In Southeast Asian countries, the taxmen are beginning to come calling. They want a slice of the very profitable pie that businesses are enjoying through eCommerce sales on platforms like Facebook Marketplace, Amazon, eBay, and others. Tax authorities in Thailand, Indonesia, Vietnam, Malaysia, and Singapore are in the process of deciding whether to make legal changes so that they can capitalise on this ever-growing revenue stream. The difficulties that these governments are experiencing is deciding how to levy the traditional corporate income tax, personal income tax, and VAT on sales that are conducted on internet platforms or by foreign companies.
Why you should be building your startup in Southeast Asia
How big is the pie?
There is a chance that economic growth could falter across the globe in 2019, due to global trading tensions, political uncertainty, and rising interest rates. However, Southeast Asia’s digital economy is growing and is currently a hotspot for investment and revenue.
According to the Google-Temasek e-Conomy SEA 2018 report, drastic market acceleration across Southeast Asia’s internet economy is leading experts to predict that it will reach $240 billion USD by 2025. This is partly due to the fact that in 2018, the Southeast Asian economy grew exponentially through eCommerce, online media, online travel, and ride-hailing. These developments have led many overseas investors to pour record amounts of funding into the region. Most important for this article, though, is that Southeast Asia produced $23 billion USD in eCommerce revenue by the end of 2018–doubling 2017’s total.
With the above in mind, it is likely that consumers will continue to increase their already growing online expenditures, shifting from brick-and-mortar shopping to online purchasing.
Finding the balance
ASEAN governments would like the technology giants of eCommerce to pay their dues when it comes to taxation–understandably so, given the exponential growth within the sector and the potential capitalisation that can come from it. However, they are looking to do so without asphyxiating future growth and development. After all, offering favourable tax rules to attract foreign investment and businesses is an excellent way to boost a country’s economy.
So, let’s take a look at how some Southeast Asian governments are dealing with the lucrative prospects of eCommerce taxation, courtesy of KPMG International Cooperative.
Thailand’s Revenue Department (TRD) began proceedings by holding a public hearing outlining a set of proposals surrounding the government supervision of eCommerce transactions. After the initial hearing, the TRD has since released a second draft of the proposal. The first draft considers the ways that the TRD can increase revenue collection from businesses operating in eCommerce. They formed a team of researchers to evaluate how other countries in Asia and the Western world treat the taxation of eCommerce and digital businesses. Currently, the TRD can handle domestic taxation with relative ease, as they can effectively detect any transactions and present the appropriate Thai taxes to them. However, the current regulations do not provide the TRD with an adequate basis to impose Thai taxes on outside companies because, under domestic rules, the majority of foreign operators do not have a physical presence in Thailand.
Building upon the initial draft, the second proposal focuses on VAT. The TRD removed the proposed corporate income and withholding taxations in favour of bringing eCommerce transactions with non-VAT registered consumers into the sights of VAT.
If the proposals are successful, a foreign company which provides services for Thai consumption will have to pay a 7% VAT charge, if their income from these services exceeds ฿1.8 million Thai Baht per annum. If a business creates a website with a Thai internet domain name or incorporates a payment system in Baht, they will also be subjected to pay Thailand’s national income tax charges.
At this time, the proposals have not yet been implemented and TRD has not confirmed their final proposal, which one can assume will combine tax-related and VAT-related factors from both the first and second drafts.
The eCommerce market in Singapore is vast. Payment technology company, WorldPay, predicts that the industry is set to expand by 48% to $7.4 billion USD by 2022. eCommerce taxation was first mentioned with the release of the 2018 budget, where the government announced that they were planning to implement a Goods and Services Tax on imported services from January 2020. Followed by a statement from Finance Minister, Heng Swee Keat: “…to make sure that [its] tax system remains fair and resilient in a digital economy.”
The prospect of this new eCommerce taxation is highly anticipated in the Lion City, but when Singapore’s 2019 Budget was announced, the new taxation system, to the surprise of many, did not feature.
It would seem that the Singaporean government is taking a slower and more pragmatic approach to the implementation of this new tax, exercising caution and considering all of their options and not looking for a short-term fix. As Jeff Paine, managing director of the Asia Internet Coalition, stated in his 2018 article, Singapore Budget 2018: Govt’s ‘wait-and-see’ stance on e-commerce tax a wise move:
“having short-sighted tax structures can potentially harm eCommerce and SMEs in the long run…[before advocating a multilateral approach], given the difficulty and complexities of e-commerce transactions between countries, it would be a bold and somewhat unpragmatic move for any country to implement its own standalone cross-border tax structure.”
The government of Malaysia has announced that the Customs Department was engaging in talks with the finance ministry, pushing for the imposition of a 6% goods and services tax to be extended and placed on foreign eCommerce as well as domestic providers. All thoughts and plans on this matter will go through the nation’s Organisation for Economic Cooperation and Development governmental department.
The country government has since confirmed that its plans for the digital taxations will come into legislation in 2020, with the Malaysian finance minister, Lim Guan Eng stating:
For imported online services by consumers, foreign service providers will be required to register and remit related service taxes to the Malaysian customs, effective January 1, 2020. These tax measures will balance competition between retail outlets and online stores, especially those owned by overseas companies.
As for the taxation of products from foreign companies, the Malaysian government has not yet given specific details regarding their intentions. They are, however, looking to lower business costs in Malaysia and avoid double taxations via a new credit system, which they began implementing on the first day of 2019.
In Indonesia, the government is taking aim at the growing ride-hailing application trend. According to the Google-Temasek report, the sector in which the online transport industry resides, had a revenue total of $8 billion USD in Southeast Asia last year. The Indonesian Transport Minister has stated that ride-hailing apps will be subject to the countries’ existing corporate income tax, which is currently set at 25%.
From April, all operators of the Indonesian eCommerce market will have to give the Indonesian government accurate details of their turnover. The tax department announced that a company with a minimum yearly turnover of $339,943 USD must charge VAT to their customers, and then hand over the subsequent money to the authorities.
Large enterprises–like Grab–will be subject to a 25% corporate tax on profits, while small and medium-sized enterprises (SMEs) will be expected to pay a 0.5% income tax.
Vietnam’s governmental suggestion is that all cross-border payments from out of the country should be filtered through the domestic gateways of the National Payment Corporation of Vietnam. This would allow the Vietnamese government to monitor and track any tax liabilities so that they can impose them with ease. The Vietnamese authorities are also tracking back and assessing the financial records of eCommerce giants who have already been operating within the country–resulting in tensions between outside investment and the government bodies involved.
In 2017, the Ho Chi Minh City tax department went head-to-head with the now-defunct ride-hailing firm, Uber, due to a reported 53 million Dong. Uber, of course, disputed the demands, and attempted to sue the tax department in the Vietnamese courts–the case was swiftly dismissed.
Out of the Southeast Asian economic powerhouses, the Philippines is the only country to have already implemented an eCommerce tax system. Since 2016, companies outside of the country who supply Filipino consumerism are subject to a 12% VAT bill, if they have processed online transactions exceeding a total of $37,310 USD. For transactions of a lesser value, a 3% charge is levied instead. Perhaps the Philippines could be a role model and thought leader when it comes to eCommerce taxation for the rest of Southeast Asia.
As we can see, the various governments across the Southeast Asian region face their own, individual challenges and have their ideas on how the eCommerce taxation system should be implemented, on a localised level. A deep level of critical thinking and analytical meandering needs to occur before the perfect eCommerce tax plan is thought up; but for now, the future of foreign companies supplying Southeast Asian consumer needs is looking bright.