approach.

(a) Assessment of the DigitalServices Tax

The digital services tax is essentially a special tax that has both
the characteristics of a consumption tax and an income tax. 44 In view
of the existing international taxation structure, this structure bears
enormous potential for conflict: First of all, it is questionable whether
that fits to established international tax law principles: According to
Art. 2 of the OECD's Model Agreement (MA), double taxation
agreements are only applicable to taxes on income and on capital. As
the aim of the digital services tax shall be the compensation for
inadequate company taxation, the digital services tax could be
characterized as an income tax. 45 In this case, however, the digital
services tax is in tension with Art. 7 (1) of the OECD's MA

43 See COM(2018) 148 final, supra note 7, at 22.

44 See Eilers & Oppel, supra note 2, at 369.
45 See Valta, supra note 39, at 771-772.
40 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

according to which profits of an enterprise are taxable only in the

resident state unless the enterprise carries on business in the other
state through a permanent establishment situated therein. If the
requirement of the existence of a permanent establishment is not met,
which will often be the case for the digital services tax, profits are
not subject to any income taxation regarding the OECD MA.
Accordingly, the digital services tax would not have any scope of
application in the case of double taxation agreements.46 The levying
of the digital services tax would therefore only be possible through
an amendment of existing double taxation agreement of a treaty
override.
If the digital services tax is characterized as a consumption tax
there is a risk of double taxation according to the current VAT
rules. 47
Lastly, the benefits of such a tax are questionable. 48 The
administrative burden for companies and states is estimated to be
very high, especially in view of the new allocation mechanism. The
revenue effects, on the other hand, are relatively small. The European
Commission is assuming that the digital services tax would generate
only 5 billion euros annually in revenues within the EU. 49 The
deduction from the corporate tax base further reduces the effective
tax revenues for the member states. Moreover, it must be considered
that digitalization will affect all sectors of the economy, which makes
it nearly impossible to single out digital versus non-digital
transactions. 50 Finally, the aim of the reform should not be to
establish a specific tax regime for digital services and other
digitalized business models as such a separate framework would
drive an inefficient separation between digital and non-digital
sectors.
Overall, the digital services tax bears a risk of double taxation and
unprofitable cost expenditure.

46 See Juliane Kokott, Herausforderungen einer Digitalsteuer [The Challenges of a Digital Tax], 28
ISTR 123, 129 (2019); Valta, supra note 39, at 772.
47 See Eilers & Oppel, supra note 2, at 369.
48 See Eilers & Oppel, supra note 2, at 369.
49 See COM(2018) 146final, supra note 12, at 9.
5o See Karina Ponomareva, European Union/OECD/International - Comparison of Proposals to
Adjust the Permanent Establishment Concept to the Digital Economy, 73 BIT (2019), https://research.
ibfd.org/#/doc?url=/collections/bit/html/bit_2019_1 1e21.html.; Schn, supra note 10.
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 41

(b) Assessment of the Significant DigitalPresence

The introduction of a significant digital presence as a new nexus
for international taxation is a solution to cover digital services and
allocate the taxation of revenues according to the place where the
user of the data is generated. Multinational enterprises could be
taxed, even if they have no physical nexus in a state.
Also, this part of the EU reform proposal has some significant
problems. First, the definition of 'value creation' would be reformed.
However, the content of the concept of value creation is rather vague.
It is often argued that the place of residence of the user is the place of
consumption, but not the place of value creation.51 Meanwhile, the
place of value creation is where the user data is evaluated, thus, the
location of the company offering the digital service.52 In addition, the
definition of digital services has been formulated very broadly by the
EU Commission. This will create problems in classification issues,
especially when companies with traditional business models contain
elements of digitalized business models.53 The disadvantage of a
definition that is too broad is illustrated by the following example: A
company that operates a cross-border mail order business for
physical books is taxed on its physical presence. If it switches its
business model to the sale of digital substitutes (e-books), the place
of consumption is decisive.5 4
If the idea of a digital presence shall be an adequate measure at
all, it must be established at a global level - even beyond the EU
level. Otherwise, double taxation will be imminent if on one hand,
states tax a digital presence of companies and on the other hand, the
state of residence enforces taxation rights based on the same
income.5 5 Thus, a reform proposal that only covers EU issues is not
sufficient.
The EU Commission's proposal on the introduction of a digital
services tax as well as on a significant digital presence is simply not
practicable at present. The EU should, therefore, rather work towards

51 See Reimar Pinkernell, Grenziiberschreitendes digitales Wirtschaften (Ertragsteuerrecht)

[Cross-Border Digital Business (Income Tax Law)], in DIGITALISIERUNG IM STEUERRECHT 321, 356
(Johanna Hey ed., 2019).
52 See Becker & Englisch, supra note 32; Eilers & Oppel, supra note 2, at 370.
5 See Kokott, supra note 46, at 123, 131; Zaller, supra note 22, at 2903, 2904.
54 See Pinkernell, supra note 51, at 365.
5 See Eilers & Oppel, supra note 2, at 370.
42 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

an international consensus that leads to useful results for taxing the

digital economy.

II. LIABILITY OF PLATFORMS FOR TAX EVASION IN THE SHARING

ECONOMY

The focus of the second part of this paper are transactions that
occur through the sharing economy platforms. The platform
economy not only creates new challenges for tax law with regard to
the taxation of the platform operators themselves. Platforms are used
to process a large number of transactions, which in turn are taxable.
The taxation of such transactions via platforms is less problematic
regarding taxability. Rather, questions of the enforceability of
taxation claims arise here.
A. Introduction
The sharing of cars, clothing or the own home via online
56
platforms or apps has become an increasing trend. This business
model is characterized by a facilitator operating a website or an
application on a mobile device and thereby connecting providers (e.
g. sellers or accommodation hosts) and users (e. g. buyers or
renters).57 The provided goods or services are for collective use.
The owner of these goods may be the sharing platform operator itself
(e. g. the short-term commercial car-sharing) or the users of the
platform who offer their goods online (e. g. private accommodation
via Airbnb). In the latter cases, the platform only acts as an

56 See Aleksandra Bal, United Kingdom/European Union - Managing EU VAT Risks for Platform
Business Models, 72 BIT (2018), No. 4a/Special Issue, doc&url=/collections/bit/html/bit 2018 4a e2_
1.html; NIKOLAS BEUTIN, SHARE ECONOMY 2017. THE NEW BUSINESS MODEL 5, 9 et seq.
(PricewaterhouseCoopers GmbH ed., 2018), https://www.pwc.de/de/digitale-transformation/share-
economy-report-2017.pdf (last visited Dec. 12, 2019).
5 See Sebastian Henke, Jan Singbartl & Josef Zintl, Mietwohniiberlassung an Touristen. Wimdu,
Airbnb & Co. aus zivilrechtlicher Perspektive. Neues von der "kollaborativen Wirtschaft" [Rental
Accommodation to Tourists. Wimdu, Airbnb & Co. from a Civil Law Perspective. News from the
"Collaborative Economy"], 2018 NZM 1, 2; Christian Solmecke & Bonny Lengersdorf, Rechtliche
Probleme bei Sharing Economy. Herausforderung an die Gesetzgebung auf dem Weg in eine geteilte
Welt [Legal Problems with the Sharing Economy. Legislative Challenge on the Way to a Divided
World], 18 MULTIMEDIA UND RECHT [MMR] 493,494.
See Federal Ministry for Economic Affairs and Energy, Sharing Economy in Germany, 2 (2018),
https://www.bmwi.de/Redaktion/EN/Publikationen/Studien/sharing-economy-im-wirtschaftsraum-deuts
chland.pdf? blob=publicationFile&v=4 (last visited Dec. 9, 2019) [hereinafter Sharing Economy in
Germany]; Stefan GroB & Stefan Heinrichshofen, "Share Economy" und die Frage nach der
Umsatzsteuer ["Share Economy" and the Questions of Sales Tax], 65 UMSATZSTEUERRUNDSCHAU
[UR] 385 (2016).
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 43

intermediary. 59 If the service provider is a private person interacting

with another private person it is called a 'P2P-transaction', which
occurs outside of traditional business structures. 60 This type of
transaction is very common in sharing economy business models.
Sharing platform operators create an online marketplace, bringing
together providers with consumers. The platform operator charges a
commission for providing the platform. 6 1 Thus, the platform business
model consists of three main actors, the platform operator (e. g.
Airbnb), the service provider (e. g. an accommodation host) and the
service consumer (e. g. a guest). The concept can be categorized as
follows the re-allocation of goods ('redistribution markets', e. g.
eBay), the exchange of intangible assets ('collaborative lifestyles', e.
g. Airbnb, TaskRabbit) and the access to products or services without
need for owning the underlying assets ('product-service systems', e.
62
g. Zipcar). The sharing economy is growing rapidly. In 2015 the
gross revenue in the European Union (EU) from sharing economy
platforms and providers was doubled in comparison to the previous
year and estimated to be 28 billion euros. Experts estimate the
sharing economy could add up to 572 billion euros to the economy of
the EU in the future. There is a high potential for new businesses to
capture these fast-growing markets. 63
The taxation challenges that arise in the context of transactions of
platform users shall be exemplified by the accommodation (short-
term leasing) sector. The facilitation of accommodation services in 64
private homes was one of the earliest sharing economy markets.
One of the most prominent examples is Airbnb, 65 which operates as
an intermediary platform that allows individuals to rent their homes,

51 See Sharing Economy in Germany, supra note 58.

61 See Katerina Pantazatou, The Taxation of the Sharing Economy, TAX AND THE DIGITAL ECON.
215, 216 (Werner Haslehner et al. ed., 2019).
61 See RACHEL BOTSMAN & Roo ROGERS, WHAT'S MINE IS YOURS: How COLLABORATIVE

CONSUMPTION IS CHANGING THE WAY WE LIVE 71 et seq. (2011); Burcin Bozdoganoglu, Tax Issues
Arise From a New Economic Model. Sharing Economy, 2017 INT'L J. BUS. & So. ScI. [UBSS] 119,
120; A European Agenda for the Collaborative Economy, COM(2016) 356 final, at 3 [hereinafter
COM(2016) 356final].
62 See Botsman & Rogers, supra note 61; Bozdoganoglu, supra note 61.
61 See COM(2016) 356final, supra note 61, at 2; Beutin, supra note 56.
64 See Official Norwegian Report (NOU) 2017:4 (hereinafter Norwegian Report) 9, https://www.reg
jeringen.no/contentassets/lb2lcafea73c4b45b63850bd83ba4fb4/en-gb/sved/nou 20174 chapter l.pdf.
65 Airbnb, https://www.airbnb.ie/.
44 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

rooms or apartments. 66 Airbnb is also very successful in Germany. 67

ZEW68 estimated the monthly revenue of Airbnb in Germany was at
69
57 million euros in 2018, which results in an average annual
turnover of Airbnb rentals in Germany of over 683 million euros in
2018.70 In comparison, the revenue of common hotel groups in
Germany was in 2018 as follows: Accor about 1,310 million euros,
Best Western about 705 million euros, Steigenberger about 517
million euros and Hilton about 356 million euros.71
Although the activity of and on Airbnb is not illegal in the most
cities, Airbnb faces increasing pressure from city or state authorities
- 72 -- 73
concerning many legal issues, ranging from questions of taxation
74 75 76
to tenancy law, consumer protection law, building law and

66 See Rainer Brtutigam & Christopher Ludwig & Christoph Spengel, Steuerlicher Reformbedarf
bei Service-Plattformen: Eine Analyse anhand des deutschen Airbnb-Marktes [Tax Reform Needs for
Service Platforms: An Analysis Based on the German Airbnb Markets], 11, http://ftp.zew.delpub/zew-
docs/gutachten/ZEWExpertiseAirbnb_2019.pdf (last visited Dec. 12, 2019); Sharing Economy in
Germany, supra note 58, at 26.
67 See Airbnb, Airbnb-Jahresriickblick fiir 2017: Mehr als drei Millionen Gastankiinfte in
Deutschland [Airbnb Annual Review for 2017.- More Than Three Million Guests Arrivals in Germany],
Dec. 19, 2017, https://press.airbnb.com/de/airbnb-jahresrueckblick-fuer-2017-mehr-als-drei-millionen-
gastankuenfte-in-deutschland/ (last visited Dec. 12, 2019); Nick Lin-Hi, Entwicklungsperspektiven der
Sharing Economy: es ist nicht alles Gold was gldnzt [Development Perspectives of the Sharing
Economy: Not All That Glitters Is Gold], in DIGITALE WIRTSCHAFT UND SHARING ECONOMY.
WIRTSCHAFTSETHISCHE UND MORALOKONOMISCHE PERSPEKTIVEN 145, 147 (Detlef Aufderheide

&
Martin Dobrowski ed., 2017); Beutin, supra note 56.
68 ZEW (Leibniz Centre for European Economic Research in Mannheim, Germany, founded in
1990) is a member of the Leibniz Association and one of Germany's leading economy research
institutes, see https://www.zew.de/en/das-zew/ueber-das-zew/ (last visited Dec. 12, 2019).
69 See Brduigam et al., supra note 66, at 11.
See Briutigam et al., supra note 66, at 11.
7o

See
7' AHGZ-Ranking 2019, https://www.ahgz.de/shop/hotellerie/top-200-einzelhotels-
deutschland-2018-940.html.
72 COM(2016) 356 final, supra note 61, at 3 et seq.; Bozdoganoglu, supra note 61; Simone Bueb,
Rechtsprobleme bei Privatvermietung von Wohnungen an Touristen [Legal Problems with Privately
Renting Apartments to Tourists], 17 ZEITSCHRIFT FUR WOHNUNGSEIGENTUMSRECHT [ZWE] 207 et seq.
(2016); Henke et al., supra note 57, at 1 et seq.; Markus Ludwigs, Rechtsfragen der Sharing Economy
am Beispiel der Modelle Uber und Airbnb [Legal Issues of the Sharing Economy Using the Example of
the Uber and Airbnb Models], 36 NEUE ZEITSCHRIFT FUR VERWALTUNGSRECHT [NVWZ] 1646,
1650 et seq. (2017); Vanessa Mak, Private Law Perspectives on Platform Services. Airbnb: Home
Rentals between AYOR and NIMBY, 5 J. EUR. CONSUMER & MKT. L. [EUCML] 19, 21 et seq. (2016);
Solmecke & Lengersdorf, supra note 57, at 493-494.
7 Udo Delp & Roland Ronig, Sharing Economy, erweiterte Geschaftsmodelle und Besteuerung

[Sharing Economy, Expanded Business Models and Taxation] 2018 DB 1296 et seq.; Ivo Grlica, How
the Sharing Economy is Challenging the EU VAT System, 28 JVM 124,125 (2017); Heinz Ku8maul
&

Florian Kloster, Sharing Economy: Versteuerung der privaten Wohnraum(unter)vermietung im

Zwielicht? [Sharing Economy: Taxation of Private Living Space Subletting in the Twilight?] 54 DSTR
1280 (2016).
74 See, e.g., German tenancy law: LG Berlin (Regional Court of Berlin) of 03.02.2015 - 67 T 29/15,

ECLI:DE:LGBE:2015:0203.67T29.15.OA; LG Berlin (Regional Court of Berlin) of 18.11.2014 - 67 S

2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 45

regulatory law7 7 . With regard to taxation, studies have shown that

many landlords who place listings on sharing economy platforms did
not declare their earnings and failed to pay the corresponding taxes. 78
Since the activities on sharing economy platforms like Airbnb are
(potentially) invisible to tax authorities, hosts may escape taxation of
their income. This is one potential factor for the increasing popularity
of sharing economy platforms: Due to the tax savings of the hosts
they can offer lower prices, which makes the service of sharing
economy platform particularly attractive to both the service provider
side and the consumer side. 79 However, that has led to increased
criticism of Airbnb and led to complaints from unfair competition
by businesses of the traditional economy that pay taxes such as hotels
or bed & breakfast hostels.

360/14, ECLI:DE:LGBE:2014:1118.67S360.14.OA; Bundesgerichtshof [BGH] [Federal Court of

Justice] Feb. 29, 2012, NEUE JURISTISCHE WOCHENSCHRIFT [NJW] 1647, 2012 (Ger.).
7 Christoph Busch & Hans Schulte-N61ke & Aneta Wiewi6rowska-Domagalska & Fryderyk Zoll,

The Rise of the Platform Economy: A New Challenge for EU Consumer Law, 5 EUCML 3, 4 (2016);
Evelyne Terryn, The Sharing Economy in Belgium - A Case for Regulation, 5 EUCML 45 et seq.
(2016).
76 Bueb, supra note 72, at 210; Albert Ingold, Die ,,Sharing Economy" der kurzzeitigen
Unterkunftsvermietung als Herausforderungfiir das Gewerbe-, Bau- und Ordnungsrecht [The "Sharing
Economy" of Short-Term Rental as a Challenge for Commercial, Construction and Regulatory Law],
2016 DOV 595 et seq.; Ludwigs, supra note 72, at 1651; Meinhard Schrider, Bau- und
ordnungsrechtliche Fragen der kurzzeitigen Wohnraumvermietung ilber Internetportale im Rahmen der
Sharing Economy [Construction and Regulatory Issues of Short-Term Renting via Internet in the
Context of the Sharing Economy], 2015 GewA 392 et seq.; Alexander Windoffer, Wider die
Zweckentfremdung - Ordnungsrechtliche Grenzen der ,,Sharing Economy" bei kurzfristigen
Vermietungen [Against Misuse -Regulatory Limits of the "Sharing Economy"for Short-Term Rentals],
26 LANDES- UND KOMMUNALVERWALTUNG [LKV] 337, 339 et seq. (2016).
7 Bueb, supra note 72, at 210; Frank Hinrichs, Nebenwohnungen und Zweckentfremdungsverbot in

Hamburg [Side Apartments and Misuse in Hamburg], 20 NZM 589 et seq. (2017); Ludwigs, supra note
72, at 1652; Windoffer, supra note 76, at 341.
78 Br~iutigam et al., supra note 66.
Pantazatou, supra note 60, at 225.
80 Jonas Fehling, Airbnb, was ist das? Deutsche Finanzdmter verschlafen Millionen-Einnahmen,
Focus [Airbnb, What Is It? German Tax Offices Lost Millions of Dollars in Revenue], Oct. 22, 2013,
https://www.focus.de/finanzen/steuern/tid-34247/us-behoerden-jagen-schon-private-vermieter-airbnb-
was-ist-das-deutsche-finanzaemter-verschlafen-millioneneinnahmenaid_1136297.html; Otto Fricke
&

Carsten Linnemann, Die richtige SteuerfiirAirbnb & Co. [The Right Tax for Airbnb & Co.], Focus,
Jun. 2018, at 25; Christian Ramthun & Benedikt Becker & Ridiger Kiani-Kre8 & Volker ter Haseborg,
Jagd auf Airbnb [Hunting on Airbnb], WIRTSCHAFTSWOCHE, May 4, 2018, at 28; Peter Talaska
&

Oliver Cremers, Auskunftsersuchen an ,,Airbnb": Sind Selbstanzeigen noch moglich? [Requests for
Information to 'Airbnb ": Are Voluntary Reports Still Possible?], 71 DER BETRIEB [DB] 1824, 1825
(2018); Gattrik Wewer, Faire Chancen ffir die kollaborative Wirtschaft? Neue Agenda der EU-
Kommission [For the Collaborative Economy? New Agenda of the EU Commission], 49 ZEITSCHRIFT
FUR RECHTSPOLITIK [ZRP] 193, 196 (2016).
 TSINGHUA CHINA LAW REVIEW [Vol. 12:29

It should also be noted, however, that the sharing economy also

shows tremendous benefits: Its business models have a significant
potential to contribute to competitiveness and growth. For
consumers, the sharing economy can provide new services, an
extended supply, and lower prices. It can also encourage more asset-
sharing and more efficient use of resources, which can contribute to
the protection of the environment. 81 Thus, the sharing economy
should be supported and developed in a responsible manner. 82 For
this purpose, tax systems must be modified and targeted on the
digital economy. 83 Consequently, the aim of this part of the paper is
to develop proposals to reform the direct taxation of the sharing
economy transactions, illustrated by the example of Airbnb.
B. Taxation Challenges of ProviderTransactions

1. Sharing Platforms and Contractual Relations

The Airbnb platform model works as follows: Airbnb operates as
an intermediary online platform that allows registered individuals to
rent out their homes, rooms or apartments, while Airbnb handles the
entire payment process. The tenant transfers the rent to Airbnb, and
Airbnb charges a service fee based on the rent and transfers the
remaining amount to the host. 84 The special feature of the platform
model is that the platform operator carries out the payment
transactions and thus controls the transaction data as well as the
payment flow.
This requires three legal relationships: The first contractual
relationship is between the platform operator Airbnb and the host
who offers its real estate through the platform. This contractual
relationship constitutes the right of the host to use the platform for
offering his apartment and obliges him to pay a fee to Airbnb in the
event of letting the apartment to guests. The second contractual
relationship is between Airbnb and the guests and enables the guests
to use the platform and book accommodations. The host and the

81 See COM(2016) 356final, supra note 61, at 2; Grlica, supra note 73.
12 See COM(2016) 356final, supra note 61, at 2; Lin-Hi, supra note 67; Beutin, supra note
56;
Talaska & Cremers, supra note 80, at 1824.
83 See COM(2016) 356final, supra note 61, at 2, 15.
14 See Ludwigs, supra note 72, at 1650; Mak, supra note 72,
at 20.
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 47

guest are the parties of the third contract, which comprises the rental
agreement.

2. Challenges for the Income Taxation of Users of a Sharing

Platform
In general, sharing economy transactions can be compared to
conventional activities and characterized within the existing tax
principles of a country.85 According to German tax law as to the most
other jurisdictions, a host of Airbnb is subject to income tax on her
income earned at Airbnb, even in case of sharing her own home in
return for remuneration.86 Nevertheless, many hosts do not tax their
earnings and tax authorities fail in collecting taxes. The damage
caused to the tax revenue because of non-compliance of Airbnb hosts
is estimated to be huge. 87 But not only the treasury is being harmed,
also the principle of tax neutrality is threatened since non-
compliant (and undetected) online providers get a tax advantage
compared to traditional providers due to a lack of tax enforcement. In
order to avoid such distortions of competition, a level playing field
for all market participants is required that also comprises an equal
enforcement of tax laws. 89
For the establishment of such an adequate framework, first, it is
important to identify the reasons for tax evasion in the sharing
economy. The main reason for revenue loss created by sharing
economy activities via Airbnb is not that the existing substantive tax
would be insufficient. 90 The transactions of hosts via Airbnb are
subject to income tax and the applicable laws are clear for the most

85 See Nangel Kwong, The Taxation of 'Sharing Economy' Activities, TAXATION

IN A GLOBAL
DIGITAL ECONOMY 61, 64 (Ina Kerschner & Maryte Somare ed., 2017); For specific tax rules regarding
the sharing economy see Part II, section 3 a).
86 See Bueb, supra note 72, at 211; Kufmaul & Kloster, supra note 73, at 1282 et. seq.
87 See Briutigam et al., supra note 66; COM(2016) 356 final, supra note
61, at 13; Jonas Fehling,
supra note 80; Fricke & Linnemann, supra note 80; Ramthun et al., supra note 80 at 28; Talaska
&

Cremers, supra note 80; Wewer, supra note 80.

" See Federal Constitutional Court of 27.06.1991 - 2 BvR 1493/89, 84 BVerfGE 239; THOMAS
FETZER, DIE BESTEUERUNG DES ELECTRONIC COMMERCE IM INTERNET [THE TAXATION OF
ELECTRONIC COMMERCE ON THE INTERNET] 211 et seq. (2000).
" Sharing Economy in Germany, supra note 58, at 90-91.
90 Carrie Brandon Elliot, InternationalTaxation of the Sharing Economy: Recurring Issues, 72 BIT
No. 4a/Special Issue (2018), available at https://www.ibfd.org/IBFD-Products/Journal-
Articles/Bulletin-
for-International-Taxation/collections/bit/html/bit 2018 4a int 7.html.
48 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

part. 91 The key issue is the lack of tax compliance and tax
enforcement. 92 The first reason for that might be that service
providers in the sharing economy are to large extent private
individuals, who may have little knowledge of the tax rules and
limited experience of involvement in commercial activity.
Secondly, activities in the sharing economy generate small incomes
from numerous private individuals, who may be active in several
markets simultaneously and who may start and drop activities
relative frequently. 94 However, the most challenging problem is the
lack of visibility of the provider's activity. 9 5 National tax authorities
do not necessarily know whether a person rents out his apartment for
some days per year.96 In Germany, for example, tax authorities only
check the intended use of an apartment at the time of purchase.
Subleases are not visible to the authorities, in principle. Furthermore,
it is very difficult to identify taxpayers due to the sheer volume of
low-value transactions and the fact that many transactions are
conducted between providers and private consumers aggravates the
amount of information that needs to be collected.9 7 Tax authorities
are essentially dependent on the landlords declaring their income or
the platform operator must provide the data.98 Collecting data from
the platform operator was already practiced by a request of German
authorities to Airbnb Dublin in May 2018.99 But the practical effect
of this method is limited. The process is very time-consuming and
covers only occasional transactions. Future transactions require new
requests for information, so that this procedure cannot sufficiently
contribute to equal taxation. However, since platform operators have
the required information, reforms should focus on them.

' Bueb, supra note 72, at 211; Ku8maul & Kloster, supra note 73, at 1282 et seq.
COM(2016) 356 final, supra note 61, at 14; Sharing Economy in Germany, supra note 58, at 6;
92

Grlica, supra note 73; Pantazatou, supra note 60, at 231.

9 Grlica, supra note 73.
94 Norwegian Report, supra note 64, at 10.
9 Elliot, supra note 90.
96 Pantazatou, supra note 60, at 225.
9 Grlica, supra note 73.
98 Pantazatou, supra note 60, at 225.

See Finanzbeharden nehmen Airbnb-Vermieter unter die Lupe [Tax Authorities Scrutinize Airbnb
Landlords], FAZ, May 04, 2018, http://www.faz.net/aktuell/finanzen/meine-finanzen/steuern-sparenfi
nanzbehoerden-nehmen-airbnb-vermieter-wegen-verdacht-auf-steuerhinterziehung-unter-die-lupe-1557
3894.html (last visited Dec. 12, 2019); Ramthun et al., supra note 80.
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 49

C. Proposalsto Secure Tax Collection of Transactionson Airbnb

The European Commission is convinced that countries can
improve tax collection by collaborating with platform operators
which already record digital transactions via their platforms. 100 One
factor of digital business models that can be taken advantage of for
reforming models regarding the sharing economy is the generally
increased traceability of transactions due to the rise of data.10 1 As the
sharing economy and its economic arrangements are relatively
uniform and there are not many major players, enforcement measures
should therefore involve the platform operator. At the platform
operator's level there are three different ways to contribute to better
enforcement and collection of taxes: Information on the platform of
tax obligations and support in fulfilling them through automated
compliance processes; storage and transmission of service providers'
data; direct collection and payment of taxes by the platform
operator. 102

1. Existing Reforms
Several cities have already implemented such reforms in order to
effectively tax transactions performed through sharing platforms.
Those proposals can be divided in three groups: informative
measures, data control systems and the obligation of the platform
operator to collect taxes.
An example for an informative measure has been implemented in
Estonia with regard to ride-sharing platforms. To simplify the tax
declaration process for drivers, transactions between drivers and
customers are registered by the platform provider which sends the
relevant data to the authorities, pre-filling taxpayers' tax forms. 103
Data control system obliges platform operators to keep relevant
information regarding transactions performed through the platform
users and to transfer the data to tax authorities.
A tax system which obliges the platform operator to collect and
pay taxes on behalf of the taxpayer is called withholding tax system.

.00 See COM(2016) 356final, supra note 61, at 14.

' See COM(2016) 356final, supra note 61, at 14.
102 See Pantazatou,supra note 60, at 225.
"o3 See Pantazatou,supra note 60, at 225; COM(2016) 356 final, supra note 61, at 14.
50 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

A withholding tax is a special form of income tax collection. 104

Whereas usually the recipient of taxable income has to pay income
tax on that income a withholding tax shifts that responsibility to the
payer of the compensation. 1os Measures regarding tax collection
obligations of the platform operator on behalf of state authorities
vary in their design. One existing example of a cooperation is tax
collecting agreements between Airbnb and various local tax
authorities around the world. 106 According to these agreements,
Airbnb collects tourist taxes or occupancy taxes on behalf of the host
and remits it directly to the respective tax authority. 107 In France,
new laws even made it mandatory for platform operators to collect
and remit tourist taxes from January 2019. 10 Italy implemented a
general framework tailored to the sharing economy, which states that
annual income up to an amount of 10,000 euros earned will be
subject to a tax at a rate of 10%. The tax will be withheld at source
by the platform operator and transferred to the tax authorities.109
Similarly, Belgium implemented a withholding tax on income up to
an amount of 5,000 euros per year. It will be taxed at a rate of 20%
after a deduction of a 50% allowance, which results in fact in an
effective tax rate of 10%.110

104 See Federal Ministry of Finance, An ABC of Taxes, 81 (2016), https://www.bundesfinanzmini

sterium.de/Content/EN/Standardartikel/PressRoom/Publications/Brochures/2012-10-30-abc-on-taxes-
pdf.pdf?_blob=publicationFile&v=17 (last visited Dec. 12, 2019).
15 Id. at 133.
See Sharing Economy in Germany, supra note 58, at 119; Solmecke & Lengersdorf, supra note
106

57, at 493 et seq.; BRAD STONE, DIE SHARING-ECONOMY: TEILE UND HERRSCHE. WIE UBER UND
AIRBNB GANZE INDUSTRIEN UMKREMPELN [THE SHARING ECONOMY: COMPONENTS AND RULES. How
UBER AND AIRBNB TAKE UP WHOLE INDUSTRIEs] 298 (2017).
107 See Airbnb, Hosting Help: In What Areaslis Occupancy Tax Collection and Rremittance by

Airbnb Available? https://www.airbnb.ie/help/article/2509/in-what-areas-is-occupancy-tax-collection-

and-remit
tance-by-airbnb-available? set bev on-new-domain=1528102327 kNEtV2POf2uawWaX (last visited
Dec. 12, 2019).
'08 See Bal, supra note 56.
109 See Bozdoganoglu, supra note 61. Revenues over the amount of 10,000 euros are subject to the
rates applied to the professional income of service providers.
110 See Sharing Economy wird ab Mittwoch in Belgien besteuert [Sharing Economy Will Be Taxed in
Belgian from Wednesday], BRF, (Mar. 03, 2017), https://brf.be/national/1067171/; Alexander De Croo,
Belgian Government Approves Simple and Low Tax Rates for Sharing Economy, (Jun. 06, 2016),
https://www.decroo.belgium.be/en/belgian-government-approves-simple-and-low-tax-rates-sharing-
economy; Marc Quaghebeur, Belgium Introduces a Tax Regime for the Sharing Economy, (Jul. 08,
2016), http://www.dvp-law.com/documents/news-items/20160708-belgium-introduces-a-tax-regime-
for-the-sharing-economy-.xml.
2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 51

2. Assessment of the Reforms

(a) Informative Measures

The first reform proposal contains simplifications in the tax
declaration process as exemplified in the case of Estonia.
Information tools, tax declaration assistance or automated prepared
tax declarations on or through the platform shall facilitate the service
providers' tax compliance. 11 1 As the European Commission suggests
in its communication on the collaborative economy '[raising]
awareness on tax obligations [...], issuing guidance, and increasing
transparency through online information' are possible ways of
ensuring a level playing field without hindering the growth of the
sharing economy. 112 It is probably true that these informative
measures promote tax compliance. But these measures alone will not
guarantee proper tax collection since they do not secure taxpayers'
compliance declaring their income achieved from sharing economy
platforms. Therefore, reforms linked to mere informational measures
alone are not sufficient.

(b) Data Collecting System

The second approach is obliging platform operators to report the
data they obtain from transactions. With that information tax
authorities can check the tax records of service providers which will
support tax compliance since taxable persons may fear the risk of
being detected. 113 However, getting data when the platform operator
is located in a third country becomes extremely difficult, since
national law cannot be enforced easily in a third country. Hence, in
order to enforce the platform operators' obligation of transferring
data, this obligation would have to be supplemented by liability
obligation in order to be more effective.

(c) Withholding Tax System

The third proposal suggests an obligation for the platform
operator to collect taxes on behalf of the service providers.114 Airbnb
would have to withhold the taxes in the course of the payment

. See Pantazatou, supra note 60, at 231.

112 See COM(2016) 356final, supra note 61, at 13.
.. Bozdoganoglu, supra note 61, at 125.
114 See Sharing Economy in Germany, supra note 58, at 16; Fricke & Linnemann, supra note 80.
52 TSINGHUA CHINA LAW REVIEW [ Vol. 12:29

process and transfer them to the local authorities for the landlords'
accounts. 11 This reform model seems most promising where data are
centralized at the platform like in the case of Airbnb. When users
register with Airbnb, Airbnb already requests personal data from the
service provider, which could be extended to include the tax
identification number.116 The tax identification number is necessary
for a withholding tax system so that the tax authorities can allocate
the withheld tax and its underlying transactions. The transactions
carried out are already followed by the platform operator under the
current system as part of the booking process, since a brokerage
commission is retained. On this basis, a fixed tax rate could then be
charged at a fixed rate on the rental price and transferred to the tax
authorities. Such a tax would not be totally new since in many
jurisdictions a withholding tax at source is applied to dependent
employment or income from capital assets. The huge advantages of a
withholding tax are an increasing tax compliance of service providers
(theoretically up to 100 %), and a reduction of the administrative
burden for tax authorities.
Since such a withholding tax, however, increases the
administrative burden for platform operators the question arises as to
whether that increase can be justified.
(i) Justification for the Introduction of a Withholding
Obligation for Platform Operators
The implementation of an automated tax withholding system will
cause administrative costs to the platform operator, 117 which under
German law as well as EU law affects the platform operator in its
fundamental rights, such as the freedom of profession. Therefore,
it is questionable whether the integration of platform operators into
the tax enforcement system is legal and can be justified. The

115 See Klaus-Dieter Drtien, Grenzen der Steuerentrichtungspflichten -

Verfassungsrechtliche
Bestandsaufnahme angesichts intensivierter Arbeitgeberpfilichten beim Lohnsteuerabzug [Limits of Tax
Payment Obligations - Constitutional Inventory in View of Intensified Employer Obligations with
Regard to Wage tax Deduction], 86 FR 1134 (2004); Sharing Economy in Germany, supra note 58, at 6.
116 See Fricke & Linnemann, supra note 80.

." See Pantazatou,supra note 60, at 223.

.. Johanna Hey, Mitteilungspflichten oder Quellenabzug - Maflnahmen zur Sicherung von
Steueranspriichen [Communication Obligations or Withdrawals: Measures to Secure Tax Claims],
FESTSCHRIFT FUR HEINRICH WILHELM KRUSE ZUM 70. GEBURTSTAG 269, 287 (Walter Drenseck
&

Roman Seer ed., 2001).

2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 53

integration might be justified by equal taxation. Fair taxation is a

legitimate purpose. 119 Furthermore, possible considerable
justifications are conservation of resources to protect the
environment, the social idea of sharing and the reduction of
administrative costs.120 But the involvement of platform operators for
governmental functions as tax collection must also be reasonable to
achieve these aims. This is the case, if the platform operator must
show some responsibility for the tax issues that arise with regard to
sharing economy transactions. 121 The platform operator enables
transactions to be carried out easily and anonymously by providing
the platform and it contracts with the dishonest hosts at the first stage
of the procedure. However, it should also be noted that the platform
operator is only an intermediary which offers a 'neutral'
infrastructure contribution similar to that of postal and telephone
operators, market operators or logistics providers in the analog
world.122 Thus, on one hand, the operators of digital markets make an
inevitable contribution to the development of the infrastructure on
the internet and carry out socially desirable actions.123 On the other
hand, platform operators enable tax evasion. However, the
integration of the platform operator can be justified because it is
placed in a better position compared to the tax authorities since it has
the control of the payment transactions and the information which is

" BFH (Federal Fiscal Court) of 05.07.1963 - VI 270/62 U, 77 BFHE 408; Federal Constitutional
Court of 29.11.1967 - 1 BvR 175/66, 22 BVerfGE 380, 383 et seq.; Drijen, supra note 115, at 278 et
seq.; Bernd Heuermann, Entrichtungspflicht - Steuerpflicht - Grundpflicht? [Payment Obligation, Tax
Liability, Basic Obligation?],95 FR 354, 358 (2013); Hey, supra note 118, at 278; GREGOR KIRCHHOF,
DIE ERFULLUNGSPFLICHTEN DES ARBEITGEBERS IM LOHNSTEUERVERFAHREN [THE EMPLOYER'S
OBLIGATION TO COMPLY WITH THE INCOME TAX PROCEDURE] 72 et seq. (2005); Gtinter Krohn,
Zuldssigkeit und Grenzen der Uberwalzung von Steuerabfiihrungspflichten auf private Unternehmer
[Eligibility and Limits of the Transfer of Tax Deduction Obligations to Private entrepreneurs], 24 BB
1233, 1236 (1969).
120 Solmecke & Lengersdorf, supra note 57, at 497.
121 Federal Constitutional Court of 22.01.1997 - 2 BvR 1915/91, 95
BVerfGE 173, 187; of
02.03.2010 - 1 BvR 256/08, ECLI:DE:BVerfG:2010:rs20100302.1bvr025608; Drijen, supra note 115,
at 291 et seq.; Ulrich Hufeld, Betreiberhaftung im Internethandel: Gutachten zu § 22f, 25e UStG - neu
- im Entwurf eines Gesetzes zur Vermeidung von Umsatzsteuerausfallen beim Handel mit Waren im
Internet und zur Anderung weiterer steuerlicher Vorschriften vom 1.8.2018 [Operator Liability in
Internet Business: Expert Opinion on § 22f 25e UStG - New in the Draft to Avoid Sales Tax Losses
When Trading Goods on the Internet and to Change Other Tax Regulations from 1.8.2018], 2018
DEUTSCHE STEUER-ZEITUNG [DSTZ] 755, 760 et seq. (2018).
122 Hufeld, supra note 121, at 763; Ansgar Ohly, Die Verantwortlichkeit von Intermedidren
[Responsibility of Intermediaries], 59 ZEITSCHRIFT FUR URHEBER- UND MEDIENRECHT [ZUM] 308, 311
(2015).
123 Ohly, supra note 122, at 308.
 TSINGHUA CHINA LAW REVIEW [Vol. 12:29

needed for proper taxation. 124 Thus, the withholding tax falls within
its sphere of influence.
Moreover, the effort which is necessary on part of platform
operators has to be evaluated as low. The platform operator has
already most of the required data since the operator carries out the
booking process. It must keep records for its own taxation anyway.
Missing data could be requested easily and automatized during the
registration process. The tax deduction could be integrated to the
system which handles the fee for Airbnb. With the collection of the
tourism tax this procedure is already practiced by Airbnb. In
addition, this reform model is also beneficial for platform operators:
The tax gaps caused by hosts led to many criticisms on the platform
model of Airbnb. This criticism could be eliminated with the
withholding tax.

(ii) Justification for a Tax Prepayment Obligation

Nonetheless, the withholding tax gives also causes for concern
with regard to its effects on the taxable hosts. In the case of
withholding tax, the tax is already due when the transactions are
carried out. As a result, withholding taxes have an advance payment
character. It is, therefore, necessary to strike an appropriate balance
between the amount of the withholding tax and the actual tax
liability. 125 As a collection technique, the deduction at source can
therefore only be adequate if the ratio between income and taxable
income is relatively constant, so that it is possible to calculate the
withholding tax on the basis of income without having to fear over-
collateralization.126 In the case of income from rents via Airbnb, this
will regularly be less problematic, since usually no significant
expenses can be deducted or these expenses can be considered
already with the calculation on Airbnb within the course of the
booking procedure.
After all, a withholding tax (also named deduction tax at source)
which obliges the platform operator to collect and transfer a tax on
behalf of service providers is the most efficient reform proposal for

124 Carsten Brodersen, Haftung und Schuld im Steuerrecht [Liability and Debt in Tax Law],
FESTSCHRIFT FUR WERNER THIEME ZUM 70. GEBURTSTAG, 895, 898 (Bernd Becker & Hans Peter Bull
& Otfried Seewald ed., 1993); Drtien, supra note 115, at 292 et seq.; Hufeld, supra note 121, at 765.
125 Hey, supra note 118, at 284.

126 Hey, supra note 118, at 284.

2019] THEDIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 55

the taxation of the sharing economy. Outsourcing this enforcement

and collection function to the platforms ensure (theoretically) full tax
compliance. The platform operators of the sharing economy are best
placed to ensure compliance with the rules by their users and are
ideally positioned to ensure enforcement of service providers' legal
obligations since all the information is already centralized on the
platform.127 A tax deduction at source or withholding tax system is,
therefore, one of the most effective instruments for securing tax
compliancel28 and also the most effective way to avoid tax evasion of
the Airbnb hosts.

III. SUMMARY
Digitalization has given rise to a tremendous number of cross-
border online transactions. However, income of these digital business
models is not necessarily taxed in the country in which a digital
service has been used. This is why the current rules on international
taxation are criticized for being outdated. The reform proposals of
the EU are based on two ideas: The first concept is the introduction
of a new digital services tax at the rate of 3 %. The second proposal
suggests a modification of the nexus for taxation: Instead of the
existence of a physical presence (permanent establishment) a new
nexus shall be introduced: a significant digital presence. The
assessment of both proposals has shown that none of them can solve
the taxation problem adequately. The digital services tax bears the
risk of a patchwork of tax rules, treaty overrides, double taxation and
unprofitable cost expenditures. The modification of the nexus that
includes a digital presence besides a physical one needs precise
definitions and clear differentiation criteria to distinguish digital and
traditional business transactions. To avoid double taxation, any
reform must be based on an international consensus.

127 See Fricke & Linnemann, supra note 80; Hey, supra note 118, at 278; Pantazatou, supra note 60,
at 224; Solmecke & Lengersdorf, supra note 57, at 497; KLAUS TIPKE, DIE STEUERRECHTSORDNUNG.
BAND III. STEUERWISSENSCHAFT, STEUERGESETZGEBUNG, STEUERVOLLZUG, STEUERRECHTSSCHUTZ,
STEUERREFORMBESTREBUNGEN [THE TAX REGULATION VOLUME III. TAX SCIENCE, TAX LEGISLATION,
TAX IMPLEMENTATION, TAX LAW PROTECTION, TAX REFORM MEASURES] 1465 (2nd ed. 2012).
128 See, e. g., Federal Constitutional Court of 27.06.1991 - 2 BvR 1493/89, 84 BVerfGE 239, 281 et

seq.; of 10.04.1997 - 2 BvL 77/92, 96 BVerfGE 1, 8; of 09.03.2004 - 2 BvL 17/02, ECLI:DE:BVerfG:

2004:1s20040309.2bvl001702; Hey, supra note 118, at 278 et seq.; Heuermann, supra note 119.
56 TSINGHUA CHINA LAW REVEW [Vol. 12:29

Another challenge for taxation arises especially in the sharing

economy is that the anonymity of the internet combined with an
increased activity of private individuals on sharing economy
platforms makes it difficult for the tax authorities to identify taxable
transactions. The introduction of a withholding tax could be an
important starting point to avoid tax evasion not only for
accommodation platforms but also in the context of other sharing
economy platforms. Introducing an automated withholding tax
system could guarantee an effective and equal taxation of the income
of users of the sharing economy. Digital technologies, therefore, not
only pose new challenges to taxation but also provide new tools for
enforcing tax.