Let’s start with Uber.

Let’s say an Uber rider in Kuala Lumpur taps her iPhone and requests a ride. At the end of the ride the details (such as distance and time spent on the road) are recorded and the rider gets off. No money changes hands, it’s all billed through the rider’s credit card seamlessly; there’s no tipping and no haggling. It’s easy and convenient.

Now, the real question is what happens to the money that just got billed? To uncover the answer, lets follow the money from a tax point of view.

Let say, the total ride cost was RM100. The total fare is credited and sent across national borders into the account of a company in Netherlands called Uber B.V. (you can see it at the end of your uber invoice that gets sent to you as a rider).

This company collects the fare electronically, through Raiser Operations B.V. (another Dutch subsidiary), and sends RM80 (or 80% of the fare) to the driver’s account.

The remainder, $20 enters a complicated network of Dutch offshore companies.

Why this helps in avoiding tax?

Two reasons:
1. There’s no recorded income for Uber in Malaysia (where Kuala Lumpur is), hence, invisible to the inland revenue records in Malaysia. Well, the driver being an independent contractor according to Uber has the right to declare his/her income to pay taxes, but we will come back to this.
2. Uber B.V. is not uber’s HQ in Silicone Valley, but a Bermuda-registered Dutch subsidiary. Is it Uber’s international arm? nope. That is another Bermuda-registered Dutch subsidiary called Uber International C.V.

Now, we have cleared that, how do Uber use it to minimise tax?

The RM20 that was left from the total RM100 fare gets transferred to Uber International C.V. through an “Intangible Property License Agreement” by Uber B.V. (after keeping a small proportion to the fare to cover its admin expenses).

The justification that companies like Uber give for funnelling a huge royalty payment is that the underlying Intellectual Property of Uber (Software, the engine, location data, etc) is what makes Uber successful. Hence, the majority of the profits in the Google’s value chain should be attributed to this IP. Other activities, such as sales, marketing and R&D are deemed as routine and worth significantly less.

Here’s the kicker: Under Dutch law, ANY royalty payment is NOT taxable.

All in all, Uber has 10 subsidiaries in the Netherlands, all of which are situated in a small office building in Amsterdam’s central. Only one of the companies, Uber B.V., has real employees. The rest are holding companies or shells with no employees or furniture.

The royalty income is now — legally — off the grid and is not taxed in Malaysia, in Netherlands or in the United States. This strategy of using two Netherlands companies connected by a license agreement is called the Double Dutch.

This strategy depletes governments off millions of dollars — Yet the move is legal and is decades old.

Who else is using the Double Dutch?

Google
According to the new regulatory fillings In the Netherlands by Alphabet Inc. (i.e.Google’s parent company), Google saved $3.6 billion in worldwide taxes in 2015 by moving 14.9 billion euros ($15.5 billion) to a Bermuda shell company (Double Dutch with a Bermuda shell company)

Facebook
Facebook flipped more than $700 million to the Cayman Islands as part of a “Double Irish” tax reduction strategy.

Apple
According to a study released last year by the liberal nonprofit groups the Center for Tax Justice and the U.S. Public Interest Research Group Education Fund, Apple has booked $181.1 billion in offshore profits, more than any other company. Yet, it pays a 2.3% effective tax rate on it, according to the study. According to Bloomberg, if the Irish government is forced to recoup taxes from Apple, the company may face a $19 billion tab in the worst-case scenario. In response, the company said in a 2014 report that it “has received no selective treatment from Irish officials over the years.”

And many more, such as Microsoft, Starbucks, Ikea, Amazon, etc.
Everything these companies are doing is legal. It’s avoidance and not evasion.

Now, this is where things get ugly for Uber:

  1. Most Uber drivers don’t pay taxes
    Every uber driver is considered as an independent contractor. This means uber drivers are running their own business and is paying uber a small fee (20% of the ride fare) to use their platform. When you are an independent contractor, you are responsible for both halves of payroll taxes. When you are an employee, you are responsible for one half and the employer is responsible for the other half. Again, Uber saves an immense amount of money by passing the tax liability of payroll taxes on to the driver. Additionally, Uber does not have to offer benefits to the independent contractors like they would their employees.
  2. In many markets, Uber has refused to be labelled as a taxi to avoid GST 
    For example, Uber sued the Australian tax office for forcing Uber riders to pay GST as they are providing “taxi services”. Uber’s argument is its drivers should not have to pay GST unless they earn more than $75,000 because they are not providing taxi services.

Who is the real loser?

You, Me and Our Families

In recent years, three of the top U.S. tech companies have saved over $8 billion dollars in taxes. Had they paid their taxes like the rest of us,4 million children could have health insurance, 6.5 million children could be vaccinated, 200,000 elementary teachers could be hired, a year’s worth of groceries could be purchased for 770,416 families, and the entire California Highway Patrol could be funded for four years.

Other Local Startups and Entrepreneurs

These structures, political lobbying and other tax evasion methods employed by the tech giants make it hard for local startups who would like to compete in the same space.

What Now?

Just when Uber and other tech companies appear to have mastered the tax game, the tide is changing. The Irish government closed the tax loophole that permitted “Double Irish” tax arrangements in 2015. Companies already using the structure, however, are allowed to continue employing it until the end of 2020.

In 2013, David Cameron said: “When some businesses aren’t seen to pay their taxes that’s corrosive to the public trust. Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues and it is time to call for more responsibility. This is an issue whose time has come … [Multinational companies should] wake up and smell the coffee.”

IMHO

I think it’s time for us — being consumers of these companies — to take a stance against these tax practices. Instead of supporting them, we should support our own localized startups such as Grab, Carousell, etc.

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(Thanks Tim for the inspiration)

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