Alibaba has blocked 200,000 vendors globally since September in response to governmental pressure for the Chinese e-commerce giant to crack down on tax avoiders using its platform.
The purge comes as India cracks down on e-commerce platforms tolerating sellers that refuse to pay tax and the U.K. and Germany jump ahead of sluggish EU efforts to tax sales on e-commerce platforms, despite expert’s predictions that doing so could prompt some vendors to flee to Alibaba.
Alibaba Group Holding Ltd.’s online platform AliExpress “forbids illegal activities by third party online sellers,” the company told Bloomberg Tax in a statement. “Globally, AliExpress has strict measures in place to take action against items that contain descriptions that encourage tax avoidance.”
AliExpress has been closing the online “stores” as it learned about breaches, a company executive added, and repeatedly reiterates its policies to vendors.
“We can urge the sellers to follow the local norms and regulations in the market,” the executive told Bloomberg Tax. “When notified that breach is happening, we take action against such sellers and such stores.”
The company didn’t specify where the tax-avoiding vendors were located, but industry participants say many are likely to be small Chinese outfits.
“This is a practice that is done globally, and it’s an ongoing exercise,” the executive said.
Still, the crackdown may deal a short-term blow to Alibaba’s prospects in India, which is a small but growing market for the company, according to Jayanth Kolla, founder of technology consultancy Convergence Catalyst. He expects that prices for some of the goods will rise because vendors would be forced to start adding tax to prices.
“There would be a dip in business for these players, but they would find a way to factor this in either through scale of economy or other ways,” he said. Even if sales on Chinese sites like AliExpress are a relatively small part of the Indian e-commerce market, local vendors are concerned that the low prices were allowing them to nab more market share.
And while the U.S. Supreme Court has ruled that states can hold online marketplaces liable for sales tax not collected from third-party sellers, this has also thrust the biggest online marketplaces—that help customers with tax compliance—into gaining market share just because of the assistance they offer, according to Andrew Silverman, a tax policy analyst at Bloomberg Intelligence.
“Interestingly, in the U.S. the introduction of the Wayfair ruling has meant that the very largest companies like Amazon have gained market share, as their mid-sized rivals struggle to meet the difficulty of complying with the Supreme Court ruling,” he said.
Value-added tax fraud on online marketplaces has come under increased scrutiny in many countries. In the United Kingdom, for example, Her Majesty’s Revenue & Customs estimates that the tax loss from VAT fraud and error on online marketplaces was between 1 billion pounds and 1.5 billion pounds ($1.9 billion) in 2016-2017. The figure represents 10 to 12 percent of the overall VAT gap in the U.K.
The EU VAT tax gap, which includes the U.K., stands at 147.1 billion euros ($168.4 billion), with HMRC estimating that online VAT fraud and error in the bloc at roughly similar levels to the U.K.
The scrutiny of e-commerce companies is only set to increase as customs officials wrestle with how to stop vendors in places like China using their platforms as a way to bypass local taxes. In India, for example, they can label goods worth up to 5,000 rupees ($71) as “gifts,” allowing them to enter the country tax free when they are really destined for commercial sale.
The Mumbai branch of India’s customs department on Dec. 28 issued an order designed to clamp down on the practice, saying that the gift clause was being “abused.” It also threatened to cancel the registration of couriers who don’t enforce the rules.
The issue threatens to escalate into an even broader challenge for foreign e-commerce sites in India, with the Commerce Department currently finalizing a sweeping policy designed to regulate the sector.
Groups representing domestic vendors have lobbied the government to introduce strict new measures to combat tax avoidance, such as banning sites that don’t register in India. They say vendors on sites like Alibaba are able to undercut their prices because they avoid tax.
Sachin Taparia, founder of consumer engagement group LocalCircles, met with commerce ministry officials in December to raise his concern. In a September letter, the group asked that all foreign e-commerce sites and apps register as business entities in India or be banned. “The worry was that it would grow,” he said, “then all the Indian industry would get displaced.”
Other online retail giants like Amazon.com Inc. and Walmart Inc.-owned Flipkart Group are better shielded because they use their own domestic logistics networks, analysts say, unlike Alibaba. Vendors on AliExpress will instead use couriers or the postal service to mail their products.
“Amazon will always be compliant with local laws, have robust processes to ensure this and zero tolerance for any non-compliant seller,” an Amazon spokesperson told Bloomberg Tax.
--With assistance from Hamza Ali