Uber’s many riders obviously love it, but it seems civic officials are having conniptions. Their main complaint is that Uber drivers are unlicensed to carry passengers and may not have adequate insurance. In addition, officials are genuinely concerned that the presence of Uber creates chaos in the traditional (highly-regulated) taxi market.
None of these issues, however, seems to be enough to stop the explosive growth of Uber. While it’s hard to defend an industry that’s as dodgy as the traditional taxi business, there is one thing in the cabby’s favour: at least they pay Canadian taxes, while Uber does not.
How does Uber manage its corporate tax dodge?
It called Double Dutch and says a lot about the nature of digital business today. Uber is a technology company; its business model is built around its smart phone app, which directly connects customers, those in need of a ride, with people willing to give them a ride. Uber customers can summon drivers on their smartphone and the ride is billed to their credit card.
So far so conventional; apart from the smart phone app, this is how conventional taxi businesses operate.
How does it work in practice?
Let’s say an Uber user in Calgary taps her smart phone and summons a driver. At the end of the ride the details are recorded and the rider walks away. No money changes hands, it’s all billed through the rider’s credit card automatically; there’s no tipping and no fuss.
The story gets interesting from a tax point of view if we follow the money. Let’s say, for argument’s sake, it’s a $100 ride. The total fare is credited and sent scurrying across national borders through the Internet into the account of a company in Holland called Uber B.V. This company collects the fare and then, through another Dutch subsidiary (Raiser Operations B.V.), sends, in this case, $80 to the driver’s account. The remainder, $20 enters a labyrinth of Dutch offshore entities.
The secret to the tax strategy is two-fold. One, there is no recorded income for Uber in Canada. The driver, presumably, pays tax on his earnings, but the company is invisible to Revenue Canada in this transaction.
Second, Uber B.V. is not Uber headquarters (that’s in San Francisco). Nor is Uber B. V. the international arm of Uber, set up to manage its operations. That’s Uber International C.V., another Bermuda-registered Dutch subsidiary.
The financial wangle dangling gets a bit complicated from here, but basically Uber B.V. keeps a small proportion of the fare to cover its expenses, and then transfers the remainder to Uber International C.V. through an “Intangible Property License Agreement”. Interestingly, under Dutch law this royalty payment is NOT taxable.
This strategy is called Double Dutch because it uses two companies resident in the Netherlands connected by a license agreement. This novel approach creates a method of transferring revenue from tax paying sources anywhere in the world to off-shore entities tax free.
All in all, Uber has 10 subsidiaries in the Netherlands, all of which are situated in a homey style building in Amsterdam’s central canal district. Only one of the companies, Uber B.V., has real employees. The rest are holding companies or shells.
This Double Dutch royalty income is now “ocean money”; it has fallen off the grid and is not taxed in Canada, in Holland or in the United States (the home of Uber and its employees). This income exists in the increasingly important ‘gray zone’ of international tax avoidance that’s rapidly being occupied by multi-national companies operating in the digital universe in Canada and around the world.
The problem with Uber – like most global corporations today – is it avoids paying national and provincial taxes while displacing traditional businesses that did.
Is it any wonder national governments are under fiscal pressure? Tax avoidance is exploding, and it’s starting to bite. The proportion of income tax paid by corporations has fallen over the past half century from roughly 47 percent of total tax revenues to 19 percent (and that proportion is continuing to fall rapidly). Meanwhile, stuck at home wage earners now shoulder 81 percent of the income tax burden. It’s unfair to society and the rest of us.
Quite frankly, carried to its logical conclusion the digital world could blow apart our borders, undermine national finances and – possibly – unravel our civilization.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.