Ride-hailing firms forced to complete tax mission

A new regulation could shake up the transport market as ride-hailing firms will be squeezed for tax

Going into effect on December 5, Decree No.126/2020/ND-CP guiding the Law on Tax Administration 2019 regulates that e-hailing platforms have a responsibility to declare tax for driver partners at the VAT rate of 10 per cent compared to 3 per cent as set previously. The rate is calculated based on all revenues from business cooperation activities and must be paid on behalf of individual partners instead of through commission as before.

Applying the new tax regime on ride-hailing service providers such as Grab and Gojek will make their tax declarations more transparent, contribute to increasing the state budget, and create a fair playground for the traditional taxi.

Ta Thi Phuong Lan, deputy head of the department of tax administration for small- and medium-sized enterprises and individuals under the General Department of Taxation, said VAT rates for companies such as these have hitherto been too low and needed to be raised to the correct level.

According to Lan, almost all taxi tech service providers declared tax under the role of transporters since Decree No.10/2020/ND-CP providing by-automobile transport business and its conditions came into effect in January. However, Grab still remained outside the list of transporters and had yet to declare and pay tax as regulated.

“Vietnamese officials have long been pondering whether ride-hailing companies are technology service providers or transport companies, but the new decree makes it clear they are the latter,” Lan said.

Notably, according to the previous calculation, Grab just had to declare and pay VAT based on commission, equalling 10 per cent of each trip’s revenue.

For example, with a trip worth VND100,000 ($4.35), Grab received commission of VND20,000 (87 US cents) per trip and then had to pay 10 per cent VAT for this commission. The drivers acquired VND80,000 ($3.48), simultaneously suffering 3 per cent of VAT.

With the new decree in effect, if there is no change in commission ratio between ride-hailing service providers and partners, drivers will only have to pay personal income tax of 1.5 per cent instead of 3 per cent of VAT if they have an annual income of over VND100 million ($4,345).

As such, tax duties on drivers will be lighter than they are now.

However, after the decree came into effect, hundreds of GrabBike riders went on strike, that forced ride-hailing app Grab to make an official statement claiming that its recent move to increase fees is aimed at fulfilling its tax obligations and complying with the current laws.

Grab’s latest increase of fees to fulfil its tax obligations have triggered concerns among drivers that they would earn less as passengers switch to other transportation service providers. Grabcar and GrabBike fees were raised by 5-6 per cent starting from December 5 to ensure drivers’ income following a raise to the value added tax (VAT) following Decree No.126/2020/ND-CP.

In a statement responding to protests, Grab said that it places top priority on legal compliance in Vietnam. Grab is strictly compliant with the Law on Value Added Tax 2008, Law on Tax Administration 2019, their guiding documents, and especially Decree 126, which took effect on December 5. Some points in Article 7 in Decree 126 stipulate that organisations and individuals that declare tax on behalf of taxpayers must fully implement the regulations on tax declaration and tax payment.

Commenting on this case, Matthew Lourey, Managing Partner of Acclime Vietnam, said that the Vietnamese tax system and legislative system in general is often regarded as reactive. “We can see that it takes time to understand and react to changing business environments,” he said. “When operators like Grab, and Uber before it, enter a market using a business model fundamentally different to what others use, there is often a gap in the line, or where the intent of the law is used in a different manner.”

The model adopted by Grab was based around the argument that it is a technology company and each operator is a private business – therefore Grab believes it should be only taxed on its earnings (the commission, and not the service provide by the driver).

“However, as we have seen in other jurisdictions, this model can be argued as a transport operator, the same as a taxi. The driver has no control over prices, the customer uses the app but cannot choose the driver, and the relationship is no different to booking a conventional taxi other than the price being provided up front,” Lourey explained. “As a result, the argument to levying VAT on the full price, being the value of the product booked by the customer from Grab (the same as a taxi, a coffee, or anything else a consumer buys from a shop) appears logical for the tax system.”

The change in the application of taxes is therefore something that may be hard for Grab and similar technology-based disruptors to circumvent, he added, as VAT is applied on the value of a product consumed, not the various components of the product.

“For drivers that plan on a certain level of income, they are in a difficult position. The risk with the gig economy model is that there is no income certainty or job security, and that they are completely at the mercy of the parent entity – it is not a true self-employed situation as they don’t own or have control of their customers,” Lourey said.

Vietnam has formalised the legal framework for Grab and other ride-hailing platforms since Decree No.10/2020/ND-CP took effect in April, meaning Grab and other ride-hailing platforms can now operate as legal businesses in Vietnam after the pilot e-hailing programme ended.

The country’s latest move to increase taxes on ride-hailing companies will change the specific battle between traditional taxi companies and platforms such as Grab and GoJek. Specifically, Grab’s fees are now equal or even higher than traditional taxi firms.

Grab previously offered very cheap fares to attract passengers to its platforms, thus rising fees means Grab may no longer be competitive in terms of commuting prices.

However, Grab also has advantages in its superapp vision with multiple on-demand services from motorbike and car hailing to food and express delivery. Thus, Grab has gained a competitive edge over traditional taxi firms which only provide taxi services. Indeed, Grab’s food delivery and express delivery services have grown significantly during the pandemic as more people stay at home.

Thus, traditional firms may need to diversify their offerings and update technology if they want to serve the evolving demand of consumers.