How to prevent tax leakages in digital economy – Kor Bing Keong and Chew Boon Choo

The evolution of technology has led to radical changes in business models over the years. It has dramatically increased the ability of consumers to shop online and the ability of businesses to sell around the world.

The scale of cross-border trading of goods and services in the digital economy poses new tax and regulatory challenges. For example, it can affect a country’s goods and services tax (GST) revenue collection and the level playing field between overseas and domestic suppliers.

Singapore has generally adopted a pragmatic and pro-business approach in the design of its GST system. This approach has, however, compounded leakage brought forth by the digital economy.

For one, GST is not levied on supplies of services (for example, downloadable software) by overseas suppliers to Singapore businesses, as the reverse charge mechanism – where the customer self-imposes GST on the purchase of services from overseas suppliers – is currently not operative in Singapore.

GST is also not levied on supplies of low-value goods, such as fashion items, bought through online stores because of the GST import relief on non-dutiable goods costing not more than S$400. (RM1,190)

This relief should not be confused with another GST import relief on goods meant for personal use and hand-carried by travellers into Singapore, which is dependent on the time spent away from Singapore.

Most developed economies do impose a reverse charge mechanism and do not grant the relief for low-value imports.

More significantly, GST revenue could also leak when supplies of services such as ebooks, software and downloadable music by overseas suppliers are made to Singapore consumers, as such supplies are generally considered to be made outside the GST regime.

This is a growing concern, especially when goods such as physical books are being re-characterised as services (for example, downloadable ebooks) when they are sold online.

To address this issue, several countries, including Norway, South Korea and EU member states, have started to tax cross-border services and intangibles by treating such services as supplied in the country where the consumers are located, and requiring the overseas service providers to register for GST in that country.

In addition, they have also introduced simplified registration systems to encourage compliance by overseas service providers. In the United Kingdom, it was reported that the introduction of new VAT (similar to GST) rules to tax digital services at the place of consumption could potentially yield an additional £300 million (RM1.7 billion) of tax revenue yearly.

Other countries are making progress on this front, too. For example, Australia intends to extend GST to offshore intangible supplies to Australian consumers with effect from July 1, 2017, under draft laws that were introduced early this year.

The additional GST revenue to be collected from taxing the digital economy was estimated to be around A$350 million (RM1 billion) for the fiscal years 2017 to 2019. New Zealand has also introduced a draft law to tax the digital economy from October 1, 2016.

The extent of GST leakage in Singapore caused by the digital economy is currently unclear. However, in view of the developments in other jurisdictions, Singapore may consider adopting similar approaches.

The government could consider introducing new rules to require overseas service providers that sell to consumers here to register for GST in Singapore, if such sales exceed the registration threshold.

Singapore could also introduce simplified GST registration procedures for such suppliers to encourage compliance, and impose penalties for non-compliance, including penalties for key executives of such suppliers.

At the same time, import relief for low-value items could be abolished, or the relief threshold could be reduced in order to increase the effectiveness of taxing the digital economy.

While the above measures are unlikely to have an impact on small companies, big companies that contribute significantly to the digital economy may comply in view of the reputation risks, as well as risks to its key executives.

This will contribute towards levelling the playing field for overseas suppliers vis-a-vis domestic suppliers, and at the same time generate more tax dollars for the government. – TODAY Online, March 13, 2016.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.