Digital Tax Administration of Taxi Market and International Online Platforms

Evolution of Tax Market

Taxi is one of the most popular types of public transport in the world. The taxi market makes a significant share of the economy of any country and can reach up to 1% of GDP. Hundreds of thousands and even millions of drivers can be involved in this segment of the transportation industry.

For example, Didi Chuxing officially entered the Chinese taxi market in June 2015. In the first three months of operation, almost 5.5 million drivers and about 8.5 million passengers used the service. Later, it has become the largest taxi service provider in the country and the South Asian region.

Passenger transportation is a simple form of receiving the basic or additional income for the drivers. That makes this market attractive to many people, including those informally employed.

The tax administration of taxi markets is a tough challenge for authorities. The millions of taxable objects, the cross-border nature of taxi aggregators, the mix of the main and additional employment of the drivers, and a substantial share of the shadow economy radically complicate the administration and decrease the tax gap.

The digitalization of the taxi market has led to the emergence of ride-hailing or mobility as a service online platforms and mobile applications. They quickly won the market by reducing the taxi delivery time and the price of the service for the passengers.

The success of Uber, one of the first digital taxi companies, created a new term—the «Uber economy». Its basic principles have gone beyond transportation and spread to other industries of the sharing economy.

Ride-hailing online platforms and mobile applications can operate within one country and cross-border. The lack of regulations for taxation of the new digital business models creates many problems for the national tax authorities. The standard response of forbidding and not allowing can further complicate the situation and encourage drivers to go into the shadows to evade taxation.

The Global Taxi Market Structure, Segments, and Participants

Global Taxi Market

The global taxi market reached $69.18 billion in 2019. AMR projected [1] it will reach $120.89 billion by 2027, registering a CAGR of 12.3% from 2020 to 2027. The major taxi market segments include booking type, service type, vehicle type, and region.

By Booking Type	Online Booking Offline Booking
By Service Type	Ride-Hailing Ride Sharing
By Vehicle Type	Cars Motorcycle Other
By Regions
By Key Participants

Some of the largest international taxi service providers include [2] Uber, Lyft, Grab, and DiDi.

Area of Operation	600 cities in 65 countries	300 cities in the USA and Canada	Southeast Asia	400 cities (Asia, Americas)
Founded	March 2009	June 2012	June 2012	June 2012
Headquarters	San Francisco, USA	San Francisco, USA	Singapore	Beijing, China
Users	75 million	23 million	35 million	550 million
Drivers	3 million	1.4 million	2.6 million (all time)	21 million
Rides per day	5 billion	500 million	2 billion	7.4 billion in 2017
Revenue	$7.5 billion (2017)	$1 billion (2017)	$1 billion (2018)	$ 25-27 billion gross ($4-4.3 billion net)
Valuation	$ 72 billion	$ 15 billion	$ 11 billion	$ 56 billion

Next, we will look at the participants of the taxi market from the optimized tax administration point of view. Among the key market participants, we will emphasize the role of:

• Passengers, consumers of taxi services
• Vehicles
• Drivers
• Traditional taxi companies with the fleets of cabs
• Online ride-hailing taxi aggregators for passengers, drivers, and taxi companies

Passengers (Riders)

A passenger is a consumer of the taxi service who orders and pays for the transportation (b2c model) or an employee of the company who pays for his ride to the service provider (b2b model).

Passengers usually order a taxi ride through a mobile application or by phone (the ride-hailing model), but in many countries, it is still possible to stop a taxi hailing on the street.

The rider can pay for the service in cash or by credit card. In many countries, non-cash payments, including tipping, are popular because it is convenient. No need to have cash and small coins for tips and change. During the pandemic, contactless payments become even more popular.

Passengers can form groups to share rides (the ridesharing model). Several passengers share one vehicle for one trip along a common route or its parts.

Different passengers can use one vehicle for separate short-term rides (the car-sharing model).

The diverse needs of passengers looking for various ride options set the structure of the specific business models and influence the further transformation of the taxi market.

Vehicles

Taxi companies provide riding services by using cabs, motorcycles, and scooters, as well as by other modes of transportation, such as minivans, commercial vehicles, and buses. Licensed taxis must have a special insignia or special appearance that distinguishes them from other vehicles on the road. Taxis may have special privileges, such as the right to use dedicated lanes that other vehicles cannot. The cab must undergo regular technical inspection to comply with transport safety requirements.

Drivers

Several drivers can use one car as a taxi. Solidly linking one driver to one car makes little sense because of the need to replace employees in shifts, in case of illness, or repair to ensure maximum efficiency in using vehicles and drivers. To ensure the safety of the provision of services, a state may require drivers and/or taxi companies to have an appropriate license. Regulation may also require drivers to attend regular medical examination, and cabs equipped with electronic logging devices for monitoring the driver’s condition and logging his work time.

Often, regulators use taxi licensing to regulate competition in the taxi market.

The license itself can be quite expensive and significantly affect the cost of transportation services for the passengers.

Taxi Companies

A taxi company is a legal entity or individual entrepreneur who:

• Maintains its fleet of cars, employs drivers, and pays corporate/personal taxes and social contributions for employees; and/or
• Rents their cars to self-employed drivers or other entrepreneurs.

Safe transportation requires security and entails the need for licensing, special driving permits, and insurance.

To receive orders from passengers, a taxi company may use its dispatching service or use electronic hailing platforms of aggregators. There are also independent dispatch services that function as intermediaries between the passenger, the driver, and/or the aggregator. They do not create jobs for drivers and the associated taxes and social contributions.

Online Aggregators of Taxi Services

Online platforms like Uber or DiDi primarily function as a digital dispatch service. They connect customers and drivers, distribute orders, build, and optimize riding paths, send invoices, and process payments from the riders, and perform other functions.

They can be residents operating within the country of origin, and global non-residents who serve local riders and accept payments outside the country where they provide the service (Uber in EU countries).

The role and share of electronic platforms are constantly growing because they provide the passenger with a shorter pickup time, various car classes, and reasonable prices. The entry of global taxi service aggregators into local markets can have a significant impact on the business of existing taxi companies, as shown in the following diagram.

Type of Taxi Company	Current Status	Impact on the Business Model
Dispatching Service	Supplies mediation between passenger, driver, and/or aggregator. Does not create jobs for drivers and corresponding taxes and contributions to the state.	Exit from the market with the growing share of self-employed drivers who receive direct orders from aggregators.
Fleet Manager	Runs the fleet of cabs with leased cars. Gets income from renting cars to drivers. May offer mediation between the driver and the aggregator.	Car rental income stays intact. New digital services and business models may reduce operating costs
Traditional Taxi Company	Hires drivers for the full-time job, owns or rents the cabs. Gets income from the passengers and/or aggregators; pays wages to drivers and taxes to the state. Creates jobs, personal income tax, and social contributions for the drivers	The business model stays the same. Lose a market share to aggregators as some drivers may become self-employed and work directly with aggregators.

The Role of the Shadow Economy

We have listed the key participants in the legal transportation market. But let us not forget about the existence of the shadow market, which is beyond the control of regulators and tax authorities. Any excessive pressure from the state on the legal transportation market quickly leads to the transition of its participants into the shadows. Many drivers consider being informally employed or self-employed.

The tax administration of taxi markets is a tough challenge for the authorities. The millions of taxable objects, the cross-border nature of taxi aggregators, the mix of the primary and secondary employment of the drivers, and a substantial share of the shadow economy radically complicate the administration and decrease the tax gap.

Therefore, within this industry, the state must operate as carefully and accurately as a cardiac surgeon during a complex operation.

Taxi Market and Taxation Systems

The organization of massive passenger transportation is a complex task with many influencing factors. Among them may be non-residents, residents, large taxi companies, and small informal taxi operators that reduce the tax base to zero. Traditionally, the states struggled to levy taxes on the taxi market.

Let us show the cash flow patterns in the taxi organization and show what taxation options exist for the government.

The primary object of taxation is the passenger transportation service, provided within the country. It creates revenue and income, which are subject to taxation. Depending on the domestic tax system, this may be a VAT, sales tax, or other tax linked to income, value-added, or profits.

The amount of taxes and social contributions directly affect the service pricing for the passenger. Many countries apply lower preferential tax rates to micro and small businesses compared to medium and large businesses. For example, in several countries, a business that has an annual turnover below the established limit is not subject to VAT. Therefore, to reduce the cost of transportation for the passenger, the taxi service provider needs to ensure that the seller is in the taxpayer category with the maximum tax benefits.

Hiring the driver can add mandatory social, pension, and medical insurance contributions. The amount of taxation and contributions depends on his tax status as an individual entrepreneur, self-employed, or as an employee of a taxi company.

Then, the tax base optimization strategy for a large taxi company or aggregator is to transfer the last mile operations to the private driver or a small taxi company.

For tax authorities, this approach resembles the fragmentation of a business. The tax administration will look to link larger organizations to these patterns. It could be a large taxi fleet or an online platform that supplies information services for searching cabs, getting passenger orders, and accepting payments in the interests of the organizer of the transportation. Even if the online platform receives payments abroad, local tax authorities should include its income in the domestic tax base. The fundamental elements of the tax base in the taxi market include:

The organizer of the transportation (e.g., driver, taxi company, online aggregator)..

• The sale of transportation services must include an issue of fiscal receipts and is subject to taxation. It is necessary to decide who is the principal—the organizer of transportation himself or another person. Depending on the regulatory requirements, the tax levies may transfer from the agent to the principal.

The driver

• Pays the taxes depending on his employment and business status.

The taxi companies

• Pays the taxes depending on the status as an organization or an individual entrepreneur, and on the turnover or profit. If the country has adopted the status of a tax agent for the employer, then the taxi company also pays taxes and social contributions from the wages of its employees, including drivers.

The online aggregators

• Receives a commission from the transportation organizer for attracting customers and accepting non-cash payments. For the cash transactions, the transportation organizer receives the money directly from the rider. Pays local taxes, if: a) he is a tax resident of the country or b) the country has legislation that obliges foreign companies (non-residents) to pay taxes at the place of delivery of the service.

Taxi Tax Administration Transformation and the Role of Digital Platforms and Aggregators

The rise of online hailing services that heavily invest in attracting customers has changed the taxi industry during the past several years. The major goal of these transformations is to simplify the business model, reduce the number of intermediaries, and lower the costs to reduce the price of the service for the passenger.

The tax authorities rarely keep up with this transformation, because the old objects of taxation (taxi parks) disappear, and new ones (electronic platforms) appear, including in foreign jurisdictions.

The most informal scheme involves a non-resident’s online aggregator collaborating directly with informally employed drivers. The state may collect zero taxes if the resident driver and non-resident aggregator do not declare the income. This allows the lowest cost of transportation by minimizing the number of intermediaries along with the tax burden while making the business model extremely competitive.

If the regulation does not control these schemes, then the participants in the legal taxi market quickly become uncompetitive and forced to go into the shadows.

The good news is that online taxi service aggregators can create maximum transparency for the tax administration, since all orders and payments go through them. Then the entire cash flow becomes available for analysis and the formation of a tax base. Also, aggregators register and connect drivers and taxi companies, which makes them visible to the tax authorities.

STAGE 1	STAGE 2	STAGE 3
Shadow taxi market	The aggregator registered drivers and checks their licenses and other state requirements (if needed)	All aggregators and their drivers work legally and pay taxes
Most private drivers work without licenses and do not pay taxes and contributions	To get orders from aggregators, the driver must become an individual entrepreneur, self-employed, or an employee of a taxi company	Widespread usage of the aggregator’s mobile application increases the share of electronic payments (convenient, hygienic)
	Registered taxi companies and drivers receive taxi licenses and work permits	Taxi companies pay personal income tax and social contributions for their employees. Individual Entrepreneurs pay taxes on income and contributions. The self-employed drivers pay income tax. Aggregators pay taxes on income / value-added / profit

To summarize, digital aggregators are a new reality, shaped by tremendous investments that are reforming the transportation market. This transformation is impossible to resist and avoid. Restrictions will create more incentives and loopholes for illegal activities of online platforms and drivers.

Denying the existence and development of electronic aggregators will lead to the fact that they will coordinate the work of drivers from other jurisdictions, reducing state revenue collection to zero.

Therefore, the tax authorities should cooperate with aggregators, giving them the green light for localizing their business on the territory of the state, getting information about their customers (drivers and taxi companies), and transactions to form a tax base.

With this approach, the state creates the preconditions for achieving the complete transparency of the taxi market and growth in revenue collection.

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[1] Allied Market Research. Taxi Market Statistics 2020–2027 [URL]

[2] Management Analysis of Uber. Technical Report. Jul 2019. Amisha Kumari, Samridhi Sharma [URL]