Last week Grab drivers in Hanoi went on strike, shutting off their Grab accounts and refusing to respond to requests for rides or deliveries. Dressed in the now familiar green and white jackets and helmets they wear to identify them as Grab drivers, they gathered outside the company’s local offices to voice their displeasure over a change in the fee scheme that resulted in a reduction of the drivers’ share of fees collected from customers. The change came from a decree on tax that went into effect on December 5 and imposed VAT taxes on the entire fee collected from passengers rather than just the portion of the fee collected by the ride hailing company.
The new tax rules come as the most recent move in the Vietnamese Government’s relationship with Grab and other ride hailing firms and marks the culmination of a years long debate as to the exact nature of ride hailing.
In America, where the concept of ride hailing first emerged, the debate about regulation of the firms involved centers mainly on the relationship of the drivers with the company. Are they employees or freelancers and what obligations does the company have towards the drivers? In Vietnam, however, the debate so far has focused on the nature of the company itself. Is a ride hailing company a technology company or a transportation company and how should it be taxed?
What is Ride Hailing?
Ride hailing is a service that connects passengers with drivers for the purposes of transportation by contract. Ride hailing companies provide apps and software that allows passengers to input a fixed point of origin and destination and connect with a driver who owns and operates his own vehicle and who can transport them according to their request. Ride hailing drivers are not specially licensed and cannot pick up passengers on the street like taxis.
Passengers, especially in Vietnam, pay either using an e-wallet connected to the ride hailing app (which is then split and paid to the company and the driver) or with cash. According to Tech in Asia (see article here) ride hailing firm Grab:
generally receives a fee from drivers across its various services, such as GrabTaxi, GrabCar, and GrabBike. Drivers deposit credits into an account with GrabTaxi, and the corresponding amount is deducted for every booking they complete.
It is unclear, especially through legislation in Vietnam, whether these methods of payment create a relationship between the passenger and the driver or the passenger and the ride hailing company or both. Unfortunately, the history of legislating ride hailing in Vietnam has failed to clarify the situation, though the arguments exist for both possibilities and the guidelines passed earlier this year suggest that the Government is now treating ride hailing services in Vietnam as a contract between the passenger and the company with a separate contract between the company and the driver.
The Beginnings of Ride Hailing in Vietnam
Ride-hailing first came to Vietnam in 2014 through the auspices of the Singapore company Grab. It first introduced GrabTaxi which provided customers with cars owned and operated by individual drivers and then later that same year added GrabBike which offered similar services but with motorbikes.
Shortly thereafter American company Uber made a foray into Southeast Asia, including Vietnam, and had some success, but in 2018 sold its Southeast Asian subsidiaries to Grab. Indonesian company Go-Jek, in Vietnam Go Viet until this year, also joined the competition for the ride hailing market. Several other smaller companies and startups entered the sector including Aber, FastGo, VATO, MyGo, and Be Group JSC. In 2020, the estimated revenue in the ride hailing sector is expected to exceed two billion USD.
The Legislative History of Ride Hailing in Vietnam
Ride Hailing Under Existing Legislation
When Grab and Uber first entered the Vietnamese market, the prevailing legislation that seemed to govern their activities defined “transportation services by car” as the act of using cars to transport goods, passengers on streets for the purpose of obtaining profit; and includes transportation businesses that collect money direction and transportation business that don’t collect money directly.
The Ride Hailing Pilot Program
Vinasun Sues Grab
The HCMC Appeals Court ruled Tuesday said that Singapore-based Grab has operated as a transport company in Vietnam by deciding fares, managing vehicles and directly receiving money from customers.
Grab drivers have their income cut if passengers are not satisfied with their services, which means the drivers are under the company’s management, just like other transport companies, the court said.
However, as Grab is only registered as a technology company in Vietnam, it does not have to bear the same tax rate and pay drivers’ insurance and other fees as other taxi firms, which is not an equal situation, the court said.
Although the entrance of Grab into the market has benefited users, it was one of the main reasons that caused a decline in Vinasun’s revenue, and therefore the earlier ruling is upheld, it added.
Some commentators caution that such a decision will set a bad precedent and allow other taxi companies to sue Grab and other ride hailing companies for losses that may or may not be attributable to their penetration in the market. This is a limited possibility, however, as the window during which ride hailing in Vietnam was classified as “science and technology” services was closed in April of this year when a new decree ended the pilot program and definitively categorized ride hailing in Vietnam as a transportation service.
Ride Hailing in Vietnam Legally Becomes Transportation
In a decree issued on 17 January 2020 and effective as of 1 April 2020, the Government created a new category that now includes both taxis and ride hailing services. Now, the “business of transportation by automobile” is defined as
the act of at least one of the specific stages of transportation activities (directly managing transportation, driving or deciding the price of transportation) to transport passengers, goods on streets for the established purpose of profit.
Additional definitions provide for transportation services by taxi and transportation services by contract, both written and electronic, and seem to answer all of the arguments for classifying ride hailing in Vietnam as a “science and technology” service. Specific regulations were imposed on ride hailing drivers and companies and, in general, served to do much to level the playing field between traditional taxi and ride hailing services. (For a complete brief on the regulations included in the decree see our special alert here.) Ride hailing in Vietnam, now, is legally a transportation service.
This piece of legislation did not come a surprise, though, and looking at the legislation implementing the pilot program it is clear that the possibility existed even in 2015. According to that document, some of the main purposes of the pilot program were to determine how ride hailing services should interact with the Government and the community and, specifically, how they would pay taxes.
What’s Next for Ride Hailing in Vietnam?
Now the Government has imposed a new tax regime on ride hailing companies, one that continues their treatment as transportation services rather than as “science and technology” companies. Under the pilot program, the service provided was seen as the provision of the app and the company was only taxed according to the amount of fees it received for that service. Drivers were taxed separately on their portion of income as freelancers. But now that the service under contemplation is the act of transportation itself rather than just the provision of an app, the company is now liable for taxes on the entire service provided. The tax for drivers on their portion of the service remains unchanged.
Grab, at least for now, rather than dramatically increasing fees to compensate for the increased taxes, have reduced the driver’s share of the fees. It is this reduction of pay that the Grab drivers were protesting in their strike last week. In an alternative strategy, Go-Jek has raised its fees to compensate for the loss of revenue payable as taxes.
With the imposition of regulations earlier this year and now the change in tax status, the Government has come to a conclusion on how it wants to treat ride hailing services. They are transportation services and not “science and technology” companies. What remains, though, is the question of how the ride hailing companies will continue their relationship with drivers. Now that the Government views drivers as assisting the companies in providing a unified service, will they continue to be classified as gig workers or will the Government make moves to consider them as employees of the ride hailing companies and impose labor regulations accordingly?