Huge tax revenue losses from e-commerce activity
When trading activities in the virtual environment yield huge profits, tax collection becomes a dilemma for many countries.
Retail sales of e-commerce worldwide has reached trillions of USD and increased sharply every year.
The rapidly evolving digital economy has increased the complexity of tax collection and administration and has led to unfair competition. Collecting taxes from e-commerce activities is considered a global dilemma, because the current tax system is built for the traditional economy while the digital economy is based on online transactions.
The global e-commerce market grew to US$26 trillion by 2020, according to the United Nations Conference on Trade and Development (UNCTAD). The strong rise of e-commerce in the context of Covid-19 brought the share of online retail in total retail sales from 16% to 19% in 2020.
E-commerce revenue grows every year and penetrates deeper into people's lives. Commercial activities on these platforms have become more and more popular in many countries, but tax collection is always a "headache" for many governments.
E-commerce platforms allow cross-border shopping and transactions in many jurisdictions. Sellers do not always determine the amount of tax to be paid and even deliberately dodge this duty. Therefore, many countries are considering or have enacted rules that require electronic exchanges to fulfill their tax obligations as well as rely on these online platforms to collect taxes.
In 2019, the Organization for Economic Cooperation and Development (OECD) recommended that tax authorities rely on e-commerce platforms to prevent tax evasion. The OECD has come up with a harmonized set of rules on value-added tax/goods and services tax (VAT/GST) in the digital economy. The set of rules, already in place in a number of countries, is supposed to help eliminate double taxation or no taxation.
Countries are all looking for ways to more efficiently collect taxes from technology corporations or online-based activities.
Since 2016, the UK has implemented many additional measures to tackle the "erosion" of VAT with online shopping. E-commerce platforms such as eBay and Amazon are responsible for ensuring their overseas customers are registered for VAT in the UK. Online platforms face heavy fines and even criminal prosecution if they fail to comply with the rules.
In Germany, a bill passed in 2018 makes e-commerce platforms legally liable for unpaid VAT from German sellers.
India applied a controversial e-commerce tax policy, which required e-commerce platforms to collect GST from suppliers. Many e-commerce businesses in the country complained that the regulation increased compliance costs when they had to take over the function of the tax authorities.
In Europe, from July 1, 2021, any online seller or e-commerce exchange must register their business in a member country if they want to sell goods online in the EU. Companies selling goods online must collect VAT even if the transaction takes place through warehouses based in the EU.
Experience for Vietnam
Photo: In Vietnam, in the near future, e-commerce floors will have to declare and pay taxes on behalf of individual sellers.
Vietnam is one of the most promising digital economies in Southeast Asia. Its e-commerce market is also very attractive with an impressive growth rate. Vietnam's e-commerce revenue reached 13.2 billion USD in 2020 and may reach 52 billion USD in 2025 with an average growth rate of 29% per year.
The activities of buying and selling goods on e-commerce platforms are becoming an indispensable part of people's lives in many regions. But tax administration in this field has many challenges.
The Tax Administration Law No. 38 and a number of Circulars issued since 2020 have added many regulations related to tax administration for e-commerce activities. Following regulations on cash flow management with cross-border platforms, the Ministry of Finance has recently issued Circular 40, stipulating that e-commerce floors must declare and pay tax on behalf of individual sellers.
E-commerce floors will define the turnover for tax declaration and pay taxes on behalf of business individuals based on revenue, and other revenue received by individuals doing business on these floor, including revenue received through shipping units (CODs), payment intermediaries and other forms of payment. The taxes withheld directly on sales are Value Added Tax and Personal Income Tax.
This provision has caused a lot of controversy. E-commerce platforms believe that it will increase compliance costs when they have to invest in both infrastructure and human resources to determine, classify the taxes, or they cannot control or do not have information about revenue because they are only connection platforms.
Experts said that the Vietnamese e-commerce market has its own character: large cash transactions, seller operating on multiple platforms, with diverse revenue sources.
Meanwhile, the management agency said this regulation would not affect individuals who comply with tax obligations because they will not have to pay tax at a fixed business location if they have paid taxes through e-commerce floors. The tax management agency also will extend the implementation so that e-commerce businesses can prepare for the provision and connection of data with the tax authority.
According to the roadmap, from January 1, 2022, e-commerce floors operating in Vietnam must connect and provide seller information to tax authorities. "This reduces the number of focal points for tax declaration, creating favorable conditions for both taxpayers and tax authorities," said Nguyen Thi Lan Anh, Director of the Tax Administration Department for Small and Medium Enterprises and Individual Business Households of the General Department of Taxation.
Vietnam’s e-commerce has been growing rapidly, and when the pandemic is over, the e-commerce market is expected to be even more robust.