Governments risk crimping their booming entrepreneur-led online economies through ill-considered tax schemes
Southeast Asian governments almost universally praise the rapid expansion of e-commerce, a new driver of entrepreneur-led growth in several regional economies.
The region’s ‘internet economy’ was worth around US$50 billion last year and could increase to as much as US$200 billion by 2025, according to a report by technology giant Google and Singapore sovereign wealth fund Temasek Holdings.
Investment bank Credit Suisse predicted in a recent report that online retail sales could be between six to 10 times higher than traditional offline retail sales in Southeast Asia also by 2025, spurred on largely by Chinese technology giants investing in the region.
While e-commerce’s fast spread has helped to pump up regional economies, it has also presented governments with a dilemma over how best to collect revenue from online transactions. Several countries are now considering specific taxes on online firms that some fear could crimp growth.
Thailand began consultations for an e-commerce tax last year, as did Indonesia and Malaysia. Singapore is currently deliberating whether to introduce an e-commerce tax to create more competitive parity between online and traditional brick-and-mortar firms, a key motivation behind proposed tax reforms across the region.
One major concern for governments is that e-commerce firms based abroad but with local offices in the region aren’t paying their fair share of tax.
Malaysia, for instance, wants to include foreign e-commerce companies’ sales in its goods and services tax. Indonesia is considering whether to include the same international companies in a new corporate income tax (CIT) scheme.
Southeast Asia is not alone in grappling with the issue. The European Union is also busy trying to reform tax laws in ways that allow for more collections from international online firms. But, as in the EU, Southeast Asian governments could quickly run up against the contentious issue of alleged “double taxation” of online sales.
Most regional governments have signed international double taxation agreements (DTA), which means multi-national firms are not required to pay CIT in both their registered home country and those in which they operate overseas. But laws remain vague and open to interpretation, allowing both governments and tech firms to spar over enforcement.
Last month, Ho Chi Minh City’s taxation department tried to collect US$2.94 million in alleged tax arrears from the Vietnamese subsidiary of Uber, the popular ride-hailing app.
But Uber Vietnam, whose parent company Uber International Services Holding BV is based in the Netherlands, took the case to local court arguing that since Vietnam has signed a DTA with the Netherlands the firm was not responsible for CIT taxes in Vietnam. The local court threw out Uber’s claim but the case is ongoing.
The situation is even more confusing for Southeast Asian governments that aim to tax international e-commerce firms that have no permanent operations or subsidiaries within their countries but conduct online sales through overseas deliveries. US-based Amazon is one such firm that is active but without operational offices in many regional countries apart from Singapore.
In many ways, governments face the same hard choices in taxing online firms as they do offline ones. On the one hand, authorities know that low taxation and generous incentives tend to attract foreign investment and allow domestic entrepreneurs to flourish.
On the other, all governments need more revenue to fund their infrastructure-driven economic plans, as is the wont of most regional ruling parties. Vietnam’s Communist Party is desperate to boost state revenues to rein in its rising public debt, while Philippine President Rodrigo Duterte needs more funds to pay for his various spending vows.
The Google and Temasek Holdings’ report says that of the US$12 billion invested in Southeast Asia’s online economy by local firms since 2016, three-quarters came from the region’s so-called “unicorns,” start-ups that are worth more than US$1 billion.
There are thought to be seven such unicorns in Southeast Asia, among them ride-hailing app Grab, e-commerce site Lazada, Indonesian online marketplace Tokopedia and travel and hotel booking platform Traveloka. Those valued at less than US$100 million accounted for US$1.9 billion in investment over the same period, the report said.
As a result, some economists think Southeast Asian governments risk deterring future investments by trying to tax multinational e-commerce transactions, especially if the measures could be perceived as violating laws or agreements against double taxation.
According to a recent article by Hosuk Lee-Makiyama, director of ECIPE, a Brussels-based think tank, most Asian countries benefit from the current arrangement since the larger, typically US-based firms, pay more tax in the region than their Southeast Asian counterparts.
“If Asian governments could tax Silicon Valley firms, but their own exporters were required to pay taxes in the US or Europe, Asians would be back at a net loss,” he wrote.
But it is the smaller, locally-registered e-commerce firms that fear they will be expected to shoulder the tax burden. Many low-profit, one-person outfits contend they are not part of the formal economy, since selling a few clothes or skincare products each month is a side project, not a full-time job.
Slightly larger and more formal online firms say that new taxes, depending on the percentage of sales, could cripple their nascent growth. And, if local firms are targeted first and more directly than international ones, it would tilt the competitive playing field further in favor of foreign over local firms, they say.
One small-scale Vietnamese online vendor who requested anonymity said he is concerned more about the administrative task of paying taxes than the actual financial cost.
He says that he spends four hours a day managing his Facebook-hosted shop, but if the necessary tax-related paperwork takes an additional hour out of his day it won’t be profitable for him to continue.
Governments know that these smaller e-commerce vendors are easier targets compared to multi-million or billion dollar international firms who understand loopholes better than their probing tax investigators.
Local firms, though, are starting to catch up. After Thailand announced plans last year to enforce a withholding tax on internet transactions, there were suggestions that vendors would simply shift to cash-on-delivery, already popular in Thailand, rather than bank payments.
That would deliberately make it impossible for the country’s Revenue Department to monitor sales and calculate how much income tax is owed, a strategy online entrepreneurs seem increasingly willing to employ.