(Bloomberg) -- Saudi Arabia has slapped several technology firms, including Uber Technologies Inc. and its Dubai-based subsidiary Careem, with tax bills worth tens of millions of dollars, according to people with knowledge the matter.
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Uber and Careem face a combined bill worth around $100 million, two of the people said. The claims are related to a dispute over how to calculate the value-added tax owed over the past few years by gig economy firms versus their individual contractors -- and include hefty penalties for late payment, the people said.
Several of the companies are trying to negotiate with the kingdom’s Zakat, Tax and Customs Authority, they said. The tax authority didn’t respond to a request for comment. Uber and Careem both declined to comment.
The disputes draw Saudi Arabia into a global debate over how to tax the activities of gig or “sharing economy” platforms like Uber, Airbnb and TaskRabbit, which rely on individual drivers, couriers or hosts that often fall below taxation thresholds. The U.K. has also looked at toughening up tax rules on activities in the sharing economy. But the unexpected costs could spook investors at a time when Crown Prince Mohammed bin Salman and Saudi officials are trying to attract multinational firms to the kingdom and boost foreign investment.
The issue burst into public view this month, when a top investor in Dubai courier app Fetchr -- once among the Middle East’s most promising startups -- said the company was considering filing for liquidation after becoming “insolvent” because of a disputed $100 million tax bill in Saudi Arabia.
But the issue is broader than Fetchr and is affecting other tech companies operating in the kingdom, the people said.
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The taxation question cuts at the heart of Prince Mohammed’s diversification ambitions and the growing pains along the way. Saudi officials have repeatedly pledged to listen closely to the concerns of the private sector. Yet some businessmen complain that unpredictable policy shifts over the past five years make it difficult to plan ahead and calculate risks. It also comes at a time when the kingdom is increasingly competing with Dubai, a city in the neighboring United Arab Emirates, as a destination for startups.
Saudi Arabia used to rely almost entirely on crude exports for state revenue, but in 2018, as part of efforts to boost non-oil revenue, officials introduced a 5% value-added tax. They hiked it to 15% after the pandemic hit and sent oil prices plummeting, though Prince Mohammed has promised to lower the rate in the future.
Since the tax was first levied, firms like Uber typically paid it on what they perceived as their own value-add, or the company’s commission. That’s just a portion of the total amount paid by customers, much of which goes to the drivers who use their platform.
But last year, the tax authority began sending companies reassessments that levied tax on the full amount, including the contractors’ cuts, the people familiar with the matter said.
Authorities argue that those individuals fall below the value-added tax threshold and that it would be impractical to collect tax from them directly, the people said. But because the bills date back several years and include cumulative penalties, they leave companies on the hook for money they didn’t collect, the people said.
Some of the companies have tried to seek help from the kingdom’s Ministry of Investment and other entities, but were told the problem required a political solution, two of the people said.
“We are aware of cases like this,” the ministry said in a statement to Bloomberg. “The Ministry of Investment is an advocate for investors across government and we are working closely with relevant government bodies to address this issue and collectively work towards a swift and just resolution.”
Policy changes outlined under the kingdom’s investment strategy, announced last week, are “designed to create a fair and enabling business environment that integrates the needs of local and international investors into government decision-making,” the ministry added.
Saudi Arabia’s sovereign wealth fund owns a nearly 4% stake in Uber, and the fund’s governor, a top adviser to the Saudi crown prince, has a seat on the company’s board. Careem is wholly owned by Uber, but both brands operate as distinct apps in the kingdom.
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