Beyond creating a liquid secondary market, there is limited incentive for Airbnb to go through a conventional IPO. In common with some other high-profile tech start-ups, it has had no trouble in raising capital through private channels.
However, even though a secondary market provides a means whereby existing financial backers can cash out their investments, the recent experience of Uber Technologies Inc (US:UBER) demonstrates that the wider market has probably become more circumspect regarding online disrupters, as investors start to question when increased revenue, market share and capital expansion should give way to profitability.
Shares in the ride-sharing app are still changing hands well below their offer price, but management – as is its wont – remains resolutely upbeat, citing a 37 per cent increase in gross bookings over the second quarter. Impressive on the face of it, but if I was holding shares in Uber, I would be more interested in finding out why a 14 per cent increase in quarterly revenue to $3.17bn (£2.48bn) fed through to an expanded adjusted operating loss of $1.59bn (Q218: loss of $441m) even after obligations linked to the IPO are stripped out.
People like to compare the expansion of the tech space over the past few years with the dot.com bubble of the late 1990s, but I think there are several differentiating factors. For a start, many directors of early online platforms were only guessing at the level of consumer engagement in their given online markets; and at the realistic amounts of capital required beyond initial software development (consider the experience of online branded fashion retailer Boo.com, which burnt through $135m in venture capital during the first 18 months of trading before it was placed into receivership prior to liquidation in 2000). Another factor worth considering is that much of the related technology infrastructure that we now take for granted either wasn’t in place 20 years ago, or wasn’t sufficiently robust from a technological perspective.
Uber’s teething troubles as a listed entity aren’t attributable to any technical shortcoming. But the group’s ability to pursue its business model in several jurisdictions, most notably in Europe, has been imperilled by government regulators, who view its deregulated business as unfair competition to existing services. Uber drivers are often able to avoid the more stringent licensing and competency tests in other countries outside the US as it represents itself as a digital business and not a transport service.
As ever, it’s a case of regulators striving to keep pace with digital disruptors; a systematic lag we’ve highlighted previously when we’ve reviewed the rapidly growing drone industry. However, there is another area where regulatory change could have profound implications for digital and cross-border commerce. Airbnb recently revealed in a note in its accounts that a tax inquiry by HM Revenue & Customs (HMRC) could eventually lead to legal proceedings. It’s probable that the disclosure is linked to the introduction of the Diverted Profits Tax (DPT) provisions in the UK, which seek to reduce the impact of profit-shifting practices employed by large multinationals, including numerous online entities. This isn’t the first salvo utilising the so-called ‘Google tax’, but it could represent a step up in HMRC’s efforts to curtail efforts by non-UK companies to avoid a UK taxable presence through "contrived arrangements".
Zoe Wyatt, Partner at Andersen Tax, posits that HMRC will seek to determine whether Airbnb [Ireland] has designed a corporate structure that artificially avoids creating a taxable presence by splitting out its UK-based marketing and payments processing businesses and pricing them as “low-level” services. If HMRC manages to get its hooks into Airbnb, it will not only create a precedent, but, as Zoe Wyatt points out, it helps to explain why the OECD is considering rescinding Article 9 of its Model Tax Convention, namely the ‘arm’s length principle’. This states that a transfer price on international business transactions between different arms of the same corporation should be the same as if the two companies involved were two independents. Next week’s issue will feature Megan Boxall’s review of the FAANG’s financial performance through 2019 – it will be interesting to see if there are any accompanying notes to the financials on any new taxation arrangements.
