Title page
Asia-Pacific and Fiscal Affairs Departments
Digitalization and Taxation in Asia
Prepared by a joint team from the IMF Asia-Pacific and Fiscal Affairs Departments, comprised of Era Dabla-Norris, Ruud de Mooij, Andrew Hodge, Jan Loeprick, Dinar Prihardini, Alpa Shah, Sebastian Beer, Sonja Davidovic, Arbind Modi, and Fan Qi
INTERNATIONAL MONETARY FUND
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Copyright ©2021 International Monetary Fund
Cataloging-in-Publication Data IMF Library
Names: Dabla-Norris, Era, project director. | Mooij, Ruud A. de, project director. |International Monetary Fund. Asia and Pacific Department, issuing body. | International
Monetary Fund. Fiscal Affairs Department, issuing body. | International Monetary Fund, publisher.
Title: Digitalization and taxation in Asia / prepared by a joint team from the IMF Asia-Pacific and Fiscal Affairs Departments, led by Era Dabla-Norris and Ruud de Mooij.
Other titles: International Monetary Fund. Asia and Pacific Department (Series). | International Monetary Fund. Fiscal Affairs Department (Series).
Description: Washington, DC : International Monetary Fund, 2021. | Departmental paper series. | “Prepared by a joint team from the IMF Asia-Pacific and Fiscal Affairs Departments, led by Era Dabla-Norris and Ruud de Mooij, and comprising Andrew Hodge, Jan Loeprick, Dinar Prihardini (coordinator), Alpa Shah, with contributions from Sebastian Beer, Sonja Davidovic, Arbind Modi, and Fan Qi. Research assistance was provided by Hibah Khan and Biying Zhu. Sofa Cerna Rubinstein supported the production of the paper.” | Includes bibliographical references.
Identifiers: ISBN 9781513577425
Subjects: LCSH: Technological innovations—Economic aspects—Asia. | Taxation—Asia. | Tax administration and procedure—Asia.
Classification: LCC T173.8 D33 2021
This joint Asia-Pacific–Fiscal Affairs Departmental Paper presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Prepared by a joint team from the IMF Asia-Pacific and Fiscal Affairs Departments, led by Era Dabla-Norris and Ruud de Mooij, and comprising Andrew Hodge, Jan Loeprick, Dinar Prihardini (coordinator), Alpa Shah, with contributions from Sebastian Beer, Sonja Davidovic, Arbind Modi, and Fan Qi. Research assistance was provided by Hibah Khan and Biying Zhu. Sofa Cerna Rubinstein supported the production of the paper.
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Contents
Glossary
Executive Summary
Introduction
1. Digitalization in Asia
Asia’s ICT Sector
Digitalization Beyond the ICT Sector
How Is Digitalization in Asia Different?
2. Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward
Challenges of Taxing Digitalized Businesses in Asia
Multilateral Reform
Digital Services Taxes
3. Digital Services, Digitally Delivered Goods, and VAT
Digital Services in Asia
Policy Options and Country Practices
Revenue Potential
Annex 1. Methodology
Annex 2. Detailed Formulary Apportionment Results
References
Boxes
Box 1. Amazon and Alibaba—Comparison between an American and Asian Tech Giant
Box 3. Ensuring Taxation of Intermediary Fees
Box 4. GST Compliance Mechanism for Supply of Digital Services by MNEs in the Case of India
Tables
Table 1. Residual Profit by Headquater Jurisdiction, 2017
Table 2. Residual Profit and Other Descriptive Statistics by Sector, 2017
Table 3. Digital Services Taxes in Asia
Table 4. The Economic Impact of DSTs
Table 5. VAT on Digital Services––Approaches in Asia-Pacific
Figures
Figure 1. A Digitalized Economy
Figure 2. Asia’s ICT Sector
Figure 3. Internet Access in Asia
Figure 4. E-Commerce in Asia
Figure 5. Asian Sales of E-Commerce Companies
Figure 6. Global Market Share: E-Commerce Companies
Figure 7. Turnover of Asia’s Tech Giants
Figure 8. Sales, Productivity, and Profits of Asia’s Tech Giants
Figure 9. Income Tax Expensed
Figure 10. Growth of Asia’s Tech Giants
Figure 11. Top 20 Locations of Residual Profit
Figure 12. Potential Revenue Effects of Pillar 1, Amount A
Figure 13. Facebook: Active Users and Average Revenue Per User
Figure 14. Survey-Based Estimates of the Tax Base and Revenue Potential in 2019
Figure 15. MNE Activities at Home and Abroad and the Destination of Asian MNE Profits
Figure 16. Change in Income Tax Revenue from Applying FA
Figure 17. Total CIT Revenue Effects from Destination-Based RPA
Figure 18. Partial CIT Revenue Effects—from Elimination of Profit Shifting
Figure 19. Partial CIT Revenue Effects—from Reallocation of Residual Earnings
Figure 20. Increase in Digitally Delivered Services and Demand for Digital Media
Figure 21. Survey-Based Estimates of Direct VAT Revenue Potential and VAT Efficiency in Asia
Glossary
| ADS | Automated Digital Service |
| B2B | Business to Business |
| B2C | Business to Consumer |
| BEPS | Base Erosion and Profit Shifting |
| CbCR | Country by Country Reporting |
| CIT | Corporate Income Tax |
| Destination country | Country in which the purchaser is located (same as market country) |
| DST | Digital Services Tax |
| EL | Equalization Levy |
| EU | European Union |
| FA | Formula Apportionment |
| FDI | Foreign Direct Investment |
| G20 | The G20 is the international forum that brings together the world’s major economies |
| GDP | Gross Domestic Product |
| GST | Goods and Services Tax |
| ICT | Information and Communications Technology |
| IF | Inclusive Framework |
| Investment Hub | Generally refer to countries with a high ratio of FDI to GDP. For example, the OECD considers those countries with inward FDI greater than 150 percent of GDP to be an investment hub. |
| Market country | Country in which the purchaser is located (same as destination country) |
| IGST | Integrated Goods and Services Tax |
| MNE | Multinational Enterprise |
| OECD | Organisation for Economic Cooperation and Development |
| OIDAR | India is chargeable on supply of Online Information Database Access and Retrieval |
| PE | Permanent Establishment |
| Profit shifting | Shifting of where profits are booked for tax purposes, and encompasses base erosion |
| Rents | Earnings in excess of the normal required return |
| Residence country | For a corporation (most frequently the location of managerial functions; occasionally the place of incorporation) |
| Residual profit | Profits in excess of routine |
| Routine return | Broadly equivalent to normal return, commonly as identified by transfer pricing methods |
| RP | Residual Profit |
| RPA | Residual Profit Allocation |
| Source country | Jurisdiction in which production of goods or services occurs |
| User participation | Contribution by the user of the product to the business model |
| VAT | Value-Added Tax |
Executive Summary
Digitalization in Asia is pervasive, unique, and growing. It stands out by its sheer scale, with internet users far exceeding numbers in other regions. This facilitates e-commerce in markets that are large by international standards, supported by innovative payment systems and featuring major corporate players, including a number of large, home-grown, highly digitalized businesses (tech giants) that rival US multinational enterprises (MNEs) in size. Opportunity for future growth exists, as a significant population share remains unconnected.
Digitalization raises new tax challenges and existing rules can be perceived as unfair. Existing income tax systems have been criticized as failing to confer taxing rights on jurisdictions where highly digitalized businesses have a large base of customers that generate value, but where they have no physical presence. Increasingly digitalized businesses may also have relatively more intangible assets (for example, trademark and patents), which are harder to value and easier to relocate, enabling profit shifting under existing rules. This may especially affect smaller, less developed economies. The nexus of digitalization and tax also goes beyond income taxation, raising issues regarding the effective value-added taxation of digital services, property rights over private information, and the use of digital technology in tax design and revenue administration.
Global tax reform proposals will create winners and losers in the region, although the overall revenue impact is likely to be modest. New taxing rights for market countries at the expense of residence countries, along the lines of proposals discussed under Pillar 1 of the OECD-Inclusive Framework (IF) will change the geographic distribution of tax revenue paid by MNEs in Asia. Investment hubs and low-tax jurisdictions are likely to lose revenue as less profit will be shifted towards them. Countries that do not host the headquarters of large MNEs, but have a large user base of their customers, are likely to gain revenue from the reallocation. Results are more ambiguous for countries that have both a large market and tax residence for large MNEs. For example, the home countries of Asia’s tech giants could lose revenue if these firms have to pay more tax in other countries where they are expanding. While the revenue effects are likely to be modest for most countries under current proposals, the rapid pace of digitalization can increase the importance of this revenue reallocation effect over time.
Digitalization is increasing pressure on the century-old international tax framework, which more fundamental reforms could address in the medium term. The reforms currently being considered in the OECD-IF could be a step toward more comprehensive reforms in the future. Systems that are being discussed among tax experts include, for example, formulary apportionment and residual profit allocation. These approaches would cause a much larger reallocation of tax revenue across countries, with the largest losses expected for investment hubs. At the same time, these proposals could deliver considerable simplification and closer alignment of profit attributions to where production and sales take place. Depending on the design, these reforms could also ease the pressure of international tax competition and provide scope for increasing revenue raised from MNEs, including through an increase in CIT rates as desired by countries.
Unilateral tax measures, such as digital services taxes (DSTs), adopted by a number of Asian countries are likely to have small revenue effects. DSTs are simpler in design and implementation than corporate income tax initiatives, but risk introducing distortions of double taxation and trade retaliation. In taxing gross revenue, they are blind to the profitability of the ring-fenced tech giants and therefore less efficient than alternative profit taxation reform options. Countries with domestic tech giants may find a DST less attractive as the income of these firms is already taxed under the existing CIT regime. A relatively narrow gross revenue tax base also results in limited revenue collection—often estimated in the range of 0.01–0.02 percent of GDP, suggesting that the choice to introduce a DST needs to be weighed against other tax reform priorities. That said, revenue from DSTs may have higher buoyancy in the future, given strong growth of digital economic activity, a trend that has been accelerated by the COVID-19 pandemic.
Extending the value added taxes (VAT) to capture e-commerce and digital services more effectively could yield significant short-term revenue and other efficiency gains. Capturing VAT on digitally provided services and e-commerce supplied from abroad will help countries increase revenue unilaterally. Applying VAT consistently on all digital imports also levels the playing field between domestic and foreign suppliers, and between goods and services—thus enhancing efficiency. The expected revenue effects from effectively doing so are greater than from DSTs or the global reform proposal currently under consideration under OECD-IF Pillar 1, in particular when accounting for indirect returns from relying on marketplaces as a third party information source and as collection agents to expand the VAT base. There is scope to leverage administrative reforms in VAT on digital imports to support both the compliance management of residents and the implementation of corporate tax reforms that shift taxing rights to the market country for non-residents.
For many Asian countries, additional efforts in taxation are necessary to meet their revenue mobilization needs. International tax reform towards greater destination-based income taxation in combination with a global minimum tax (Pillar 2 of the OECD-IF) would ease pressures from international tax competition and allow countries to raise corporate income tax rates if desired. Further revenue mobilization efforts might be required to finance future spending needs. These could focus on broadening the tax base by removing tax holidays, exemptions, and other preferential tax treatments. These are common in developing Asia but are often ineffective and inefficient and could even become redundant under a global minimum tax. Digitalization of tax administrations could further help revenue mobilization by addressing tax evasion and widen the tax base for corporate taxes and VAT. Such comprehensive tax reforms, however, go beyond the scope of this paper.