By Sally So, Advisory Manager, Radius
Determining whether to expand abroad — and if so, where and how — are tough decisions for a company to make. Don’t do it, and you miss out on markets where competitors are gaining a foothold. Plunge in without understanding the laws and culture of the target country and you risk fines and reputational damage.
For years, these worries have plagued ridesharing service Lyft as it watched on the sidelines while industry-dominating competitor Uber set up shop in over 600 cities worldwide, rising to a market capitalization of $68 billion to Lyft’s $7.5 billion.
Now, after going back and forth about international expansion for years, Lyft has finally decided to open its first operation abroad, in Toronto. Uber already has a presence there, and Lyft’s service is expected to start in December. Lyft has also signed an agreement with Chinese ridesharing service Didi, enabling customers to use the Didi app to order Lyft cars while visiting the US, and it is reportedly considering operations in Australia, New Zealand, Mexico and the UK.
As an incentive, Lyft is offering a 25 percent bonus to the first 3,000 drivers in Toronto who are approved and complete 20 rides a week during the company’s first three months of operation.
In addition to Toronto, Lyft plans to operate in Hamilton, Ontario and other suburbs, giving it access to 7 million people. It may or may not gain permission to operate in Mississauga, which hosts the city’s international airport. The city gave Uber permission to operate there on a trial basis in March, with plans to review the rules in 2019. Both Uber and Lyft have faced battles with airports, which are taxi hubs. Lyft’s website contains a long list of US airports where it is not allowed to operate or where operations are limited.
There is some evidence that Lyft may be benefitting from these scandals in the US, where customer downloads have accelerated as the company expanded to over 90 new cities this year.
International operations, however, are a different kettle of fish. Uber’s ride abroad has been anything but smooth, and Lyft may find it hard to avoid similar problems without careful planning.
Uber has faced a host of legal challenges after angering taxi drivers in Europe, Colombia and elsewhere. It is currently appealing a London transportation authority decision to strip it of its license to operate because of corporate behavior deemed not “fit and proper.” Worse yet, a British employment tribunal recently ruled that Uber’s drivers are employees rather than self-employed contractors, a classification which, if it stands, would upend the business model of both ridesharing services. Uber has operated in London since 2012 and has 40,000 drivers there. Lyft has been holding discussions with London transportation officials.
Uber has also faced resistance in Toronto, including traffic-halting protests from taxi drivers and two court challenges. Though government officials considered banning the service, they have so far left it alone.
Regulatory and Tax Implications
Tax authorities and regulators everywhere are still trying to catch up to ever-changing economic market and service offerings. While ride sharing services are now legal in Toronto with its 2016 vehicle-for-hire bylaw , there is as we’ve seen still much criticism and pressure from local taxi drivers indicating that more regulations are needed. With the introduction of Lyft into the Canadian market creating even more competition for taxi drivers, one can anticipate that there will be a continued push for changes and more stringent regulations governing ride sharing services in jurisdictions throughout Canada.
Uber and other prominent multinationals are also facing pressure from tax authorities around the world to pay their perceived fair share of taxes. Assuming Lyft has a similar corporate tax structure to that of Uber, the Canada Revenue Agency (CRA) will potentially lose out on significant tax revenues.
Much of the taxable income reported by ride sharing companies lies with their intellectual property (IP), in this case their respective software. IP in such cases is often structured via licensing agreements to sit in an offshore entity, where royalty income can be virtually tax-free. A much smaller amount of income is retained in the country where the services are rendered, and generally speaking only that small amount can be taxed by local authorities.
As more sharing-economy players like Lyft enter the Canadian market, the CRA will likely have to reassess its current tax regulations to keep up with the changing economic landscape and protect its revenues.
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