Challenges in taxing the digital economy

The health crisis and social distancing are the catalysts making consumers more reliant on e-commerce. As this trend is on the rise, failure to collect tax from cross-border digital service providers means the amount of tax loss could be significant.

Vietnam boasts one of the digital economies with the most rapid growth rates, posting an increase of 25-30% per annum. In 2025, its digital economy will be worth US$33 billion, 3.7 times that of 2018, according to E-Economy SEA 2018 report.

New Law is out but unclear questions remain

Before the Tax Management Law 38/2019/QH14 (the Tax Management Law) was passed and took effect on 1 July, 2019, Vietnam could not collect tax from e-commerce foreign enterprises that extracts revenue from Vietnamese individual customers due to the lack of a regulatory collection mechanism even though, in principle, income arising in Vietnam was in the scope of the official circular on foreign contractor tax.

The Tax Management Law has legislated the obligations of foreign contractors in registering, declaring and paying tax directly with the tax authority. This marks a tax policy milestone in response to the drastic changes in how business-to-business (B2B) or business-to-customer (B2C) transactions are conducted. It should be noted that the Tax Management Law does not create any new tax burden, but adds a mechanism that catches transactions for which tax collection was not feasible before.

The impacts of the law remain unclear since implementation guidelines have not been introduced. Many questions remain, especially with regard to e-commerce platforms operators, payment gateway operators or commercial banks.

E-commerce Platforms to withhold taxes?

The number of transactions via intermediary online platforms, including social media that function like e-commerce markets, is major. Some countries and jurisdictions ask foreign goods and service providers to fulfill the tax obligations directly with the tax authority or via a local resident authorized representative; some others require e-commerce platform operators through which the transactions are conducted to withhold, declare and pay the taxes on behalf of the foreign suppliers.

The first approach requires foreign suppliers to comply with Vietnam’s tax regulations. If they do not voluntarily provide information, tax collection will be challenging; except for the case they trade through Vietnamese corporate registered e-commerce platforms. In many cases, even these suppliers do not have sufficient information of buyers including source of payment, IP addresses, etc. to determine whether income is derived from Vietnam.

The Government is looking into amendments to Decree 52/2013/ND-CP dated 16 May 2013 on e-commerce, so that there will be more clarity in the responsibility of foreign e-commerce websites in collecting and storing data. However, there is yet any regulation on sharing such information with foreign suppliers trading on their platforms. The question is whether foreign suppliers that do not pay tax because they do not have adequate information on income sources are exempted from penalties?

Under the second approach, the onus falls on e-commerce platforms. It makes things more convenient for tax offices, but foreign e-commerce platforms will concern the costs it imposes. They will have to monitor transactions for income arising from Vietnam and compute how much tax to pay. Who will bear the responsibility when disparities arise is also an issue to ponder.

Applying Double Taxation Avoidance Treaty for tax exemption?

A basic principle on allocation of taxing rights under double taxation avoidance treaties (“DTA”) is that a source country will have the taxing right over the income earned by foreign non-residents who do not have a permanent establishment (“PE”) in the source country under the relevant DTA. The PE concept has for long associated with a fixed base in the country through which the foreign entity carries out its business activities.

This is no longer suitable when e-commerce transactions are considered since foreign suppliers can foster long-term, effective and direct interaction with customers without having any fixed bases. Enterprises may make use of this to avoid tax.

To address the tax challenges from the digitalization of the economy, the Organization for Economic Co-operation and Development (OECD) initiated a bold project in May 2019, known as the base erosion and profit shifting (BEPS) 2.0 project, with the  publication of the Programme of Work (PoW) to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy. The aim is to provide a coordinated approach to the re-allocation of taxing rights (under pillar one) and the introduction of global minimum tax rules (under pillar two).

While such a consensus has not been reached yet, some countries have imposed digital tax on cross-border e-commerce transactions (both direct and indirect taxes). The Philippines and Indonesia plan to impose value-added tax and income tax on e-commerce transactions. Indonesia introduces a new tax, called the Electronic Transaction Tax, to deal with cases in which foreign providers claim not having a PE in Indonesia and use the DTA to request for income tax exemption.

While the Tax Management Law in Vietnam does not introduce a new tax, it signals the Government’s serious attention to digital business. Although the guidelines for DTA interpretation remain, the Vietnamese authorities are considering the notion of PE in the context of the digitalization of the economy, including the creation of a fix base via digital transactions. Foreign providers may not simply ask for tax exemption using the lack of a PE in Vietnam as a reason.

If Vietnam adheres to its stand that it has the taxing right over the income of foreign providers, domestic laws will determine the tax rate. If both value-added tax and corporate income tax are considered, the tax rate will be about 10%. In the B2C model, this is not a low tax in comparison with the rates in some countries and jurisdiction in Asia – Pacific such as Singapore (7%), Australia (10%), Japan (10%), Korea (10%), Taiwan (5%), Malaysia (6%), Thailand (7%) and Indonesia (10%).

The roles of commercial banks and intermediary payment firms

The roles of commercial banks and intermediary payment firms have become clearer since Decree 126/2020/ND-CP guiding the Tax Management Law was released on 19 October 2020. These entities do not have to worry about handling tax for every e-commerce transaction; they only need to perform this role in response to specific requests by tax offices when the foreign providers are determined as not declaring and paying tax in line with the prevailing regulations.

However, challenges may arise. For example, when the seller transfers payments for a basket of goods to various suppliers via an e-commerce platform, it will be hard to determine who is receiving how much. When it is out of their control to monitor payment, the responsibility of payment firms in such instances needs more clarification.

Disclaimer: The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

According to Saigon Times Weekly, 21 November 2020