Indirect Tax Developments in Asia—Spotlight on the Digital Economy

In the second half of 2022, tax professionals in Asia continue to face significant uncertainty and will need to analyze how their businesses may be affected by changes to tax laws and administrative policies. With the rapid digitalization of the global economy, Asian tax authorities are noticing gaps in their indirect tax laws and taking action to stop perceived tax leakages from cross-border transactions in digital or electronically supplied services.

This article provides an update on the key rules affecting the digital economy in China, Indonesia, Malaysia, Singapore and Vietnam.

China

China has not introduced a digital services tax, nor are there any value-added tax rules specifically targeting economic activities in the digital space. The general rule remains that VAT applies if either the supplier or the recipient is in China, unless the relevant services are completely consumed abroad or are exempted or zero-rated. There remains a lack of guidance on the application of the VAT rules to the e-commerce sector.

Substantively, an issue is whether digital services provided to a Chinese recipient by a foreign service provider may be considered to be “completely consumed abroad” and hence not subject to VAT, given that the current rules were drafted in the context of pre-digital era services with clearer physical presences. In practice, digital services provided by a foreign service provider are normally not considered to be completely consumed outside China if the service recipient utilized the services while physically present in China.

Foreign service providers, including foreign digital services providers, are required to register in China. However, this requirement has not been strictly enforced except for construction services. Therefore, China relies heavily on the general VAT withholding regime to collect VAT payable by foreign digital services providers, which imposes a withholding obligation on Chinese service recipients. VAT withholding is generally not an issue in cross-border business-to-business digital service transactions. However, for business-to-consumer transactions, the withholding rules are difficult to enforce against individual consumers in China. Also, the rules do not impose a specific obligation on e-commerce platform operators to withhold VAT chargeable on digital services provided by foreign service providers via the platforms.

Having said that, the Chinese government has been tightening its scrutiny of e-commerce platform operators and other technology companies. Although not specifically related to indirect taxes, in 2021, the State Administration for Market Regulators issued measures to enhance supervision over the digital economy, which would enable tax authorities to cross-check data. In 2022, the Cyberspace Administration of China, State Taxation Administration and SAMR jointly issued measures to regulate profit-making online live-streaming activities, with mandates on tax collection and enforcement.

Looking ahead, China may introduce tax reforms to provide more certainty about the taxation of the digital economy.

Indonesia

The Indonesian government has enacted long-awaited regulations to implement VAT and other provisions in Law No.7/2021 on Tax Regulation Harmonization related to crypto assets and financial technology (fintech).

Under Indonesia’s new rules, VAT applies to crypto asset transactions from May 1, 2022. Crypto assets are treated as intangible taxable goods, and VAT applies on delivery by the seller. The delivery of taxable services is defined to include the provision of electronic facilities services that are used for the trading of crypto assets by trade operators through electronic systems (i.e., exchanger and e-wallet), crypto asset verification services (mining) and/or crypto asset mining pool services. The following rates apply:

• Crypto assets trading: VAT is imposed at the rate of 0.11% if the marketplace is registered in the Commodity Futures Trading Regulatory Agency (Bappebti), or 0.22% if the marketplace is unregistered in Bappebti.
• Marketplace services: VAT is imposed at the rate of 11% on the delivery of services through electronic systems.
• Mining services: VAT is imposed at the rate of 1.1% of the crypto asset value.

VAT is imposed on the delivery of fintech operation services from May 1, 2022. The definition of fintech operation services includes the provision of payment services, investment transactions settlement, capital raising, peer-to-peer (P2P) lending services, investment management, the provision of online insurance product services, market support services, digital finance support, and other financial services activities.

It is noteworthy that money in the form of electronic media (i.e., bonus points and top-up points), fund placement or funding services through a P2P platform, financing services provided directly by a lender and online insurance services provided directly by an insurance company, are not subject to VAT.

Another significant development is that VAT is now imposed on the use of taxable intangible goods and taxable services from outside into the Indonesian customs area through trade using electronic systems. From April 1, 2022, VAT must be collected, paid and reported at the rate of 11% (to be increased to 12% from Jan. 1, 2025) by foreign sellers, foreign service providers, foreign and/or Indonesian trade operators through electronic systems (i.e., e-commerce marketplaces), if appointed as VAT collectors by the Minister of Finance.

Malaysia

In Malaysia, service tax on imported digital services provided by foreign service providers (FSPs) has been imposed since Jan. 1, 2020. FSPs that exceed the registration threshold of providing 500,000 Malaysia ringgit ($112,000) in value of digital services to Malaysian consumers (either individuals or businesses) within a 12-month period are required to register with the Royal Malaysian Customs Department (RMCD) and charge service tax at the rate of 6% of the value of the digital services.

“Digital service” is defined widely to mean any service delivered or subscribed over the internet or other electronic network, which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated. Examples of digital services include the provision of mobile applications, streaming services, and cloud storage services.

In an update to its Guide on Digital Services, available here, the RMCD has stated that the definition of digital services would include the provision of a 3D drawing sent via e-mail by a provider outside of Malaysia. By contrast, delivering the same 3D drawing via e-mail would not be considered a digital service if the 3D drawing is customized and a series of draft versions is sent to the purchaser. This fine line between digital services and non-digital services is a reminder that businesses need to analyze the nature of their services to determine if they are indeed delivered with minimal or no human intervention, to the extent that it falls within the scope of digital services.

Where intragroup relief applies, the RMCD has clarified in its Guide on Digital Services that the FSP need not register with the RMCD as a foreign registered person. If the FSP is already a foreign registered person, it may apply for cancellation of its service tax registration. For context, digital services provided by FSPs to any Malaysian company within the same group of companies are not subject to service tax, if the same digital service is not provided to any person outside the group of companies.

The remission powers of the relevant tax authority also apply to foreign registered persons; they may make applications for the remission of penalties online.

Singapore

From Jan. 1, 2023, Singapore’s goods and services tax, GST, will be expanded to apply to overseas suppliers that make B2C supplies of remote services. This will be implemented by expanding the Overseas Vendor Registration (OVR) regime, which was first introduced in 2020. Currently, the OVR regime only applies to B2C supplies of digital services, while B2B services are separately subject to the reverse charge mechanism. Once the change takes effect in 2023, all B2C supplies of remote services, whether digital or non-digital, made by overseas suppliers will be brought to tax under the expanded OVR regime.

Given the rise in e-commerce transactions in recent years, this latest move to expand Singapore’s tax base is not an unexpected one, with other countries including Australia and New Zealand having already implemented measures to impose GST/VAT on remote services.

As businesses develop new technologies to deliver products and services and enhance customer experience, they will need to consider whether they are affected by the expanded OVR regime. One issue of concern to many businesses is whether they will be caught by the electronic marketplace rules. Under the OVR regime, operators of electronic marketplaces may be required to charge and account for GST on behalf of the overseas suppliers that make B2C supplies of remote services through their platforms. This could result in far-reaching consequences for businesses that are regarded as electronic marketplace operators.

For example, if Company A provides an integrated telemedicine platform offering medical services from various overseas healthcare providers, would it be regarded as an electronic marketplace operator? What about a scenario where Company B maintains a forum/platform facilitating communications between overseas businesses and end-users for the sale of their product or service offerings on the platform? This can be a complex question that requires businesses to carefully review and assess their business models to avoid getting caught off guard by the rules.

The expansion of the OVR regime is a principled move given the need to widen Singapore’s tax base and level the playing field between local and overseas suppliers. That said, there is no denying that many businesses will be impacted by this change and face higher tax compliance costs. Given the potential consequences, it would be prudent for businesses to plan ahead and review their existing or proposed business models, especially when it comes to how these may be affected by the electronic marketplace rules.

Vietnam

Vietnam is one of the fastest expanding e-commerce markets in the region. The Vietnam E-Commerce Association has forecast a 29% average growth rate for e-commerce in Vietnam from 2020 to 2025 (i.e., $52 billion by 2025). It is therefore unsurprising that the Vietnamese government has sought to reform its indirect tax policies for the digitalizing economy.

In June 2019, the National Assembly of Vietnam adopted the Law on Tax Administration, which has a chapter on the taxation of e-commerce businesses. Since then, the Ministry of Finance has issued a circular to provide implementation guidelines for this law.

Under the new tax rules, VAT is collected through foreign suppliers that do not have a permanent establishment in Vietnam conducting an e-commerce business or a digital-based business or providing other services to organizations and individuals in Vietnam, which register for tax declaration and payment in Vietnam. If the foreign supplier does not register, the purchasers or service recipients in Vietnam, or commercial banks/intermediary payment service providers if the purchasers are individuals, would be responsible for withholding and paying the VAT.

There remains significant uncertainty about the compliance obligations of foreign suppliers, local B2B customers, banks, and payment service providers; and the tax authorities are expected to continue to issue clarifications about the scope and other aspects of the new e-commerce tax rules.

Key Takeaway

Indirect tax rules in Asia continue to develop rapidly as governments seek to expand the tax base and reduce tax leakage in a digitalizing economy. Tax professionals need to analyze the impact of new rules on their business models and how their businesses should adapt to achieve the best outcomes from both a compliance and commercial perspective.

Planning ahead is critical in seeking to pre-empt potential controversies.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Yvonne Beh is a Tax Partner at Wong & Partners, member firm of Baker McKenzie in Malaysia; Shih Hui Lee is a Principal (Tax Adviser) at Baker & McKenzie Wong & Leow, member firm of Baker McKenzie in Singapore; Thanh Vinh Nguyen is a Tax Partner at Baker McKenzie, based in Ho Chi Minh City; Ria Muhariastuti is a Senior Tax Specialist at HHP Law Firm, member firm of Baker McKenzie in Indonesia; and Jason Wen is Head of Tax Controversy Practice at Baker McKenzie FenXun (FTZ) Joint Operation, based in Beijing.

The authors may be contacted at: yvonne.beh@wongpartners.com; shih.hui.lee@bakermckenzie.com; thanhvinh.nguyen@bakermckenzie.com; ria.muhariastuti@bakermckenzie.com; jason.wen@bakermckenziefenxun.com