31 May DARK MONEY | Tax take shrinks as online accommodation agents rake it in
This is a huge market and no one knows how it all works except the mug operator who washes the linen, cleans the toilets and battles with being recognised by Google to compete with these guys … and pays income tax on every dollar earned.
Duncan McIntyre is the owner of Mt Martha Villas, a B&B on Victoria’s Mornington Peninsula. Like thousands of hotel and short-stay operators across the nation, McIntyre is alarmed at the growing market power of online travel agents (OTAs).
When the OTA market began around 2000, online accommodation sites were efficient. They dealt with the overhang of inventory – spare rooms, that is – and they matched the travelling public with B&B operators for a small charge. Now, says McIntyre, the market has consolidated and foreign, tax-avoiding multinationals are calling the shots, driving up prices.
Another beachside apartment operator on the New South Wales South Coast – she didn’t want to be named for fear of reprisal – says the OTAs stop her from discounting.
The fees can be up to 30% per cent (to get premium position on an OTA website) and they don’t allow you to compete (on price) with them.
As a small business, we are beholden to list with these sites as they obviously have power in Google rankings, and we would disappear without such listings.
Both operators talked about tax. Online accomodation websites are booming yet their billions of dollars in income, income that used to flow to Australian companies and contribute to Australia’s tax base, now almost entirely bypasses these shores.
Heading for a virtual duopoly
The two leaders in the accommodation space are Booking.com and Expedia, with more than 18,000 in listings daily. An investigation of their financial statements shows the former books its sales directly to The Netherlands and the latter directly to the US; so no GST and virtually no income tax.
The chief executive of the Accommodation Association of Australia (AAA), Richard Munro, says the gross value of the accommodation bookings market is A$15 billion to A$17 billion. The two top players command roughly one-third, or A$5 billion in gross spending (30% market share of total bookings, or almost 85% of online bookings in Australia).
Assuming average commission rates to Booking.com and Expedia of 15% of each sale, says Munro, these two players alone rack up annual sales in Australia of more than A$750 million.
Here is the punchline though. This A$750 million or so in sales is nowhere to be seen. Last year, Bookings.com disclosed revenue of just A$16.2 million, according to its skimpy financial statements filed with the corporate regulator, while Expedia booked $$93 million. Almost all revenue in both instances came from offshore parent companies in “service” arrangements.
Over the past three years, Booking.com has paid a mere A$2.46 million in tax in Australia, despite its offshore associates raking in A$1 billion or so in revenue.
Expedia’s financial statements are so lame they don’t disclose tax in the cash-flow statement, nor in the notes – nothing to see there. They have booked a tax expense, but expense is an estimate not a payment.
A familiar tax-avoidance structure
All this is now convention, a well-trodden path of accounting and disclosure chicanery pioneered by Google, eBay and Facebook on the advice of the Big Four accounting firms.
These are the hallmarks of the US digital giants:
zero income made in Australia actually booked in Australia
pitiful amounts of tax paid, and then only in recent years
a skinny board, a triumvirate of directors: typically two offshore and one in Australia with a low profile
a small CBD head office in an accountancy firm
As much as tax is a challenge for regulators, there is also a critical antitrust consideration. The two big players in the space have been gobbling up smaller pretenders, consolidating the market, forcing prices up, forcing small hotels, motels and B&Bs to deal with them or be left with little opportunity to access eyeballs on the world’s greatest monopoly, Google.
The Australian Competition and Consumer Commission (ACCC) is believed to be still investigating competition issues. Expedia
has been pouncing on a slew of rivals. It now owns Travelocity, Orbitz, Hotels.com, Wotif, Lastminute, Hotwire, Trivago, CheapTickets and eBookers.
There was outrage last year as hotel operators slammed the ACCC for striking a “secret” deal with the duopoly which stopped hoteliers from offering cheaper prices online.
What can authorities do about this?
While the industry brawl over pricing parity rages on, authorities could do some simple things to enhance accountability by these conniving tax avoiders. For one, the Tax Office could force – as it has done with Google and Facebook – the OTAs to bring their revenue onshore to be taxed, instead of letting them pretend their Australian businesses are really Dutch or American.
These multinationals, like the others, command puppet regimes across the globe. Their real directors, the “shadow directors”, are offshore, so their companies should be treated as such, as undisclosed agencies, and taxed accordingly.
As usual, the accountancy profession is miserably failing to uphold standards, and their multinational clients aren’t compelled to file proper General Purpose financial reports rather than the feeble Special Purpose reports designed to conceal.
Booking.com – auditor Deloitte – lists an address in Martin Place, Sydney. In 2016, it disclosed A$7.1 million in dividends to its Dutch shareholder Booking.com NV. The ultimate shareholder is US giant Priceline Inc.
Besides its one Australian director, Eve Crestani, Booking.com’s directors are a Jupiter Tsui, resident of Singapore, and Johannes Wilhelmus Pieter Maria Trass, resident of Holland.
It’s a similar deal for Expedia, registered address Bird & Bird Martin Place, Sydney. Two US directors, one Australian.
The only mention of tax in the notes to the latest accounts is a small increase in “foreign tax payable” of A$976,000.
In the case of both companies, it seems the costs were bulked up to minimise profit and therefore tax paid. Expedia shows a A$34 million marketing and advertising budget and a jump in “other” expenses from A$2.7 million to A$8.8 million last year.
It was a mistake for the ACCC to have permitted Expedia to have swallowed Australian business Wotif three years ago.
Australian authorities have allowed predatory, secretive overseas businesses to plunder their tax base while penalising thousands of Australian accommodation operators thanks to onerous commissions and diminishing competition from a duopoly.
This column, co-published by The Conversation with michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative between The Conversation and the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.