Taxing Digital Trade Could Speed Pandemic Recovery

Digital trade, such as ride-hailing and delivery apps, are taxed inconsistently in Asia. Photo: Rowan Freeman
Digital trade, such as ride-hailing and delivery apps, are taxed inconsistently in Asia. Photo: Rowan Freeman

By Richard Highfield, Go Nagata

Extending a value added tax (VAT) to more effectively capture e-commerce and digital services could yield significant short-term revenue and help ensure a level playing field between domestic and foreign players.

Addressing the impacts of the COVID-19 pandemic continues to challenge the fiscal management of just about all governments within the Asia and Pacific region. At same time,  the surge in e-commerce that largely coincided with COVID-19 has greatly boosted the potential for governments to bolster tax revenues by applying Value Added Tax (VAT) more effectively to digital trade.

Governments worldwide responded to the pandemic with increased public spending on a variety of response measures to bolster healthcare systems, strengthen social protection, and boost their economy. Coinciding with these increased outlays, tax revenues declined in most economies, thereby adding to growing fiscal deficits. While some countries are witnessing signs of economic recovery and growing tax revenues, fiscal deficits remain a prominent feature of most governments’ budgets and are likely to do so for some time.

 The Asia and Pacific region represents the largest share of global e-commerce by far and e-commerce sales continue to increase considerably. It is estimated that the region in 2020 represented more than 60% of the global e-commerce market with e-commerce sales amounting to approximately $2.4 trillion.

Although VAT is the largest source of tax revenue on average in Asia and the Pacific – and Asia is the fastest growing e-commerce region in the world – VAT reform in response to e-commerce growth has remained well below its true potential.

The strong growth of digital trade has created significant challenges for VAT systems globally, and in Asia, in particular concerning online sales of services and digital products (such as applications and “in-app” purchases, streaming of music and on-demand television, gaming, ride-hailing, accommodation rental) that often are provided by non-resident suppliers to private consumers.

Traditional VAT rules typically lack effective provisions to impose VAT on supplies that do not require the supplier to be physically present in the jurisdiction of its customers, leading to no or inappropriately low amounts of VAT being levied. This leads to an uneven playing field vis-à-vis domestic suppliers who are obligated to levy VAT on such sales.

At the same time, jurisdictions also struggle to tax all imports of low-value goods from online sales at the point of importation, given the inherent difficulties associated with effectively taxing very large volumes of low value goods by applying traditional customs methods. This is also disadvantageous to domestic suppliers who are obligated to levy VAT on sales of such goods.

 With many governments facing unprecedented fiscal challenges, improving the effectiveness, efficiency, and fairness of existing taxes makes a lot of sense and should be a priority for all.

A new toolkit recently released by the OECD and supported by ADB and other international organizations provides some helpful advice to tax authorities:

  • Create a legal basis for levying VAT on services and intangibles, including sales of digital services and digital products, irrespective of whether or not the supplier is located in that jurisdiction.
  • Identify clear criteria for determining a customer’s usual residence, by reference to data normally available to online suppliers in the normal course of their business (including bank card or other payment data, billing address, and IP address).
  • Impose VAT collection obligations on non-resident suppliers making such business to consumer supplies (“vendor collection regime”).
  • Implement a requirement for digital platform operators to remit VAT on the online sales made through their platform by non-resident online suppliers (“full VAT liability regime”). This can be complemented with reporting requirements, including to sharing and gig economy activities, thus creating considerable opportunities for greater visibility of informal economy activity.
  • Realize high levels of compliance by implementing a simplified VAT registration and collection regime for non-resident suppliers and digital platforms to fulfil their VAT-collection obligations, supported by online processes and limiting obligations to what is strictly necessary for the effective collection of VAT.
  • Extend the vendor collection regime with full VAT liability for digital platforms to online supplies of low-value imported goods, by imposing an obligation upon non-resident suppliers and digital platforms to collect the VAT on these supplies at point of sale and remit VAT to the tax authority in the jurisdiction of importation.
  • Strive for international consistency in designing and administering the above measures to impose and collect VAT on online sales by non-resident suppliers.

With many governments facing unprecedented fiscal challenges, improving the effectiveness, efficiency, and fairness of existing taxes makes a lot of sense and should be a priority for all.