A man hails a taxi in Mexico City, Mexico. (Photographer: Susana Gonzalez/Bloomberg)

Uber to Withhold Mexico Driver Taxes in Landmark Deal

(Bloomberg) -- After months of setbacks, Mexico is now on the cusp of rolling out an automatic tax payment system that forms a key part of its effort to crack down on evasion. And the government scored a marquee name -- Uber Technologies Inc. -- to be its first participant, according to a person familiar with the negotiations.

Uber to Withhold Mexico Driver Taxes in Landmark Deal

For Mexico, it’s a big get. The country has been looking for ways to boost tax collection that’s the worst among members of the Organisation for Economic Cooperation and Development, a result of an economy that remains largely informal. Uber is a key ally -- it dominates more than 80 percent of the market in Mexico, according to Dalia Research, and it also likely has many drivers and restaurants who don’t properly report or pay income tax. For Uber, the once-combative tech giant, it’s a test to a new strategy of offering more gestures of cooperation to governments.

The pilot program will be geared toward ride-hailing and food delivery services, both of which Uber provides, and will allow it to withhold taxes from users who gain income from it, the person said, asking not to be named because the information isn’t public yet. It’s set to launch next week after a year of discussions, with Uber expected to officially join in early 2019. The program doesn’t create a new tax, the person said. Uber will just collect what drivers should already be reporting and paying monthly.

The tech firm will withhold an 8 percent value-added tax plus an income tax of up to 9 percent that will vary depending on the number of rides drivers complete each month, according to documents seen by Bloomberg News.

The Finance Ministry hopes to turn it into law after a yet-to-be-defined trial period, according to the person, meaning the final say would come from the next administration -- incoming President Andres Manuel Lopez Obrador takes office Dec. 1. While the new leader has spooked investors with referendums to scrap the construction of a $13 billion airport in Mexico City as well as public consultations on ten other announced projects, from refineries to a train meant to cross five southeastern states, the taxation program will likely be kept.

The transition team is aware of the negotiations with Uber and the program may be expanded to include rentals -- Airbnb Inc. was expected to take part, but backed out at the last minute, the person said. If the program becomes law, no exceptions are expected, the person said.

Airbnb and the Finance Ministry did not immediately respond to a request for comment.

The Mexican government is betting that automatically withholding taxes will sit well with drivers. Instead of monthly filings, they’ll only have to file taxes once a year. But the voluntary nature of the program opens the door for drivers to keep evading taxes by switching to companies that decline to opt-in. Spanish Cabify and Didi Chuxing, the Chinese giant that acquired Uber’s assets in the Asian country in 2016, did not respond to requests for comment on whether they’d also join the tax program. More companies are entering the market, including Daimler AG, whose Beat ride-sharing service is starting by March.

Uber has been entangled in dozens of lawsuits including in hubs like New York and London over low driver wages, congestion and employment rights -- only a share of the many problems Dara Khosrowshahi has had to deal with since taking over in mid-2017. The legal concerns have kept the company from entering into agreements like the one with Mexico, on fears they would open up the door to debates on whether drivers should be labeled as workers, employees or self-employed.

For now, Uber says their drivers are the latter, as they haven’t agreed to perform any work or services for the firm, it argued in a London court last month. The contract between Uber and drivers is essentially a licensing agreement that allows them to use the company’s app if they meet certain conditions, the company’s attorney said.

In Mexico -- one of its biggest markets globally, behind only the U.S. and Brazil -- the agreement does not change or jeopardize drivers’ employee status since the Mexican law allows for fiscal retention without an employer relationship.

“We reiterate our willingness to collaborate with government institutions,” Uber said in a statement. “We will work together with the Mexican tax authorities to boost shared economy and grow self-employment opportunities in the country.”

©2018 Bloomberg L.P.