Last week’s flurry about whether Uber was complying with the law and should be shut down if it was not missed the point entirely. Of course, Uber should comply with the law of the land – that is a given for any business operating here – but that was not really the issue. The bigger point that no-one seemed even willing to acknowledge, let alone grapple with, was how businesses like Uber are changing business models across the world, and how inadequate current law is to deal with that change.
Companies like Uber, its accommodation equivalent AirBnB, the on-line retailer Ali Baba, even Babylon, the British on-line medical service are both everywhere and nowhere. They are everywhere in terms of their pervasive on-line reach across the world, but they are also nowhere in that they have no designated headquarters or tangible fixed assets. They operate literally in the cloud.
Yet our traditional business model is very different. Since the Industrial Revolution it has been the custom for businesses to operate from fixed sites, producing a range of tangible goods, that can be sold (and/or shipped) to merchants around the world, who then on-sell to local distributors to retail to the public. It has been possible at every stage to identify who the business was, where it was located, and for tax and customs authorities to extract their pound of flesh for national revenues accordingly. That is the premise on which the international trading system has been founded and still continues to operate.
The development of containerisation in the 1970s was probably the first chink in its armour because it allowed for the introduction of “just in time” production where goods were produced and supplied as needed, thus reducing the requirement for merchants to hold large inventories. This in turn led to the breakdown of tariff barriers, so that the role of the domestic wholesaler as the middle man with the large mark-up was steadily reduced. But the system still operated fundamentally as before, because of the constraints of shipping and communication.
As technology improved, and aircraft capacity dramatically increased, further cracks appeared. Warehouses the world over rapidly disappeared, leaving behind many derelict waterfronts, now being redeveloped as vibrant living spaces as a consequence. The development of the internet in the 1990s led to the rise of the e-businesses like amazon.com, or our own equivalent fishpond.com, and the rapid explosion of on-line retailing.
And then came the issue of how to tax these large on-line increasingly multinational ventures. The Google story, which frustrated governments the world over (including ours) because they paid so little tax everywhere, and gave rise to the creation of exotically named tax avoidance schemes like the Irish Wedge or the Dutch Sandwich, is perhaps the classic, but by no means sole, example. And it led to the development of the OECD’s Base Erosion Profits Sharing programme in which New Zealand is playing a strong role to develop a fair and consistent way of taxing these multinationals across the world.
Uber and the companies like it are but the latest iteration of this dramatic change. And it will intensify. Business of the future will be as much the trade of ideas as business of the past has been the trade of commodities. New technology, the internet in particular, has broken both the tyranny of distance and the sanctity of national boundaries. Rigid national laws in New Zealand and elsewhere that try to enforce old ways of doing business are doomed to fail, as last week’s incident shows.
In Greek mythology, Sisyphus was pilloried for constantly pushing a heavy boulder uphill in a vain attempt to overturn reality. Today’s Sisyphusian equivalents are those regulators trying to make the likes of Uber fit the established business rules of conduct. It just will not work. For that reason alone, last week’s exchange should have been a significant wake-up call. Sadly, it seems it was just a regulatory irritant.