Tax system slow to adapt to digital economy’s rise
LOST REVENUE:A lack of regulations on taxing cross-border Web-based content and services providers puts their local peers at a disadvantage, Ernst & Young said
The nation’s tax system is relatively behind developed markets in adapting to the proliferation of the digital economy, which has resulted in lost revenues for the government as the sector grows, consulting firm Ernst & Young said yesterday.
The audit services giant said that while China’s Alibaba Group Holding Ltd (阿里巴巴), which recorded sales of US$9.32 billion during last year’s Nov. 11 “Singles Day” promotions, has set an example for the rapid development of e-commerce, the digital economy encompasses many other less straightforward business models than purchasing goods online, which pose challenges for tax authorities worldwide.
The company expects more issues to arise as operational models, market scale and cross-border activities continue to grow across the globe.
In particular, Ernst & Young said that taxing cross-border Web-based content and services providers is especially challenging for the government, as these businesses do not have permanent establishments such as offices and warehouses in Taiwan.
“Current tax guidelines rely on individuals engaged in offshore digital economy activities to voluntarily declare and pay the 5 percent business tax to the government, as authorities only audit registered companies and not individuals,” Ernst & Young business tax and regulations compliance services partner Michael Lin (林志翔) said at a forum in Taipei.
Transactions under NT$3,000 are also exempt from the business tax, despite the rapidly growing aggregate sales reported by the sector, Lin added.
These transactions include app and game downloads, online lessons and hotel reservations, and involve cross-border payments via third-party services linked to credit cards, which complicates the auditing process for tax authorities, he added.
“This is problematic as a locally registered business offering similar products and services are at a significant disadvantage compared with their offshore peers, and may stifle development of Taiwan’s digital economy while reducing the nation’s tax base,” Lin said.
Lin said that in Europe, offshore companies have demonstrated a high level of willingness in fulfilling compliance, as they wish to preserve their corporate reputation.
Citing recommendations listed in an Oct. 5 Organisation for Economic Co-operation and Development (OECD) report on base erosion and profit sharing, Lin said that the government should establish a registration system for offshore companies without permanent establishments in the country.
“Such a system would allow tax authorities to determine if sales and profits are generated inside Taiwan, and if companies are required to fulfill withholding obligations, and avoid clashes between the government and companies such as Agoda.com and Airbnb,” Lin said.
In response to the rise of the digital economy, the OECD has begun classifying warehouses of online vendors as permanent establishments, as they are a vital aspect of their operations, Lin said, while suggesting the government do the same.
On whether businesses will skirt tax obligations by establishing permanent establishments, Lin said that warehouses give online firms a significant competitive edge in delivery times when competing for the local market.
“Taiwan actually has quite favorable business tax rate of 5 percent, and enterprise income tax of 17 percent; however, the government needs to expedite reforms necessary in adapting to change,” Lin said.
In related news, several Taiwanese e-commerce operators yesterday signed four cooperation agreements in Taipei with their Chinese counterparts to strengthen industry exchanges and business cooperation.
The four letters signed at the Cross-strait E-Commerce Forum involve cooperation in reselling systems for cross-border e-commerce and “online-to-offline” marketing — a business strategy aimed at attracting potential customers from online channels to physical stores.
