All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Uber makes the case for a residual profit split


Uber has proposed a modified residual profit split (MRPS) as a solution to the problems of taxing the high-tech industry. This proposal may be a game-changer in the digital tax debate.

Fearing the chaos of unilateral measures, the popular ride-sharing app business has laid out a version of the residual profit split the OECD has explored as part of its pillar one proposals. The company stressed this is a “critical time for stakeholders”.

“Our proposal is based on a modified residual profit split (MRPS), with simplifying measures intended to mitigate the complexity associated with profit splits,” Francois Chadwick, vice president of tax at Uber explained in a recent article he wrote.

“It results in a reasonable reallocation of profit to market jurisdictions over and above traditional transfer pricing methods,” he argued.

After looking at the OECD proposals, the company “concluded that a modified residual profit was the best adapted [method] to address the largest tax challenges and the best suited to use as the basis for a principle-based solution”.

The Uber plan would start from the global operating profit of the multinational enterprise (MNE) in question. This figure would be taken from audited financial statements to ensure accuracy. However, the proposal allows for some flexibility.

“Taxpayers may have multiple lines of business that might experience very different financial results,” Chadwick said. “They should be allowed to apply the proposal separately to each line of business.”

The next step would be to remove routine profits, but this would be on a case-by-case basis. Instead, the routine profits would be singled out on a group-wide basis according to an amount equal to 4% of sales or 15% of depreciable and amortisable assets other than goodwill (taking into account the ratio of the entity’s value-added costs to total worldwide value-added costs).

Chadwick hopes this would reduce the complexity and propensity for disputes over the routine returns. The remaining profits after routine returns that are removed would provide an estimated amount of the group’s residual profits attributable to intangible assets.

This is where the residual profits are divided up between product intangible profit (PIP) and market intangible profit (MIP). The overall approach is to determine the taxation of a portion of the MIP to the new rules, while continuing to subject PIP and the remaining MIP to existing tax rules.

“The reason for that approach stems from the origin of the work to address the broader tax challenges created by the digitalisation of the economy, which was that existing tax rules failed to take into account the role that market externalities play in creating value in a digitalised economy,” Chadwick explained.

This would cover different levels of user participation, including the use of data from non-paying users to support advertising by paying customers and the ability to sell in one market while operating outside it.

It would divide the total MIP between the profits attributable to market externalities and the profits attributable to functions supporting the development, enhancement, maintenance, protection and exploitation (DEMPE) of market intangibles.

“Our proposal would treat 20% of total MIP as taxable MIP under the new taxing right,” Chadwick said. “We derived that 20% from economic analysis of the portion of profit appropriately allocable to market externalities.”

“Once taxable MIP is identified on a worldwide basis, the next step would be to identify the jurisdictions that are entitled to tax a portion of the group’s taxable MIP,” he added.

The MNE group’s net revenue would be sourced to the jurisdiction of ultimate use and consumption. This would mean determining the market-sourced net revenue on a local basis, where the customer is located.

Taxpayers would face an economic nexus threshold in each jurisdiction. The Uber plan specifies a €25 million ($27.7 million) threshold for market-sourced net revenues. However, this figure is intended as an example, so the thresholds could well be different.

The proposal would only apply to companies with global net revenues of more than €750 million a year. The hope is that this threshold would help reduce the complexity of managing two parallel tax regimes at the same time.

Uber is just the latest company to make an intervention in the OECD-led debate. Companies like Johnson & Johnson and Santander have made their contributions to this discussion, while a growing number of businesses are turning to the residual profit split as the least bad option.

What is different is that Uber is synonymous with the ‘gig economy’. This is the first time such a company has taken the risk of drafting its own proposal. The result may be that more businesses will take the bold step to drawing up policy.

More from across our site

The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
Businesses need to improve on data management to ensure tax departments become much more integrated, according to Microsoft’s chief digital officer at a KPMG event.
Businesses must ensure any alternative benchmark rate is included in their TP studies and approved by tax authorities, as Libor for the US ends in exactly a year.
Tax directors warn that a lack of adequate planning for VAT rule changes could leave businesses exposed to regulatory errors and costly fines.
Tax professionals have urged suppliers of goods from Great Britain to Northern Ireland to pause any plans to restructure their supply chains following the NI Protocol Bill.
Tax leaders say communication with peers is important for risk management, especially on how to approach regional authorities.
Advances in compliance tools in international markets and the digitalisation of global tax administrations are increasing in-house demand for technologists.
The US fast-food company has agreed to pay €1.25 billion to settle the French investigation into its transfer pricing arrangements over allegations of tax evasion.
HM Revenue and Customs said the UK pillar two legislation will be delayed until at least December 2023, while ITR reported on a secret Netflix settlement and an IMF study on VAT cuts.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree