Source: Business Times
Date Published: 21 Feb 2019
Author: Michelle Quah

Attempting to determine the taxable revenues of a digital business – especially one that crosses borders – can be tricky, at best. Coming up with a mechanism that is both comprehensive and equitable is an even greater challenge.

Much of this week’s news coverage has focused on the measures announced on Monday in Singapore’s Budget 2019; but, equally newsworthy is what was not included: e-commerce tax.

Its exclusion from this year’s Budget – when it was so highly anticipated – is telling; yet the tax challenges arising from the digital economy are not unique to Singapore. Attempting to ring-fence the digital economy, while preserving the value creation of businesses, is a complex struggle that economies around the world are grappling with, and also the subject of current debate within the OECD.

The imposition of an e-commerce tax in Singapore was covered by Minister for Finance Heng Swee Keat in his Budget speech last year, when he said Singapore would implement Goods and Services Tax (GST) on imported services with effect from Jan 1, 2020, to “make sure that (its) tax system remains fair and resilient in a digital economy”.

The e-commerce segment is a fast-growing one and equity needs to be ensured between it and its brick-and-mortar counterpart.

The tax authority, the Inland Revenue Authority of Singapore (Iras), followed up on Mr Heng’s speech with two consultation papers on taxing e-commerce transactions for businesses and individuals buying digital services from overseas providers.

Many had expected that the implementation details of this e-commerce tax would be covered in this year’s Budget speech, given its looming start date. Some have taken its absence from the Budget as an indication that Iras is still working on how to best effect this change. Richard Mackender, Indirect Tax leader at Deloitte Singapore & Southeast Asia, said: “Singapore is studying the options to make sure that any change can be effectively administered and policed.”

And, with good reason. Attempting to determine the taxable revenues of a digital business – especially one that crosses borders – can be tricky, at best. Coming up with a mechanism that is both comprehensive and equitable is an even greater challenge.

Jeff Paine, managing director of the Asia Internet Coalition (AIC), an industry association made up of leading Internet and technology companies, said in his piece (BT, Feb 27, 2018, “Singapore Budget 2018: Govt’s ‘wait-and-see’ stance on e-commerce tax a wise move”) that “having short-sighted tax structures can potentially harm e-commerce and SMEs in the long run … (and so,) Singapore is taking a measured approach by exercising caution, considering all options, and taking a long-term view”.

He advocated a multilateral approach to such taxes: “Given the difficulty and complexities of e-commerce transactions between countries, it would be a bold and somewhat unpragmatic move for any country to implement its own standalone cross-border tax structure.”

It is a point of view that I agree with.

It would also mean, however, that the e-commerce tax won’t just be felt most immediately by the SME (small and medium-sized enterprises) section of the corporate arena, but also eventually by all businesses with cross-border business operations, in particular the MNCs (multinational companies).

A multilateral approach to e-commerce taxes is one that’s currently being advocated and studied by the OECD (the intergovernmental economic organisation known as the Organisation for Economic Co-operation and Development).

The OECD’s Inclusive Framework on BEPS (Base Erosion and Profit Shifting) – of which Singapore is a member of the Steering Group – put out a consultation paper last week, as part of its efforts to form a long-term solution to the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among countries.

BEPS refers to the tax avoidance strategies that exploit gaps and mismatches in tax rules around the world to artificially shift profits to low or no-tax locations.

Risk of un-coordinated, unilateral action

While acknowledging that its work “does not change the fact that countries or jurisdictions remain free to set their own tax rates or not to have a corporate income tax system at all”, the Inclusive Framework said that, “in the absence of multilateral action, there is a risk of un-coordinated, unilateral action, both to attract more tax base and to protect the existing tax base, with adverse consequences for all countries, large and small, developed and developing”.

It is examining, among other things, issues such as where tax should be paid and, if so, in what amount, “in a world where enterprises can effectively be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible value drivers more and more come to the fore”, along with the mechanics, design and coordination of such tax rules around the world.

While discussions are still at the policy formulation stage, companies would do well to keep abreast of the considerations being floated, so that they can be prepared for the changes that may affect them.

For example, the Inclusive Framework realises that the usual risks arising from structures that shift profit to entities subject to no or very low taxation is particularly acute when it comes to profits relating to intangibles – something prevalent in the digital economy. And so, it is considering two BEPS rules to circumvent these risks that would likely affect a large number of businesses.

The first is an income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to a low effective tax rate in the jurisdiction of establishment or residence. The second is a tax on base-eroding payments that would deny a deduction or treaty relief for certain payments unless that payment was subject to an effective tax rate at or above a minimum rate.

Singapore is likely keeping an eye on the outcome of this public consultation – the meeting for which is scheduled for March 13 and 14 – and related ongoing efforts in drawing up its own e-commerce tax regime. Companies should also stay attuned to such deliberations on the global stage, in spite of their omission on the local front in this year’s Budget.