Taxing Southeast Asia’s e-commerce sector

With e-commerce taking off, taxation inevitably becomes a matter of interest.

Prior to the internet, the success of a retail store hinged on its geographical location and accessibility. But the rules of this trade have changed thanks to technology. A retailer is no longer bound by its venue today; customers and merchants no longer need to interact in person, and an efficient logistics network that spans the globe has made purchasing goods online a norm.

Many brick-and-mortar stores now have online sales channels. In fact, setting up a new business no longer requires a physical storefront. Yet despite the ubiquity of e-commerce, most country’s regulations haven’t kept pace with this transformation.

In Europe and the United States, where the e-commerce sector is sufficiently mature, business-to-business (B2B) and business-to-consumer (B2C) platforms already pay taxes, but most e-commerce firms in Southeast Asia don’t face comparable rules.

While there has been talk about taxing Southeast Asian e-commerce sites, only the Philippines has an e-commerce taxation framework in place so far. Elsewhere in the region, the sector’s nascence is often used as an argument against taxation.

The Philippines: About perfect

The Philippines is an outlier that deserves a mention as the only country in Southeast Asia with an e-commerce taxation framework in place.

Philippines pesos.

Since 2013, e-commerce players in the country have been required to pay taxes. As a rule of thumb, any person or entity providing goods and services, whether via online or offline channels, needs to impose a 12% value-added tax (VAT) on top of what they charge. Businesses whose sales fall below PHP 1.92 million (USD 36,690) a year are subject to 3% VAT.

When residents buy goods worth more than PHP 10,000 (USD 200) from international online sites, they have to bear the 12% VAT on their own.

Indonesia: Close but no cigar

Among all the Southeast Asian countries that do not have e-commerce tax regulations in place, Indonesia has come closest to taxing its digital businesses.

The country’s finance ministry previously released a tax plan, called PMK-210, enumerating the obligations of online retailers in Indonesia. In particular, any business whose annual profit exceeds IDR 4.8 billion (USD 399,000) needs to charge 10% VAT.

Fundamentally, taxing e-commerce companies is a way to increase revenue for the government. The Center for Indonesia Taxation Analysis believes that the 10% VAT will help bring in an additional IDR 20 trillion in revenue for the country every year.

The regulations were supposed to take effect from April 1, but finance minister Sri Mulyani Indrawati decided to retract the rules, citing the need for a buffer period to discuss the issue with industry stakeholders like online marketplaces and e-commerce platforms.

The backtracking was also a response to push-back from the industry. There are fears of a slowdown in an economy that is dominated by micro, small and medium-sized enterprises (MSMEs), as well as the rise of backdoor selling.

Street in Bandung City, Indonesia. Photo by Fikri Rasyid on Unsplash.

Stakeholders fear that PK-201, if implemented, would hamper the growth of MSMEs. This is particularly significant in an environment where more than three-quarters of 1,765 e-commerce sellers in 18 Indonesian cities are micro businesses, 15% are small businesses, and only 5% are considered to be medium-sized enterprises.

In view of this, Indonesian E-commerce Association chairman Ignatius Untung told KrASIA,We are worried that this will be a serious entry barrier that undermines the public’s motivation to open a business.” Ultimately, stakeholders are worried that the regulation would undermine these MSMEs’ operations, bringing about devastating economic consequences.

Bukalapak’s app.

There are also concerns that, given the current organization of Indonesia’s e-commerce landscape, a poorly implemented set of tax rules would lead to rampant backdoor selling. At the moment, the online commerce market in Indonesia involves approximately USD 5 billion of formal transactions—purchases on portals like JD.id or Bukalapak—and more than USD 3 billion worth of informal commerce that takes place on social media platforms.

Before e-commerce platforms became more popular, Indonesians sold new and used goods on informal channels. Speaking with TradeGeckolocal tech blogger Aulia Masna said informal online commerce in Indonesia started in the early 2000s on the discussion board Kaskus. Soon, social channels like Facebook, Twitter, Line, and Whatsapp also “succumbed to the same e-commerce fate.”

Masna explained that as long as a platform allows the user to post a photo and text together, it can be used as a marketplace even if it wasn’t designed to be one. After all, selling items on social media only requires a smartphone and an internet connection.

With that in mind, established e-commerce platforms are worried that the regulations might lead to a “retreat” by vendors to social networks.

Photo by Muhammad Raufan Yusup on Unsplash.

“If the tax regulation restricts e-commerce 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’s co-founder and chief financial officer Muhamad Fajrin Rasyid told local media in 2017.

This month, a top tax officer recently told Reuters that the country is drafting new rules to impose taxes on online goods and services provided by foreign companies. However, it is unknown how long it will take for a new framework to be shared with legislators and the public.

Thailand: Where foreign backers call the shots

Thailand has a burgeoning e-commerce sector that is expected to grow by 14% from THB 3.1 trillion (USD 100 billion) in 2018 to THB 3.3 trillion this year, the country’s Electronic Transactions Development Agency (ETDA) predicts.

The country’s landscape is largely dominated by foreign players. Thailand’s top two e-commerce companies Lazada and Shopee are backed by Alibaba and Sea Group, respectively. Even local fashion e-commerce Pomelo counts Chinese tech giant JD.com as an investor.

Per Thailand’s current domestic tax law, any Thai B2C and B2B sellers providing goods or services to Thai consumers with annual sales volume exceeding THB 1.8 million (USD 58,600) have to pay 10% in VAT. Yet foreign operators are not subject to taxes under existing regulations.

The exemption of foreign entities from taxation resulted in a gap in tax revenue, widened by the advent of digital commerce and ensuing explosion of cross-border B2C transactions, prompting the Thai Revenue Department (TRD) to think of ways to recover that lost revenue.

Source: ShutterStock.

In an attempt to remedy the situation, TRD issued its Draft VAT Bill in January 2018, placing a focus on taxing foreign online sellers providing goods and services to Thai consumers. Under this bill, a foreign company selling for Thai consumption would have to pay 7% VAT charge if their income from these services exceeds THB 1.8 million per year—the same threshold domestic sellers are subject to.

According to this bill, so long as a business has a website with a Thai internet domain name or incorporates a payment system that utilizes baht, it will have to pay Thailand’s national income tax charges, which range from 5% to 37%.

As of now, the bill still has yet to be passed and implemented. With the current political climate in Thailand, deadlock is anticipated and passing this e-commerce bill is simply not a priority.

Singapore: Let’s wait and see 

All goods and services in Singapore are subject to a 7% goods and services tax (GST). However, online transactions for low-value goods, specifically those not exceeding SGD 400 (USD 293) in value, are exempted from this.

The threshold for e-commerce tax exemption in Singapore is high given that most transactions are likely to fall below SGD 400. Not collecting tax on these “low value goods” leads to a substantial loss in potential revenue, especially when the city-state’s e-commerce market is expected to be valued at SGD 7.1 billion (USD 5.4 billion) by 2025, according to a report by Temasek Holdings and Google.

Realizing that, local government officials were said to have cited an urgent need to “get organized around the taxation of online merchants” between 2017 and 2018.

While outlining the city-state’s budget for 2017, finance minister Heng Swee Keat said that the government was studying ways to tax e-commerce vendors. Later that year, then senior minister of state for law and finance Indranee Rajah told Bloomberg in an interview that online retail would soon come under the local tax net.

Source: Shutterstock.

Thus, in the lead-up to the release of the national budget in February 2018, there were hopes that e-commerce tax regulations would soon be set. Eight of the 12 economists in a Bloomberg survey said the budget would take into account new taxes gleaned from online vendors, according to a report by local news site Today.

However, when Heng unveiled the budget in 2018, to the shock of many, there was no mention of the matter. Instead, the government will impose taxation charges on foreign online sellers by levying a 9% GST charge on imported goods or services exceeding SGD 400 starting from January 2020. Compared to the expectations of how the issue would develop, this was only a minor step forward.

Since then, neither topic has resurfaced and the government has not released any updates on taxing the e-commerce sector. Asia Internet Coalition (AIC) characterizes this move as a “wait and see” approach. Jeff Paine, managing director for AIC, portrays Singapore as taking a measured approach by exercising caution, considering all options, and taking a long-term view to provide a stable environment for businesses to continue investing in and growing the local economy.

AIC is a lobby group formed by eBay, Facebook, Google, Yahoo, and other titans of the tech industry. It wields tremendous influence over matters of internet policy across the Asia Pacific region.

What’s next?

As national borders becoming increasingly porous for consumers, online shopping is no longer a purely domestic activity. As we look forward, Singapore, Thailand, and Indonesia are poised to impose taxation on foreign e-commerce sellers. In any case, so far, these markets are moving ahead slowly, so it may be years before plans settle.