Ecommerce has been snowballing for more than six years in Southeast Asia but yet only recently, was there any progressive movement in taxing digital transactions.
Government bodies in Thailand, Singapore and Indonesia understand the importance of taxes on ecommerce sales (products and services) in order to capture a piece of the fast growing segment and more importantly, level the playing field between its brick-and-mortar peers.
But implementing new tax regimes proves difficult given Southeast Asia’s “diverse and uncertain legal environment” explains Steven Sieker, head of Asia Pacific tax practice group.
Under existing taxation laws, only local players and not foreign companies across markets fall within local tax regimes.
“The main point is to try to tax multinational companies that are not registered in Thailand for their online business,” said Kanchirat Thaidamri, tax partner for Deloitte Thailand.
“Online is simply a reflection of what exists in the offline world: small stores don’t report all their taxes in the outside world” – Jason Ding, partner at Bain & Co, China
Below is a snapshot of the state of ecommerce tax regulations across six major APAC markets:
Ecommerce Tax in Indonesia
In 2017, Finance Minister Sri Mulyani stated the government wanted to “level the playing field between businesses that operate online and those offline, which must add 10% Value Added Tax (VAT) to the price of goods purchased”. While the tax rate is still unknown, it is expected to be lower than 10%.
The ecommerce tax, when implemented, will cover four types of platforms: online marketplaces, classified ads, daily deals and online retail that operate in the local markets but will not be levied on sales through social networks (mainly Instagram and Facebook).
Impact? Bolster the growth of social commerce in Indonesia, a country where social media platform usage is one of the highest in the world and weaken incentive to sell on e-marketplaces like Tokopedia and Lazada. Applying a 10% VAT rate to the online sector would bring in approximately USD$1.34 billion in additional tax revenues.
The Indonesia Ecommerce Association (idEA) was discussing a 0.5% VAT from each marketplace seller at the beginning of the year with the Finance Ministry – nothing has been implemented.
“If the tax regulation restricts ecommerce platforms – making selling in Bukalapak complicated because of the tax – there will be an exodus of people who would prefer selling on Instagram and Facebook, which is uncontrolled and not chased for tax because they sell through the back door,” – Bukalapak co-founder and chief financial officer Muhamad Fajrin Rasyid.
Timeline for implementation? Public trial in 2019.
Ecommerce Tax in Thailand
In July earlier this year, the Cabinet approved a proposal to collect 7% VAT from foreign ecommerce platforms deriving annual service income exceeding THB1.8 million (US$56,000). These businesses must sign up as operators under the VAT system to report to the Revenue Department.
The Nation reports the taxes apply to those selling goods and services on Internet platforms as well as the operators of Internet platforms such as Google, Amazon and Alibaba. Companies with an overseas presence and earning income from advertising/website space rental from Thailand are also subject to a 15% withholding tax.
Impact? Operators such as Facebook and Google could pass on the additional costs to its sellers and ad buyers, likewise with JD Central, Lazada and Shopee customers. Smaller players could be deterred from doing ecommerce if the business cannot sustain these taxes. Currently, vendors outside of Thailand are liable for 7% VAT only if value exceeds THB 1,500 (USD$45.76).
Timeline for implementation? Government needs to forward the draft VAT bill to the Council of State (the government’s legal advisory body) before submitting to the National Legislative Assembly for a debate. Early 2019.
Ecommerce Tax in Philippines
The country is the only market out of the region with an ecommerce taxation. The 12% VAT on total value of online transactions of more than USD$37,310 came into effect in 2016 and is applicable to store owners as well. For transactions lower than the threshold, a 3% VAT is levied instead on online transactions.
Impact? Any person or entity who, in the course of trade or business, sells, exchanges, or leases goods or properties, or renders services, and any person who imports goods, is liable to VAT. The government has its own challenges enforcing these taxes on different online business models as shutting down websites only leads to another one being created under a different IP address.
Ecommerce Tax in Malaysia
As of late 2017, there is a mechanism under Malaysia’s current GST model that taxes online services provided by local companies to Malaysian consumers, but currently is not applicable to foreign service providers.
Impact? The implementation of the digital tax may mean that foreign service providers serving Malaysian consumers will be charged with tax. The service provider can pass on the tax to customers by adding it to existing prices.
Timeline for implementation? The country is likely to follow the steps of its close neighbour Singapore.
Ecommerce Tax in Singapore
Currently, any online purchase in Singapore under SGD$400 (USD$290.17) is exempt from GST. The government did not include ecommerce tax in the budget released in February 2018 but the Ministry of Finance (MOF) said “B2B imported services will be taxed via a reverse charge mechanism, while B2C imported services will be taxed through an overseas vendor registration model” according to the Strait Times.
Impact? Decrease in shopping overseas as prices could increase with the introduction of GST on ecommerce goods and services from overseas.
Timeline for implementation? While many thought the new GST would be implemented in the 2018 budget released February this year, the government has tabled a concrete tax for ecommerce until 2020. Starting January 1, 2020, consumers will pay GST when buying online services from overseas, which includes music, video streaming, apps, online subscriptions, and digital B2B services such as marketing/accounting).
Ecommerce Tax in Vietnam
Vietnam is one of Southeast Asia’s most attractive and also nascent markets. Foreign ecommerce firms must have local representative office registered in Vietnam and pay VAT of 10%. Individual residents without an established ecommerce company in Vietnam will be subject to tax if they have annual sales revenue over USD$4,300. As of now, there isn’t heavy enforcement in place but there are plans for higher scrutiny by the National Assembly next year.
In November 2017, Vietnam’s government also released a proposal for all cross-border payments to be made through domestic gateways via the National Payment Corporation of Vietnam.
Impact? Not much concern in regards to Vietnam’s attractiveness as few companies have managed to ‘crack the local market’ and ecommerce contribution to total retail is still relatively small compared to other markets. The cross-border payments funnel will increase the tracking of tax liabilities by the National Payment Corporation of Vietnam.
Timeline for implementation? Late 2019.
Difficulties implementing an ecommerce tax in Southeast Asia
Apart from climbing over the layers of government and overcoming pressure from big corporates, and complaints from SMEs calling foul play, regulators also face the large task of enforcing such new reforms, especially concerning tax on digital services.
Products are easily tracked through physical movement in the country but services are intangible.
Axcelasia Inc Executive Chairman Dr. Veerinderjeet Singh shares: “The problem with foreign online companies is they will charge 6% GST on customers for the purchase and delivery [in Malaysia], but how will the Customs collect that amount when they don’t have offices in the country? How do you regulate that? And if they miss a few payments, how will you impose a penalty on them?”
Between now and 2020, when most implementations across Southeast Asia are expected to take root, Internet platforms and operators have little influence on the new tax policies but it’s the customers and the shift in their behaviour that will be largely impacted.
In the words of Senior Minister of State for Law and Finance Indranee Rajah, “keep shopping while you can”.