It is not easy to define the digital economy; indeed the Organisation for Economic Cooperation and Development (OECD) admits as much. However, it is possible to point to examples of how consumers make use of it: When they download a game from an online gaming company, purchase songs through a music platform or order physical goods through a Web-based portal and have the goods delivered via the postal system.
The digital economy gives rise to a Goods and Services Tax (GST) problem which the OECD has identified as part of its work to address the issue of Base Erosion and Profit Shifting (BEPS) by businesses that exploit gaps to avoid paying tax.
The GST problem arises from most online providers not being located in the same country as their consumers. For GST systems, this does not compute. Take Singapore's GST system, which is based on a 1983 statute from Britain. Back in 1983, the web was where a spider lives and the statute was not drafted with the expectation that suppliers would sell things via an electronic version of a spider's house.
In order to collect GST from consumers, the GST system requires the supplier making the final sale in a Business to Consumer or B2C transaction to be registered for the tax, collect it from the local consumer and pay it to the local tax authority.
In the online B2C world, the GST system faces two types of supply in particular that it is not very good at dealing with.
The first type of supply involves a consumer buying goods from an online retailer located in another country. The goods are shipped via post or courier direct to the consumer. GST rules generally allow goods below a certain value to be imported via post into a country without the imposition of GST, so as to minimise the inconvenience to the retailer of having to register for GST where there is a one-off sale or the value of the goods is low. In Singapore, that value is currently $400. Hence, as long as whatever the consumer buys is valued below this threshold, the goods would not be subject to local GST. Good news for the consumer, but not for any local-based suppliers who have similar or identical products to sell, since theirs will be more expensive in comparison.
The second type of supply involves the provision of services such as the digital download of music or a game, which is treated for GST purposes as being a service, and not goods. GST systems like Singapore's usually treat this type of supply as being made where the supplier is, not where the consumer is located. Therefore, such downloads are then free from local GST and, as the consumer is not in the country where the supplier belongs, the supply is usually zero-rated for the supplier. As the value of the services supplied in this manner increases, the OECD suggests that it is important the GST system evolves to keep up.
The OECD suggests two ways to deal with the GST system's inability to bring these supplies to tax.
The GST problem arises from most online providers not being located in the same country as their consumers. For GST systems, this does not compute.
For goods purchased online but delivered via the postal system, the OECD recommends that the value below which goods can be imported into a country without any GST being levied should be reduced or eliminated. That means the price of the goods would rise, in Singapore's case, by at least 7 per cent, as that is the current GST rate here. However, the goods could potentially still be cheaper than comparable local purchases, because the online retailer might not have to incur costs of infrastructure and associated overheads in the same way as the local retailer would. The responsibility to collect the GST will likely fall on the postal service or the courier that delivers to the consumer. That may also result in a local handling charge to cover the administrative costs, which the consumer might also have to pay.
For digital services, the OECD suggests that countries set up a GST registration process, with a requirement that overseas suppliers register and account for local GST on downloads, for example, supplied to consumers in that country. This is the approach taken in the European Union and, more recently, in South Korea, Japan and other Asia-Pacific countries. One question for tax authorities is how to persuade overseas suppliers to register, although the experience of South Korea and Japan indicates that responsible overseas businesses would want to be compliant and so would choose to register.
If Singapore were to do this, the price to the end consumer for a download would likely increase, assuming that the overseas supplier chooses to pass on the GST charge in the first place. Again, the experience in other countries is that they usually do pass it on.
With Singapore's 2016 Budget Statement coming up, one area to watch is whether Singapore will join the other Asia-Pacific countries in making changes to its GST system to address the challenges of the digital economy. Whether Singapore does so or not, it is clear that BEPS is not just about multinational companies paying their fair share of tax - consumers will be affected too.
- The writer is Tax Partner and Indirect Tax Leader, Deloitte Singapore.