Navigating the fast-evolving landscape in taxation on imported digital services in Asean
Businesses supplying digital services to Asean customers must keep up with the evolving tax rules for imported services in each country.
In an increasingly borderless economy coupled with the rapid evolution of technology, it is now very convenient for consumers to access and purchase digital services directly from overseas suppliers. These overseas suppliers do not require any physical presence in the country where the consumers are located. This accelerating trend, however, has not gone unnoticed. Many countries have introduced regulations to tax the supply of imported digital services, with the broad intention to level the playing field for both local service providers and overseas suppliers.
Asean is no exception and countries in Asean are progressively rolling out legislation to tax imported digital services and stay relevant in the evolving digital economy. Examples include the introduction of legislation for overseas suppliers of digital services to register for Goods and Services Tax (GST) in Singapore and that for Service Tax in Malaysia with effect from 1 January 2020. New regulations also came into effect for Indonesia and Vietnam from 1 July 2020. In the Philippines, a bill that seeks to tax imported digital services is currently pending in Congress whilst an amendment Value Added Tax (VAT) bill is pending parliamentary approval in Thailand.
Companies doing business in Asean need to understand and monitor closely the developments in the taxation of imported digital services around the world and how they will impact overseas suppliers providing digital services to their customers in these markets.
Singapore is one of the first countries in Asean to introduce GST on imported digital services, which took effect on 1 January 2020. The GST legislation was amended to implement the Overseas Vendor Registration (OVR) for the supply of business-to-consumer (B2C) imported digital services regime. The current GST rate in Singapore is 7%.
Under the OVR regime, “digital services” refer to any services supplied over the internet or other electronic networks and the supply of these services are essentially automated with minimal or no human intervention, and impossible without the use of information technology. Examples include supply of mobile applications and e-books, subscription to online newspapers as well as services performed via electronic means to facilitate the completion of transactions.
Overseas suppliers with a global turnover exceeding S$1 million (approximately US$700,000) and who make supplies of digital services to non-GST registered customers in Singapore exceeding S$100,000 (approximately US$70,000) are required to register for GST in Singapore under the OVR regime. Overseas suppliers liable for GST registration in Singapore under the OVR regime will be registered under a simplified pay-only regime. In other words, input GST claims are not allowed, thereby simplifying GST reporting and documentation requirements.
In Malaysia, Service Tax on digital services has been introduced with effect from 1 January 2020 and applies to any person who is outside Malaysia, including any person who is operating an online platform and providing any digital service to customers in Malaysia.
If the value of the digital services rendered by the overseas supplier in Malaysia exceeds the threshold of RM500,000 (approximately US$120,000) over a period of 12 months, the overseas supplier is required to register, collect and remit the 6% Service Tax on the supply of digital services to customers in Malaysia. “Digital services” refers to any service that is delivered or subscribed over the internet or other electronic networks, which cannot be obtained without the use of information technology, and where the delivery of the service is essentially automated.
In Indonesia, a 10% VAT is imposed on imported digital goods and services in the context of business-to-business (B2B) and B2C transactions, effective 1 July 2020.
Digital goods are any intangible goods in the form of electronic or digital information, including goods that are converted in its form and goods that are originally in electronic form as well, but are not limited to software, multimedia and electronic data. Digital services are any services sent through the internet or an electronic network, with automation or involving little human intervention, and are impossible to be conducted without information technology.
The Indonesian Director General of Tax has issued regulations on procedures to appoint a foreign supplier as a VAT collector, to collect, pay as well as to report the VAT on digital goods and services supplied from outside Indonesia. The thresholds to be appointed as a VAT collector are as follows: (a) have a transaction value with customers (individuals or corporates) in Indonesia that exceeds 600 million rupiah (approximately US$42,000) per year or 50 million rupiah (approximately US$3,500) per month; and/or b) a traffic volume or number of persons who accessed the platform in Indonesia that exceeds 12,000 per year or 1,000 per month.
In June 2019, the Vietnam National Assembly has approved a new Law on Tax Administration (Law), which introduces a new mechanism to collect tax from cross-border e-commerce traders and digital platform-based service providers.
This is not a new tax but rather a new mechanism to collect digital taxes by the Vietnam Government. Under the Law, foreign entities or individuals who perform e-commerce activities or do business via digital platforms without a permanent establishment in Vietnam must directly register to file tax in Vietnam or authorise other relevant parties to do so on their behalf. This is a new requirement as the Vietnam Government recognises that the current withholding mechanism is unable to capture the increasingly popular cross-border B2C transactions.
To implement direct filling, the Vietnam Government is setting up an online registration and declaration system to allow easy access for foreign suppliers. Foreign suppliers must declare tax on their own. However, if a foreign supplier fails to self-declare and pay taxes on their income earned from Vietnam, the Vietnamese tax authorities will have the right to enforce tax collection via commercial banks.
Taxes (VAT and corporate income tax) will be imposed based on deemed tax rate multiplied by revenue sourced from Vietnam. Although the Law took effect from 1 July 2020, the implementation of digital tax collection may be delayed as the online system is currently not ready.
In the Philippines, the proposed introduction of the Digital Economy Taxation Act of 2020 is currently pending legislative approval. The proposal seeks to maximise tax collection on digital services by designating network orchestrators and e-commerce platforms as withholding agents for VAT, which is currently at 12%. In addition, digital service providers conducting business in the Philippines would be required to do so through a local agent or representative.
Thailand currently relies on the reverse charge mechanism to tax Thai tax residents who purchase goods or services from overseas suppliers. However, the lack of effective enforcement has led to the proposal of a new draft bill that requires foreign e-service operators and electronic platform operators earning more than 1.8 million baht (approximately US$60,000) per year from providing digital services in the country to register for and pay a 7% Thai VAT and file VAT returns with the Thai Revenue Department.
The bill is currently pending legislative approval from the Thai parliament. Examples of the focus of the bill are movie and music streaming services and online games. If approved, foreign e-service operators and electronic platform operators will be registered under a simplified VAT registration regime. No input tax can be deducted in the VAT computation.
With the introduction of taxation of imported digital services across Asean, businesses supplying digital services and goods to customers in this region will need to manage additional compliance requirements and considerations. For example, they will need to determine whether the activities they carry out fall within the scope of taxation in the respective Asean countries, as well as ensure that they satisfy the registration and compliance requirements in each country.
Such developements are not limited to Asean. Countries around the world, such as Australia, New Zealand, Norway and the UK, have similar regimes to impose VAT or GST on imported digital services. As with any new taxes, businesses should ensure that they keep abreast of the evolving tax rules relating to the taxation of imported services in each country to ensure that they comply with the registration and compliance requirements, and avoid potential exposure to reputational risks, financial impact and penalties.
The co-authors of this article are Yeo Kai Eng, EY Asean Indirect Tax Leader and Tax Partner, and Angeline Goh, Manager, Indirect Tax - Goods & Services Tax, from EY Corporate Advisors Pte. Ltd.