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Taxman widens net over digital economy

New rules to tax e-commerce and digital services will level the playing field between online and bricks-and-mortar shops, as well as local and overseas suppliers

Marketing executive Jasmine Tay, 35, is a typical shopper in today's highly connected society. She goes to local retail stores to check the sizes of shoes and clothes before placing orders with overseas e-tailers such as Asos and Amazon as they carry some of the brands sold in Singapore.

"I could save up to 30 per cent so I don't mind waiting a few weeks for the goods to ship," said Ms Tay.

Soon, she might have to pay the 7 per cent goods and services tax (GST) for all online purchases, thus eroding her savings, especially the GST exemption she enjoys for spending less than $400 each time.

As 2018 starts, analysts and citizens are expecting changes in the tax regime, following statements from Prime Minister Lee Hsien Loong suggesting that a tax hike may be coming. Some analysts expect the GST to be raised.

Meanwhile, one tranche of tax changes will certainly come into force: taxing the digital economy. Finance Minister Heng Swee Keat had alluded to the impending e-commerce GST in his Budget announcements last year.

Senior Minister of State for Law and Finance Indranee Rajah followed up with the news in an interview with Bloomberg, on Nov 21, that e-commerce would come under the local tax regime soon.

The Ministry of Finance is studying ways to implement this e-commerce tax.

GST accounts for about a quarter (or $11.1 billion) of Singapore's $47 billion tax revenue in the 2017 fiscal year. It is the second-largest contributor after corporate income tax.

Although GST collection increased by more than 7 per cent from $10.3 billion in FY2016, the taxman is missing the opportunity to capture another lucrative source of revenue from increasing cross-border online transactions.


ST ILLUSTRATION: MIEL

DIGITAL ECONOMY

The move to introduce an e-commerce tax is a response to a burgeoning digital economy, where the revenue collected from taxing e-transactions outweighs the cost of ensuring compliance.

The digital economy also comprises e-books, apps, games and the online supply of music, movies, storage, distance-learning - all of which are not covered by the current tax regime.

"These (current) rules now appear inadequate to address the myriad situations in which the consumption of services, with the use of technology, no longer have to take place at the same location in which the supplier belongs or the service is provided," said Mr Edmund Leow, senior partner of tax at law firm Dentons Rodyk & Davidson.

Germany-based market research firm Statista estimated that e-commerce spending in Singapore was US$2.9 billion (S$3.9 billion) in 2016, and would reach US$3.3 billion last year. By 2022, online spending in Singapore would exceed US$5 billion.

This data excludes digital downloads, content-streaming services and transactions on e-marketplaces such as Alibaba and Craigslist.

Though the road ahead looks bumpy, Singapore cannot continue to have different tax rules for digital and physical goods, and for overseas and local suppliers.

Another study, released by consultancy firm Ernst & Young in February last year, showed that about 40 per cent of consumers in Singapore bought clothes and health products online, and one-quarter downloaded e-books at least once a month.

 
 
 

The study - which polled 1,000 people aged 18 to 69 in May 2016 - also showed that Singaporeans were more active online shoppers than those in Australia, Malaysia and New Zealand across product categories such as groceries, clothes, beauty products and meals.

Besides tax leakage, not having an e-commerce GST also gives overseas suppliers an unfair advantage - a sore point for many local bricks-and-mortar retailers and businesses, whose goods and services tend to be priced higher due to the 7 per cent GST.

"And with the impending increase in GST - believed to be up by 2 percentage points - the competitive disadvantage of local businesses will be exacerbated," said Mr Michael Tan, a director at Convergent Systems, which distributes tech products to local retailers such as Best Denki, Courts, Harvey Norman and those at Sim Lim Square.

REMOVE GST RELIEF

Experts proposed at least two ways to reduce the tax leak from cross-border transactions but they come with drawbacks.

The quickest way, without passing new legislation, is to remove the current import exemption for purchases valued at less than $400.

The threshold of the relief could also be lowered to be comparable with the value-added tax (VAT) exemption in France, Germany, the Netherlands, Sweden and Britain, which applies to purchases less than US$30 in value.

By removing the relief or lowering its threshold, many more parcels must be checked for taxation. The responsibility to check and collect the GST will likely fall on the shipping or courier service provider, which may impose an administrative fee on the consumer.

Not all shipping and courier firms in Singapore have automated systems to sort parcels and tabulate GST. For GST collection to be efficient, they will need to step up on automation, which translates into higher compliance costs that may again be passed on to consumers.

In South Korea, for instance, transaction tracking is automated for GST collection purposes. Inbound logistics firms run computer systems that are linked to the tax authority.

E-marketplace Qoo10 Singapore's country manager Hyun Wook Cho said the firm has also linked its systems to that of the South Korean tax authority to capture the transactions of merchants selling to Korean consumers.

Import companies will also face a higher cost of compliance for handling a high volume of low-value goods. Smaller businesses will be harder hit.

Mrs Edwina Tan, 40, owner of two locally based online stores selling maternity clothing and nursing covers, is concerned that the e-commerce GST would cripple small businesses like hers.

Mrs Tan, who imports fabric from suppliers in India, the United States and China, said: "Small businesses without accounting training would have to outsource GST accounting to a third party, and that comes at a cost."

NETFLIX TAX

Without passing new laws, however, digital goods and services in the new digital economy will not be captured by the taxman.

Thus, the Singapore Government is likely to consider what Australia has done with the implementation of its "Netflix Tax" last July.

Over the last two years, the European Union, South Korea, Japan and New Zealand have also laid down similar rules requiring overseas online suppliers targeting their domestic markets to register for VAT or GST.

The tax in Australia is imposed on all intangible supplies such as digital content, games and software. It also extends to consultancy and professional services performed offshore for customers in Australia.

The offshore service provider is required to register for GST, which is 10 per cent in Australia. An exemption that allowed goods valued at less than A$1,000 (S$1,076) to escape GST has since been removed.

The Australian government estimated that the new tax regime would add some A$350 million to its coffers in two years.

There are penalties for failing to register for GST.

"The Australian authorities also have the power to block websites that fail to comply with the new rules," said Mr Vikna Rajah, head of tax, trust and private client at law firm Rajah & Tann Singapore.

"The draconian measure should only be used as a last resort if Singapore were to implement it," he added.

Such a regime is cumbersome for overseas suppliers as they may need to adjust their pricing and charge GST only for residents of countries which impose it. And Singapore, being a small market, may not be worth the trouble for some.

In the end, Singapore may need to do both: tweak its existing GST concession and introduce the equivalent of the "Netflix Tax" to effectively tax consumption in the country. But its approach may have to be more calibrated as a small market. Care must also be taken to ensure that the compliance cost does not hamper smaller businesses or put them out of business.

Though the road ahead looks bumpy, Singapore cannot continue to have different tax rules for digital and physical goods, and for overseas and local suppliers.

Based on what is implemented elsewhere, every digital service provider - including intermediaries such as eBay, Qoo10 and even Uber or Grab - may well be caught in the tax overhaul.

 
A version of this article appeared in the print edition of The Straits Times on January 04, 2018, with the headline 'Taxman widens net over digital economy'. Print Edition | Subscribe