## dtaea

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### Executive Summary — Digitalization in Asia
- Digitalization in Asia is pervasive, unique, and growing.
- Asia stands out by scale: internet users far exceed numbers in other regions; significant population shares remain unconnected, implying opportunity for future growth.
- E-commerce is facilitated by innovative payment systems and large markets supported by major corporate players, including locally headquartered, highly digitalized businesses that rival US MNEs in size.
- Digitalization has extended beyond the ICT sector into e-commerce, fintech, online financial and other services, and platforms/marketplaces linking firms and consumers.
- Advanced economies (China, Japan, Korea, Australia, New Zealand), large developing markets (India, Indonesia), and city-states (Singapore) show varying experiences of digitalization depending on demographics, geography, and development stage.

### Tax challenges from digitalization
- Highly digitalized firms can make cross-border sales without a physical presence, challenging traditional corporate income tax (CIT) rules that allocate taxing rights to headquarters and permanent establishments (PEs).
- Market (destination) countries and countries with large online user bases often lack taxing rights under existing rules.
- Digitalized firms tend to hold relatively more intangible assets (trademark, patents), which are harder to value and easier to relocate, facilitating profit shifting and base erosion—this may especially affect smaller, less developed economies.
- Cross-border online sales complicate VAT collection because VAT is conventionally remitted by locally registered firms, making enforcement difficult for non-resident suppliers.

### Multilateral reform (OECD Inclusive Framework: Pillar 1 and Pillar 2)
- OECD-IF membership: 139 members.
- Pillar 1 (Amount A) key design elements:
  - A new taxing right for market jurisdictions over a share of residual profit calculated at a consolidated MNE group (or segment) level.
  - Proposal example: portion (perhaps 20 percent) of “residual profit”—earnings in excess of “routine profits”—of MNEs with group revenues above EUR 750 million (USD 850 million), engaged in automated digital services or consumer-facing business, would be allocated to market/destination countries.
  - Routine profit likely defined as some percentage (perhaps 10 percent) of revenue from unrelated party sales; residual is profit above this.
  - Amount B: fixed return for baseline marketing and distribution activities physically in a market jurisdiction.
  - Processes to improve tax certainty, dispute prevention and resolution.
- Pillar 2:
  - Introduces minimum taxation of inbound and outbound investment; applies broadly and does not have special treatment for digital businesses.
  - Some jurisdictions view Pillar 1 and Pillar 2 as a package; Pillar 2 expected to raise more revenue than Pillar 1.
  - Example: “Made in America Tax Plan envisages a higher minimum tax rate of 21 percent compared to the OECD-IF’s Pillar 2.”

### Projected revenue effects and distributional implications of Amount A
- Aggregate assumptions summarized:
  - Routine profits assumed at 10 percent of revenue (10 percent profitability threshold).
  - Global residual profit across all industries under that assumption: USD 1.5 trillion.
  - ICT sector accounts for about 16 percent of global residual profits.
- Illustrative reallocation assumptions:
  - 20 percent of residual profit available for reallocation.
  - Pool to be reallocated estimated at USD 98 billion under a 10 percent profitability threshold and 20 percent reallocation share.
- Geographic shares (2017 data, selected):
  - MNEs headquartered in the United States: 33.1 percent of global residual profits (Mean RP/EBT 18.0 percent).
  - MNEs headquartered in Asia-Pacific: 32 percent of global residual profits.
  - China: 12.1 percent (Mean RP/EBT 13.1 percent).
  - Hong Kong SAR: 5.9 percent (Mean RP/EBT 32.1 percent).
  - South Korea: 4.0 percent (Mean RP/EBT 8.7 percent).
  - Japan: 3.9 percent (Mean RP/EBT 5.1 percent).
  - United States share of ICT residual profits: 53.3 percent (Mean RP/EBT 24.4 percent).
  - China share of ICT residual profits: 6.7 percent (Mean RP/EBT 23.2 percent).
- Estimated magnitude of Amount A effects:
  - Global CIT revenue increase from Amount A: about 0.5 percent (OECD 2020a).
  - OECD estimates:
    - Low-income countries: increase CIT revenue by approximately 1 percent (or 0.02 percent of GDP).
    - Middle-income countries: increase CIT revenue by 0.5 percent (0.02 percent of GDP).
    - Investment hubs could lose revenue by as much as 3.9 percent of current CIT revenue (0.2 percent of GDP).
  - Sensitivity: Results depend on profitability threshold (10 percent or 20 percent) and share of residual profit reallocated (10 percent or 20 percent); increasing share reallocated scales revenue effects proportionally.
- Asia-Pacific illustrative outcomes (selected/partial):
  - Vietnam: with a 10 percent profitability threshold and 20 percent reallocation, could lose about 0.11 percent of GDP in revenue (driven by profit reallocation of Japanese MNEs); with a higher profitability threshold, revenue effects are minimal.
  - Distributional pattern: investment hubs and low-tax jurisdictions likely to lose revenue; countries with large user/customer bases but without headquarters of large MNEs likely to gain revenue; countries that both host large MNEs and are large markets may experience ambiguous effects.

### Deeper reform options: Formulary Apportionment (FA) and Residual Profit Allocation (RPA)
- Formulary Apportionment (FA)
  - FA consolidates MNE group profits and apportions them across countries using allocation keys (assets, employment, payroll, sales/users).
  - FA would apportion all consolidated profit rather than only residual profit.
  - Global implications:
    - Introducing FA can lead to a loss in CIT revenue if CIT rates remain unchanged because of consolidation of profits and losses; part of the loss is offset by reallocation from low-tax to high-tax countries.
    - High-income Asia-Pacific countries benefit from sales-based apportionment; developing countries benefit from employment-based apportionment.
  - Selected FA outcomes (change in CIT revenue from MNEs, percent of GDP; Annex Table 2.1 excerpts):
    - Australia: Sales 0.07–0.02; Employment 0.38; Asset 0.38
    - India: Sales –0.51; Employment 0.19; Asset –0.51
    - Indonesia: Sales –0.10; Employment 0.77; Asset 0.08
    - Thailand: Sales –0.38; Employment 0.44; Asset –0.22
    - Vietnam: Sales –1.87; Employment –1.85; Asset –2.75
    - Median: Sales –0.01; Employment 0.01; Asset –0.03
    - Mean: Sales –0.08; Employment –0.02; Asset –0.08
- Residual Profit Allocation (RPA)
  - RPA separates routine returns (allocated where production takes place) from residual profits (allocated by formula, e.g., destination sales).
  - Beer and others (2020) example: assuming routine returns equal “10 percent of tangible asset stocks,” micro data suggest the global residual could amount to “USD 3 trillion.”
  - Under destination-based RPA:
    - Five Asian economies with relatively low average income (Bangladesh, India, Laos, and Mongolia) would tend to benefit.
    - Many others, including Australia, Malaysia, and Singapore, would tend to lose.
    - Singapore could face a decline in corporate revenues that “could exceed 55 percent of current CIT collections (2.5 percent of GDP).”
  - Examples of partial effects from eliminating profit shifting:
    - Singapore could lose up to “7.5 percent of current CIT collections (0.4 percent of GDP).”
    - India could gain “5 percent (0.2 percent of GDP).”
  - Reallocating residual returns toward destination-based sales would increase revenues in countries with large destination-based sales and reduce revenues in high-income countries and investment hubs.

### Unilateral measures: Digital Services Taxes (DSTs)
- Types and mechanics:
  - Withholding taxes on payments to non-residents for digital services (B2B advertising focus initially); tax rates vary widely at relatively high levels of 5 to 15 percent globally.
  - User-based taxes: apply to residents and nonresidents, levied on a gross basis at rates ranging from 1.5 to 7.5 percent on revenues from in-scope digital services.
  - Digital Permanent Establishment (virtual PE): domestic rules expanding taxable presence when MNE activities exceed global turnover and local sales/user thresholds.
- Trade-offs and assessment:
  - DSTs are simpler to design and implement than CIT reforms but risk double taxation and trade retaliation.
  - Because DSTs tax gross revenue, they are blind to profitability and less efficient than profit-based reforms.
  - Narrow gross revenue bases lead to limited revenue collection—often estimated in the range of 0.01–0.02 percent of GDP for existing DSTs in some countries.
  - DST introduction should be weighed against other tax priorities given limited immediate revenue.
  - DST revenue may have higher buoyancy over time given strong growth of digital activity, accelerated by the COVID-19 pandemic.
- Regional design variety and examples (selected):
  - India (Implemented April 2020; modified Equalization Levy 2020): EL2; scope includes revenues received by non-residents for online provision or facilitation of sales to Indian market, advertising targeted at Indian users, and sale of data; threshold: Companies generating India-based digital services revenue > INR 20 million in a financial year; payment obligation: Paid by non-resident e-commerce operators.
  - India (Implemented March 2016): EL6 advertising levy; threshold: Aggregate payments to nonresident > INR 100,000 in a financial year; charged and withheld by resident payors; rate “6 percent.”
  - Malaysia (Implemented May 2019): WHT6; threshold: Companies generating revenue from consumers in Malaysia >500,000 RMB/year.
  - Indonesia (Primary Law Enacted March 2020): ETT Not Specified; digital PE thresholds for (i) group consolidated gross turnover; (ii) sales in Indonesia; and (iii) active digital media users in Indonesia.
  - New Zealand (Under Discussion June 2019): DST3; global consolidated annual turnover threshold of at least €750m, and annual revenues attributable to New Zealand of at least NZ$3.5m (USD 2.3m).
- Empirical DST revenue examples:
  - Initial Indian Equalization Levy (2016): collections of about 0.02 percent of GDP from 2016–2020.
  - India’s 2016 levy collections: “INR 7 billion, about USD 100 million (<0.01 percent of GDP).”
  - Estimates in several Asian countries (Bangladesh, India, Indonesia, the Philippines and Vietnam): an India-like DST would have yielded about 0.02 percent of GDP in 2019.
  - European Commission estimated annual DST yield for member states: EUR 5 billion (<0.01 percent of EU GDP).
  - France expects to collect EUR 400 million from the DST in 2020 (0.02 percent of GDP).
  - United Kingdom estimates its DST will raise GBP 275 million (0.01 percent of GDP) in 2020–21 rising to GBP 440 million (0.02 percent of GDP) in 2023–24.
- Incidence and geopolitical risks:
  - Short-term incidence primarily falls on US MNEs; “25 percent of profits earned by foreign MNEs are made by US MNEs.”
  - For several Asian countries (Bangladesh, India, Indonesia, the Philippines, Singapore, and Vietnam), US MNEs account for more than 50 percent of profits earned by foreign MNEs—heightening potential for retaliatory trade measures.
  - USTR has classified some DSTs as discriminatory, allowing for potential duties.

### VAT, e-commerce, and policy options
- VAT challenges for digital transactions:
  - VAT is typically a destination consumption tax; place of consumption is harder to determine for cross-border digital supplies lacking physical border traces.
  - Consumer self-assessment for VAT on cross-border B2C supplies is typically unenforceable.
  - Low-value consignments and rising volumes complicate VAT on imported goods.
- Policy options and administrative models:
  - Vendor collection model (liability on nonresident provider) is the emerging international norm; over 60 countries have implemented arrangements to tax e-services and low-value imported goods.
  - Reverse charge for imported services to registered businesses remains common for B2B.
  - Marketplaces increasingly made fully liable for VAT collection on low-value consignments (EU and United Kingdom examples), enabling reduction or abolition of low-value exemptions.
  - Customer location commonly determined by two pieces of nonconflicting information (payment profile, billing/residence address, IP address or SIM country code).
  - Thresholds for cross-border digital services registration typically at or below domestic mandatory-registration levels; some countries apply no threshold.
- Revenue potential and indirect benefits:
  - Direct short-term revenue potential of including imported digital services and online goods estimated between 0.02 and 0.11 percent of GDP.
    - Australia’s GST on digital services (introduced 2017): expected to generate AUD 350 million (0.02 percent of GDP) over two years.
    - Thailand expected to raise about THB3 billion (0.017 percent of GDP) from a 7 percent VAT on nonresident service providers in 2021.
    - Estimates for Bangladesh, India, Indonesia, the Philippines, and Vietnam: charging VAT on remotely delivered digital services and some goods could directly increase overall VAT revenue by between 0.04 and 0.11 percent of GDP.
  - Indirect administrative returns:
    - Using platform-held information can enhance compliance with VAT and other taxes.
    - Marketplaces can serve as tax collection agents; reporting from platforms can inform compliance management in sectors such as tourism and mobility, producing significant additional revenue benefits.
  - Example compliance finding: Croatia 2018 campaign found about 40 percent of vendors using platforms either did not register or declared significantly less income than platform-reported sales.

### Case study: Amazon and Alibaba (comparative facts)
- Revenue FY19:
  - Amazon: US$ 280.5 billion.
  - Alibaba: US$ 56.1 billion.
- Foreign Revenue FY19:
  - Amazon: 31 percent.
  - Alibaba: 10.1 percent.
- Gross Profit FY19:
  - Amazon: US$ 74.7 billion.
  - Alibaba: US$ 25.3 billion.
- ROE (FY17-19 average):
  - Amazon: 21.2 percent.
  - Alibaba: 18.1 percent.
- Profit growth (FY15-19 average):
  - Amazon: 37.2 percent.
  - Alibaba: 32.1 percent.
- Employees (2019):
  - Amazon: 798,000.
  - Alibaba: 116,519.
- Income tax expense (% pretax income, FY18-19 average):
  - Amazon: 17.7 percent.
  - Alibaba: 13.8 percent.
- Interpretation:
  - Amazon has significantly higher turnover and is more profitable; cloud computing growth explains part of Amazon’s diversification.
  - Alibaba’s revenue is more concentrated in e-commerce (more than 80 percent of revenue) and mainly generated by Chinese websites to date; Alibaba’s income tax expense percentage is similar to Amazon’s in recent years.

### Policy implications and recommendations (from the source)
- Extend VAT to capture e-commerce and digital services supplied from abroad to yield short-term revenue and efficiency gains and to level the playing field between domestic and foreign suppliers.
- Leverage VAT administrative reforms on digital imports to support compliance management of residents and to aid implementation of corporate tax reforms that shift taxing rights to market countries.
- Consider multilateral reform (Pillar 1 and Pillar 2) to reallocate taxing rights toward market jurisdictions and to introduce a global minimum tax; Pillar 2 could reduce pressures from international tax competition and allow scope to raise CIT rates.
- Weigh unilateral DSTs carefully:
  - Recognize simplicity and short-run attractiveness versus risks of double taxation, trade retaliation, and narrow revenue base (often 0.01–0.02 percent of GDP).
  - Consider coordination (regional or bilateral) to reduce trade tensions and harmonize definitions, reporting, and collection.
- Broader revenue mobilization:
  - Additional taxation efforts needed for many Asian countries to meet revenue needs.
  - Broaden tax bases by removing tax holidays, exemptions, and preferential treatments common in developing Asia.
  - Digitalization of tax administrations can help raise revenue by addressing tax evasion, widening corporate tax and VAT bases, and supporting implementation of broader tax reforms.
- Design choices matter:
  - Under Pillar 1 design choices (profitability threshold, share of residual reallocated), revenue effects for countries vary and are sensitive to calculation methods.
  - For FA and RPA, allocation keys (sales versus employment/assets) produce divergent winners and losers across Asia.

*Italic: Source — DIGITALIZATION AND TAXATION IN ASIA (excerpt from provided PDF content unit).*

### Executive Summary ������������������������������������������������������������������������������������������������������

### Executive Summary

### Digitalization in Asia
- Digitalization in Asia is pervasive, unique, and growing.
- Asia stands out by its sheer scale, with internet users far exceeding numbers in other regions.
- E-commerce is facilitated by innovative payment systems and large markets supported by major corporate players, including locally headquartered, highly digitalized businesses (tech giants) that rival US MNEs in size.
- Significant population shares remain unconnected, implying opportunity for future growth.
- Digitalization has extended well beyond the ICT sector into e-commerce, fintech, online financial and other services, and platforms/marketplaces linking firms and consumers.
- Advanced economies (China, Japan, Korea, Australia, New Zealand), large developing markets (India, Indonesia), and city-states (Singapore) show varying experiences of digitalization depending on demographics, geography, and development stage.

### Tax challenges from digitalization
- Highly digitalized firms can make cross-border sales without a physical presence, challenging traditional corporate income tax (CIT) rules that allocate taxing rights to headquarters and permanent establishments.
- Market countries (destination countries) and countries with large online user bases often lack taxing rights under existing rules, raising perceptions of unfairness.
- Digitalized firms tend to hold relatively more intangible assets (trademark, patents), which are harder to value and easier to relocate, facilitating profit shifting and base erosion—this may especially affect smaller, less developed economies.
- Cross-border online sales complicate VAT collection because VAT is conventionally remitted by locally registered firms, making enforcement difficult for non-resident suppliers.

### Multilateral reform and potential revenue effects
- Multilateral discussions are underway under the G20/OECD Inclusive Framework (IF), which consists of 139 members.
- Pillar 1 of the OECD-IF proposes new taxing rights for market jurisdictions, reallocating some tax base from residence countries to market countries.
- Under current Pillar 1 proposals, the geographic redistribution of MNE tax revenue in Asia will create winners and losers:
  - Investment hubs and low-tax jurisdictions are likely to lose revenue as less profit is shifted toward them.
  - Countries with large user/customer bases but without headquarters of large MNEs are likely to gain revenue.
  - Countries that both host large MNEs and are large markets may face ambiguous effects; home countries of Asia’s tech giants could lose revenue if more tax is paid where firms are expanding.
- Overall revenue impact under current proposals is likely to be modest for most countries, though rapid digitalization can amplify the importance of reallocation over time.
- More fundamental reforms discussed by tax experts, such as formulary apportionment (FA) and residual profit allocation (RPA), would cause a much larger reallocation of tax revenue across countries, with the largest losses expected for investment hubs.
- Depending on design, such deeper reforms could simplify profit attribution, align taxation with production and sales locations, ease international tax competition, and provide scope to increase CIT rates.

### Unilateral measures: Digital Services Taxes (DSTs)
- Several Asian countries have implemented unilateral DSTs.
- DSTs typically tax receipts of non-resident firms from sales to residents and can take the form of withholding taxes or user-based turnover taxes.
- DSTs are simpler to design and implement than CIT initiatives but risk double taxation and trade retaliation.
- Because DSTs tax gross revenue, they are blind to profitability of ring-fenced tech giants and are less efficient than profit-based reforms.
- Countries with domestic tech giants may find DSTs less attractive because those firms’ incomes are already taxed under CIT.
- Narrow gross revenue bases lead to limited revenue collection—often estimated in the range of 0.01-0.02 percent of GDP—so DST introduction should be weighed against other tax priorities.
- DST revenue may have higher buoyancy in the future given strong growth of digital activity, a trend accelerated by the COVID-19 pandemic.

### VAT, e-commerce, and policy options
- Extending VAT to capture e-commerce and digital services supplied from abroad can yield significant short-term revenue and efficiency gains.
- Applying VAT consistently on all digital imports levels the playing field between domestic and foreign suppliers and between goods and services, enhancing efficiency.
- Effective VAT extension to digital imports can yield greater revenue effects than DSTs or the current Pillar 1 proposal, particularly when leveraging indirect returns from using marketplaces as third-party information sources and as collection agents.
- There is scope to leverage VAT administrative reforms on digital imports to support compliance management of residents and to aid implementation of corporate tax reforms that shift taxing rights to market countries.
- Ensuring VAT compliance on intermediary fees and using mechanisms such as marketplace collection (examples discussed in the source) can expand the VAT base.

### Broader revenue mobilization and tax policy implications
- For many Asian countries, additional taxation efforts will be necessary to meet revenue mobilization needs.
- International reform toward greater destination-based income taxation combined with a global minimum tax (Pillar 2 of the OECD-IF) could reduce pressures from international tax competition and allow countries to raise CIT rates if desired.
- Further revenue mobilization could focus on broadening tax bases by removing tax holidays, exemptions, and preferential treatments that are common in developing Asia and often ineffective or redundant under a global minimum tax.
- Digitalization of tax administrations can help raise revenue by addressing tax evasion, widening corporate tax and VAT bases, and supporting implementation of broader tax reforms.
- Comprehensive tax reforms beyond the scope of this paper may be required to realize these gains.

*Executive Summary — Digitalization and Taxation in Asia*

### Introduction

### dtaea - Introduction

### Overview
- Digitalization is having a profound impact on Asia’s economy, underpinned by widespread internet access.
- Digitalization extends well beyond the large ICT sector, with high levels of e-commerce and automated digital services.
- Asia has large, highly digitalized and locally headquartered tech giants operating alongside US MNEs.
- The rapid growth of Asia’s homegrown tech giants and the presence of US MNEs highlight the importance of appropriate tax policies for these highly digitalized businesses.

### Definition and Scope
- For this paper, the ICT sector includes:
  - manufacturing of computers, electronic and optical products,
  - publishing and broadcasting,
  - telecommunications,
  - computer programming, and
  - information services.
- Digitalized economic activity in Asia encompasses both the ICT sector and other types of digitalized businesses, with many formal-economy firms approaching a “digital asymptote” (use of digital systems up to provision of purely digital services such as online gaming, search, and social media).
- The paper focuses on large, highly digitalized businesses (“tech giants”) whose business models range from ICT manufacturers and retailers with large e-commerce platforms to online marketplaces facilitating third-party e-commerce.

### Asia’s ICT Sector — Key Findings
- The ICT sector in Asia is among the world’s largest:
  - The sector accounts for more than 12, 7, and 6 percent of total value added in Korea, India, and Japan, respectively.
  - China’s ICT sector is estimated to be around 5.6 percent of GDP.
- Employment:
  - The employment share of the ICT sector in China’s urban areas is already larger than in many OECD countries.
- Growth and productivity:
  - Asia’s ICT sector has grown rapidly, driven by manufacturing, which has exhibited high labor productivity.
  - Strong growth of the ICT sector’s real value added in Korea and Japan is comparable to that of the United States and Europe.
  - China’s ICT sector is estimated to have grown rapidly by about 10 percent per year between 2013 and 2016.
  - In Korea, ICT manufacturing recorded stronger growth than ICT services and exhibited high labor productivity, reflecting a comparative advantage in manufacturing.

### Digitalization Beyond the ICT Sector — Key Findings
- Internet connectivity:
  - China, India, and Indonesia taken together have more than 2 billion active mobile broadband connections, compared with approximately 500 million in the United States.
  - Japan has more than 200 million connections.
  - Bangladesh, the Philippines, Thailand, and Vietnam each have 50–100 million mobile connections.
  - The number of fixed broadband connections is more than three times as large in China as in the United States.
- Internet user penetration:
  - The number of internet users as a share of the population remains well below the level in the United States in China, Indonesia, and South Asia, indicating considerable potential for further growth.
- E-commerce:
  - Business-to-consumer (B2C) e-commerce in China and Korea is larger than in the United States; in Japan it is similar to other G7 economies.
  - Cross-border B2C e-commerce exports in China and Japan exceed those in some G7 economies.
  - Pandemic effects: in 2020 e-commerce sales grew by 30–50 percent in Indonesia and Singapore.

### Tech Giants and Market Structure
- Presence and scale:
  - Public companies from China (Alibaba, JD, Meituan), Japan (Rakuten), and Singapore (Sea Limited) are among the largest in Asia’s e-commerce space; private companies including Korea’s Coupang and Indonesia’s Go-Jek are also important.
  - These local firms generate levels of revenue in Asia similar to large US firms, including Amazon and Walmart.
- Homegrown vs US MNEs:
  - Asia stands out for having home-grown tech giants that rival US MNEs in size.
  - Alibaba Group and JD.com have about 38 percent of global e-commerce market share by merchandise volume.
  - Alibaba operates Taobao (C2C) and TMall (B2C); JD.com has a large in-house delivery network.
- Market orientation:
  - Available evidence suggests Asia’s homegrown tech giants operate mainly within their domestic markets.
  - Large US tech giants generate the majority of their revenue outside the United States; major Asian e-commerce providers (for example, Japan’s Rakuten) derive the bulk of their income from domestic markets.
  - Expansion beyond domestic markets is occurring through joint ventures and acquisitions (examples cited include Alibaba’s purchase of a SE Asian e-commerce firm and Sea Group acquisitions; specific transaction names are in the source).

### Intangibility, Profitability, and Tax Outcomes
- Intangible assets and valuation issues:
  - Asia’s homegrown tech giants appear to rely on intangible assets as much as US MNEs.
  - Firms deriving value from intangible assets are more difficult to tax and to value for transfer pricing.
  - Using revenue per employee as a proxy for intangibility, some Asian tech giants eclipse large US MNEs on this metric.
- Profitability:
  - Asian tech giants are broadly as profitable as US peers when judged by return on equity in recent years.
- Income tax expense:
  - Some Asian home-grown tech giants appear to have income tax rates comparable to US MNEs.
  - Tax rates computed as income tax expensed as a percent of pretax income for a selection of large Asian and US tech giants indicate tax outcomes can be similar.
- Implication:
  - The rapid growth of Asia’s homegrown tech giants and the presence of US MNEs highlight the importance of appropriate tax policies for highly digitalized businesses to ensure revenue is distributed across countries in a manner perceived to be fair.

### Comparative Case: Amazon and Alibaba (summary points from source)
- Business models:
  - Alibaba’s websites have traditionally been a platform for third-party sellers without marketing Alibaba’s own products or providing delivery services.
  - Amazon invested in an extensive delivery network and sells its own products; both firms have converged in some areas (Alibaba jointly founded Cainiao Network in 2013; both have acquired traditional retail outlets).
- Size and profitability:
  - Revenue FY19: Amazon US$ 280.5 billion; Alibaba US$ 56.1 billion.
  - Foreign Revenue FY19: Amazon 31%; Alibaba 10.1%.
  - Gross Profit FY19: Amazon US$ 74.7 billion; Alibaba US$ 25.3 billion.
  - ROE (FY17-19 avge): Amazon 21.2%; Alibaba 18.1%.
  - Profit growth (FY15-19 avge): Amazon 37.2%; Alibaba 32.1%.
  - Employees (2019): Amazon 798,000; Alibaba 116,519.
  - Income tax expense (% pretax income, FY18-19 avge): Amazon 17.7%; Alibaba 13.8%.
- Interpretation:
  - Amazon has significantly higher turnover and is more profitable; Amazon’s revenue mix has diversified (cloud computing growth), while e-commerce accounts for more than 80 percent of Alibaba’s revenue.
  - Alibaba’s business model is more intangible with scope to expand internationally, but to date most revenue is generated by its Chinese websites.
  - Alibaba’s income tax expense percentage is similar to Amazon’s in recent years.

*Italic: Source — dtaea - Introduction (excerpt from the provided PDF content).*

### Box 1. Amazon and Alibaba (continued)

### Box 1. Amazon and Alibaba (continued)

### Challenges of Taxing Digitalized Businesses in Asia
- Existing international tax approach perceived as unfair by governments and civil society organizations.
- Key issues:
  - Remote contribution by users challenging the concept of a permanent establishment (PE) which requires physical presence to generate taxing rights for income taxes.
  - Information collected on personal preferences and habits of users is processed and monetized (personalized advertising and product development), contributing to profits without compensation to users.
  - Highly digitalized businesses hold relatively more intangible assets, which are harder to value and easier to relocate, enabling profit shifting under existing transfer pricing rules (Beer and Loeprick 2015).
- Regional implications:
  - Reducing the importance of physical presence could increase Asia’s ability to tax foreign MNEs operating in Asia with few tangible assets.
  - Home countries of Asia’s tech giants could lose revenue if these firms pay more tax in other countries where they expand.
  - Some Asian countries have introduced DSTs (withholding taxes or user-based turnover taxes on digital activities) as unilateral measures; these taxes raise low levels of revenue and should be weighed against other reform priorities.

### Multilateral Reform (OECD Inclusive Framework — Pillar 1 and Pillar 2)
- Overall framing:
  - OECD-led IF proposes multilateral reform to adapt the international corporate tax system to new digitized business models by reallocating part of residual profit to market (“destination”) countries and establishing new taxing rights without requiring physical presence (new “nexus”).
  - New taxing right overlaid on existing international taxation system; moves beyond arm’s length principle toward formulary methods when reallocating profits.
- Pillar 1 key elements:
  - A new taxing right for market jurisdictions over a share of residual profit calculated at a consolidated MNE group (or segment) level (“Amount A”).
    - Specifically, a portion (perhaps 20 percent) of the “residual profit”—earnings in excess of “routine profits”—of MNEs with group revenues above EUR 750 million (USD 850 million), that are engaged in automated digital services or consumer-facing business would be allocated to market (or “destination”) countries.
    - Routine profit likely defined as some percentage (perhaps 10 percent) of revenue from unrelated party sales; residual is any profit above this.
  - A separate fixed return for certain baseline marketing and distribution activities physically in a market jurisdiction (“Amount B”), aligning with the arm’s length principle; this secures existing taxing rights and simplifies enforcement.
  - Processes to improve tax certainty aimed at dispute prevention and resolution.
- Pillar 2:
  - Introduces minimum taxation of inbound and outbound investment; applies broadly and does not have special treatment for digital businesses.
  - Some countries (including the US) view Pillar 1 and Pillar 2 as a package; Pillar 2 is expected to raise more revenue than Pillar 1.
  - Example: Made in America Tax Plan envisages a higher minimum tax rate of 21 percent compared to the OECD-IF’s Pillar 2.

### Implications of Amount A for Asia — Residual Profit Distribution and Sectoral Role
- Aggregate estimates and sectoral importance:
  - Assuming routine profits are 10 percent of revenue (10 percent profitability threshold), global residual profit across all industries is USD 1.5 trillion.
  - MNEs headquartered in the US account for 33.1 percent of global residual profits; MNEs headquartered in Asia-Pacific account for 32 percent.
  - ICT sector accounts for about 16 percent of global residual profits.
- Table highlights (2017 data, summary):
  - All industries total residual profit: Total 1,457 USD billions.
  - ICT industry total residual profit: Total 236 USD billions.
  - Online retailers total residual profit: Total 1.45 USD billions.
  - Notable country shares (All industries):
    - United States 33.1 percent (Mean RP/EBT 18.0 percent)
    - China 12.1 percent (Mean RP/EBT 13.1 percent)
    - Hong Kong SAR 5.9 percent (Mean RP/EBT 32.1 percent)
    - South Korea 4.0 percent (Mean RP/EBT 8.7 percent)
    - Japan 3.9 percent (Mean RP/EBT 5.1 percent)
  - Notable ICT country shares:
    - United States 53.3 percent (Mean RP/EBT 24.4 percent)
    - Hong Kong SAR 7.6 percent (Mean RP/EBT 29.6 percent)
    - China 6.7 percent (Mean RP/EBT 23.2 percent)
    - Japan 6.6 percent (Mean RP/EBT 11.6 percent)
- Sector descriptive statistics (2017, selected):
  - ICT: Number of Companies 50; mean EBT/Assets 18.3 percent; median EBT/Assets 6.3 percent; mean RP/EBT 19.4 percent; Share of Global RP 16.2 percent.
  - Finance, Insurance and Real Estate: Number of Companies 899; mean EBT/Assets 4.6 percent; median EBT/Assets 3.1 percent; mean RP/EBT 17.9 percent; Share of Global RP 16.3 percent.
  - Manufacturing: Number of Companies 2,694; mean EBT/Assets 8.3 percent; median EBT/Assets 6.7 percent; mean RP/EBT 12.4 percent; Share of Global RP 42.8 percent.
- Geographic distribution and concentration:
  - Using consolidated data, digital firms account for a sizeable share of residual profits; ICT sector alone responsible for 16 percent of total residual profits.
  - Under the current system, residual profits across all industries are reported mainly in large economies and investment hubs.
  - For MNEs headquartered in 25 economies (including Australia, China, India, Indonesia, Japan, Singapore, and the United States), these MNEs account for 71 percent of total global residual profit.
  - With a revenue-based profitability threshold, about 44 percent of residual profit from these MNEs are declared in China and the United States, followed by Netherlands, Canada, and Puerto Rico.
  - Regionally, Europe has the largest share of residual profit (35 percent), Asia Pacific 31 percent, Americas 29 percent.
  - Affiliates located in Asia tend to be more profitable, earning a return on tangible assets of 17 percent (median affiliate returns: Europe 15 percent; Americas and Middle East 8.5 percent; Africa 4 percent).

### Sensitivity to Calculation Methods and Size of Reallocated Pool
- Location of residual profits sensitive to calculation method:
  - Using a profitability threshold based on returns to tangible assets (10 percent of value), United States emerges as top location while China accounts for only 4 percent of residual profit.
- Global revenue effect of Amount A:
  - Small overall, increasing CIT revenue by about 0.5 percent (OECD 2020a).
  - Pool to be reallocated estimated at USD 98 billion assuming a 10 percent profitability threshold and only 20 percent of residual profit available for reallocation.
  - OECD estimates:
    - Low-income countries would increase CIT revenue by approximately 1 percent (or 0.02 percent of GDP).
    - Middle-income countries would increase CIT revenue by 0.5 percent (0.02 percent of GDP).
  - Investment hubs could lose revenue, by as much as 3.9 percent of current CIT revenue (0.2 percent of GDP).
- Range and scenario assumptions:
  - Estimates reflect assumptions regarding profitability threshold (10 percent or 20 percent of unrelated party sales) and share of residual profit to be reallocated (10 percent or 20 percent).
  - Increasing (decreasing) the share of residual profit to be reallocated results in a proportional increase (decrease) in revenue effects.
  - Increasing the profitability threshold reduces the size of the potential pool of profits to be reallocated, but for some countries this results in an increase in the revenue gain because contribution to the pool is proportional to current share of residual profit.

### Potential Revenue Effects of Pillar 1, Amount A — Asia-Pacific Illustrative Outcomes
- Under an expanded scope including firms in all industries, investment hubs and developing economies in Asia Pacific could lose revenue.
- Example scenario figures (illustrative):
  - Vietnam: with a 10 percent profitability threshold and with 20 percent of residual profits reallocated, could lose about 0.11 percent of GDP in revenue, driven by profit reallocation of Japanese MNEs. With a higher profitability threshold, revenue effects are minimal.
  - Emerging economies such as India, Indonesia, and Malaysia could lose about (figure truncated in source).
- Notes on interpretation:
  - Scope discussions ongoing; a size threshold rather than activity-based scope could change impacts.
  - Top 100 largest MNE groups by revenue have revenue greater than USD 67 billion, average revenue USD 127 billion, average residual USD 1.7 billion; average MNE headquartered in the Americas has more than twice the residual profit (USD 3.4 billion) of the average Asian MNE (USD 1.6 billion). Average European residual profit USD 305 million.

*Source: dtaea - Box 1. Amazon and Alibaba (continued).*

### 0.01 percent of GDP in revenue or have a modest revenue gain. In contrast,

### dtaea - 0.01 percent of GDP in revenue or have a modest revenue gain. In contrast,

### Distributional effects and methodology
- Some jurisdictions could lose about 0.15 percent of GDP in revenue (example: Singapore and Hong Kong SAR).
- High-income countries such as Australia, Japan, and Korea, as well as large markets such as China, gain revenue under the range of assumptions considered.
- Residual profit is defined as profit above 10 percent of unrelated party sales.
- Only 20 percent of this residual is reallocated based on the share of destination sales in each jurisdiction.
- The estimates assume that this reallocation is “funded” by countries relinquishing the residual profit to which they currently have taxing rights.
- Annex 1 provides an overview of the methodology used to develop these estimates.

### Rationale for Digital Services Taxes (DSTs)
- DSTs are linked to expanding market (or “source”) country taxing rights where direct taxation of profits is difficult.
- DSTs are analogized to royalties on natural resource extraction: personal data seen as a collective national asset could justify a royalty instrument (a tax on turnover) when hard-to-value intangibles or limited capacity make profit taxation difficult.
- Current DSTs in Asia take on the flavor of highly targeted user-based royalties.

### Types of unilateral measures used to tax digital services
- Withholding taxes on payments to non-residents for digital services:
  - Levy on payments to non-residents, conceptually similar to withholding taxes on cross-border technical services.
  - Initially focused on B2B online advertising; expanded to other digital services and some B2C transactions, typically relying on financial institutions as withholding agents.
  - Tax rates on payments in scope vary widely at relatively high levels of 5 to 15 percent globally.
- User-based taxes:
  - Typically apply to both residents and non-resident companies but often target a few large foreign MNEs due to high global turnover and domestic revenue thresholds.
  - Levied on a gross basis at relatively low rates, ranging from 1.5 to 7.5 percent on revenues from the sale of digital services in scope.
- Digital Permanent Establishment (virtual PE):
  - Domestic rules expanding taxable presence when MNE activities exceed global turnover and local sales and user thresholds.
  - Few countries have clear rules for revenue attribution to virtual PEs; many constrained by existing tax treaties.

### Regional experience and design variation (selected facts from Table 3)
- India (Implemented April 2020): EL2; scope includes revenues received by non-residents for online provision or facilitation of sales to Indian market, advertising targeted at Indian users, and sale of data; threshold: Companies generating India-based digital services revenue > INR 20 million in a financial year; payment obligation: Paid by non-resident e-commerce operators.
- India (Implemented March 2016): EL6; revenues received by non-residents for online advertising services; threshold: Aggregate payments to nonresident > INR 100,000 in a financial year; Charged and withheld by resident payors.
- Malaysia (Implemented May 2019): WHT6; all income from e-commerce transactions deemed derived in Malaysia; threshold: Companies generating revenue from consumers in Malaysia >500,000 RMB/year; Paid by nonresident digital service providers.
- Indonesia (Primary Law Enacted March 2020): ETT Not Specified; revenue received by non-residents from e-commerce sales to Indonesian consumers when the digital PE cannot be applied due to a tax treaty; digital PE conditions met by exceeding thresholds for (i) group consolidated gross turnover; (ii) sales in Indonesia; and (iii) active digital media users in Indonesia; Paid by nonresident digital service providers.
- Vietnam (Under Discussion January 2021): WHT Variable; revenues received by non-resident e-commerce businesses for the supply of services to residents; Not specified; Collected and withheld by financial institutions.
- New Zealand (Under Discussion June 2019): DST3; New Zealand-source revenue received by intermediation platforms, social media platforms, content sharing sites and search engines; Businesses with a global consolidated annual turnover of at least €750m, and annual revenues attributable to New Zealand of at least NZ$3.5m (USD 2.3m); Paid by nonresident digital service providers.

### Assessment of DSTs: potential trade-offs and impacts
- Ring-fencing specific digital activities risks creating an inefficient wedge between “digital” and “non-digital” activities.
- Choosing revenues over profits as the tax base risks taxing non-rent income, distorting production, or disincentivizing investment; tax level must be calibrated accordingly.
- Risk of pass-through of the tax burden to consumers, particularly in monopolistic settings.
- Withholding taxes (B2B payments to non-residents):
  - Easy to implement and administer; most widespread to date.
  - Potentially easy to avoid (e.g., resident company setting up an offshore related entity to make payments).
- User-based DSTs:
  - Broader scope and greater revenue potential but complex design and administrative requirements.
  - Require clear rules to determine the location of the user and methods for determining the tax base.
  - High thresholds may target a few international firms and risk retaliation; low thresholds may deter entry by smaller firms.
  - Require registration, regular filing of returns, and payment of tax due.
- Incidence and welfare considerations:
  - Taxing on a gross basis may disrupt innovative business development and disincentivize investment in loss-making firms.
  - For profitable ADS providers, taxing revenue may be similar to profit-based taxation where marginal cost of providing additional services is minimal.
  - In heavily concentrated two-sided markets, taxation may have positive welfare effects.
  - Incidence in two-sided markets is complex; a tax on advertising may incentivize platforms to shift burden to the untaxed side or affect advertising prices.

### India’s Equalization Levy (policy specifics and incidence)
- India’s modified Equalization Levy (2020):
  - Broadest user-based DST adopted globally to date (covers B2B and B2C digital sales of goods, content provision, cloud, software, financial and education services).
  - Explicitly excludes Indian residents from scope rather than using a high global turnover threshold.
  - New rate of 2 percent on activities in scope of its new DST.
  - India maintains a higher 6 percent rate on B2B payments received by nonresidents for advertising services provided in India.
  - Incidence is difficult to assess: some tax may be passed on to consumers; MNEs providing free services may share the tax burden with third-party advertisers.

### Potential DST tax base and revenue estimates in Asia
- Asia is highly populous with a sizeable user base but lower value per user than Europe and the Americas.
- Facebook data: Asia accounts for a large share of active users, but revenue per user is significantly below world average.
- Regional DST base (even without China) is comparable to Europe and the Americas.
- Larger middle- and high-income economies dominate the potential base: Australia, India, Indonesia, Japan, Korea, and Singapore.
- Small, low-income countries in the region (Brunei, Myanmar) have a negligible tax base.
- Empirical revenue examples:
  - The initial Indian Equalization Levy introduced in 2016 resulted in collections of about 0.02 percent of GDP from 2016–2020.
  - Estimates suggest that in Bangladesh, India, Indonesia, the Philippines and Vietnam, an India-like DST would have yielded revenue of about 0.02 percent of GDP in 2019.
  - European Commission estimated annual DST yield for member states of EUR 5 billion (<0.01 percent of EU GDP).
  - France expects to collect EUR 400 million from the DST in 2020 (0.02 percent of GDP).
  - The United Kingdom estimates its DST will raise GBP 275 million (0.01 percent of GDP) in 2020–21 rising to GBP 440 million (0.02 percent of GDP) in 2023–24.

*Source: DIGITALIZATION AND TAXATION IN ASIA (selected excerpts).*

### 1. Facebook: Average Revenue per User 2. Facebook: Monthly Active Users (MAUs)

### dtaea - 1. Facebook: Average Revenue per User 2. Facebook: Monthly Active Users (MAUs)

### Digital Services Taxes (DSTs) — revenue potential and current evidence
- Immediate revenue potential of DSTs in Asia is small; an Indian withholding tax resembling the 2016 Equalization Levy would raise about a fifth of the DST’s potential.
- Given the current low base, revenue is likely to have high buoyancy in the future.
- The pandemic and associated lockdown measures are accelerating digital economic activity, likely increasing future revenue potential.
- Example estimates and instances:
  - Aggregate assessment for 86 US firms potentially in scope of the Indian DST: "may face tax payments in excess of USD 30 million per year."
  - By January 2021, "more than 30 countries had enacted, held public consultations on policy proposals, or announced their intention to introduce unilateral direct tax measures aimed at digital services."

### Regional adoption, administrative considerations, and geopolitical risks
- Adoption in the region has varied depending on whether countries have home-grown tech giants.
- Low-income countries with limited digital activity are unlikely to prioritize investments in DSTs, though targeted measures (for example, commissions for online facilitation of hospitality services) could become relevant for tourism-dependent economies.
- Administrative and compliance costs from DSTs are non-negligible and similar to investments needed to capture VAT on digital services supplied from abroad.
- Short-term incidence under DSTs would primarily fall on US MNEs; on average, "25 percent of profits earned by foreign MNEs are made by US MNEs."
- For several Asian countries (Bangladesh, India, Indonesia, the Philippines, Singapore, and Vietnam), US MNEs account for more than 50 percent of profits earned by foreign MNEs—heightening potential for retaliatory trade measures.
- Example: The United States Trade Representative (USTR) estimated that "more than 70 percent of digital service companies subject to the Indian DST are US based" and classified the tax as discriminatory, allowing for potential duties on Indian goods.

### Coordination and treaty-based options
- Regional and bilateral coordination of DSTs could reduce collection costs and trade tensions by harmonizing scope, definitions, and registration/reporting/payment obligations.
- A proposed new article in the UN Model Tax Convention to deal with income from Automated Digital Services (ADS) could allow bilateral coordination of DSTs and help lower the risk of retaliatory tariffs.

### Alternative policy options — Formulary Apportionment (FA)
- FA consolidates MNE group revenue across affiliates and allocates it across countries based on an allocation key (supply-based: assets, employment, payroll; demand-based: sales, user value).
- FA eliminates issues associated with arm’s-length pricing by computing the tax base at a consolidated level, potentially removing profit shifting and simplifying administration.
- Elements of FA appear in Pillar 1 (consolidation and apportionment of residual profit using sales), but FA would apportion all consolidated profit rather than just residual profit.
- Global implications:
  - Introducing FA can lead to a loss in CIT revenue if CIT rates remain unchanged due to consolidation of profits and losses; part of the loss is offset by reallocation from low-tax to high-tax countries.
  - High-income Asia-Pacific countries benefit from sales-based apportionment; developing countries benefit from employment-based apportionment.
  - Specific country impacts (illustrated in figures): Hong Kong SAR and Singapore tend to lose revenue under many FA weightings; Australia and New Zealand gain under sales-based formulas for US and non-US MNEs.

### Alternative policy options — Residual Profit Allocation (RPA)
- RPA schemes separate routine returns (allocated where production takes place) from residual profits (allocated by formula, e.g., destination sales).
- The OECD-IF Pillar 1 treats routine returns as a percent of sales and redistributes a share of global residual; other proposals compute routine returns differently (fixed percentage of tangible assets, COGS, or via transfer pricing for routine functions).
- Two RPA variants:
  - Pillar 1 style (adds residual allocation atop existing arrangements for very large firms).
  - RPA replacing current arrangements (could yield significant simplification and permit negative residuals).
- Revenue impacts (sourced from Beer and others (2020)):
  - Assuming routine returns equal "10 percent of tangible asset stocks," micro data suggest the global residual could amount to "USD 3 trillion."
  - Half of this global residual is currently declared in 16 Asian economies.
  - The RPA design would disproportionately affect highly digitalized firms and firms relying heavily on intangibles because their return on tangible assets will be elevated.
  - Under a destination-based RPA allocating residual profit by sales:
    - Five Asian economies with relatively low average income (Bangladesh, India, Laos, and Mongolia) would tend to benefit.
    - Many others, including Australia, Malaysia, and Singapore, would tend to lose.
    - Singapore could face a decline in corporate revenues that "could exceed 55 percent of current CIT collections (2.5 percent of GDP)."
- Effects from eliminating profit shifting and reallocating residuals:
  - Eliminating profit shifting could produce sizable partial CIT effects; examples:
    - Singapore could lose up to "7.5 percent of current CIT collections (0.4 percent of GDP)."
    - India could gain "5 percent (0.2 percent of GDP)."
  - Reallocating residual returns toward destination-based sales would increase revenues in countries with large destination-based sales (positively correlated with trade deficits) and reduce revenues in high-income countries and investment hubs.
    - Example: Laos would gain "about 30 percent of current revenues (0.5 percent of GDP)" while Singapore could lose "about 50 percent (2.1 percent of GDP)."
- Policy levers and mitigation:
  - Destination-based RPA schemes give countries scope to increase corporate tax rates on their allocated share of profit with less risk of base erosion from tax competition.
  - Countries losing revenue from RPA could partially offset losses by raising tax rates; a global minimum tax could further support revenues for some jurisdictions.
  - Concerns include new avoidance routes (e.g., selling through third-party distributors in low-cost jurisdictions), which sourcing rules could mitigate.

### The 2016 Indian Equalization Levy — design and outcomes
- Design:
  - Introduced in 2016 as a withholding tax on payments by domestic businesses (Indian residents or Indian PEs of nonresidents) to nonresident entities for online advertising services, at a rate of "6 percent."
  - Applies to any nonresident receiving payments from Indian residents of more than "INR 100,000 (approximately USD 1,500) in a financial year."
  - Compliance burden placed on domestic recipient: the Indian purchaser is responsible for withholding and remitting the tax.
- Collections and scale:
  - Collections were "INR 7 billion, about USD 100 million (<0.01 percent of GDP)."

*Source: https://www.imf.org/-/media/files/publications/dp/2021/english/dtaea.pdf*

### 0.06 percent of total tax revenues), in FY2017–18.

### dtaea - 0.06 percent of total tax revenues), in FY2017–18.

### The 2020 Levy: scope, subjects, and administration
- A 2 percent charge was introduced in March 2020 on revenue generated by nonresident companies from a range of digital services offered in India.
- In-scope activities:
  - Tax applies to revenue from “e-commerce supply or services,” including the sale of online goods and services (including through platforms) to any person who is resident in India or who uses an Indian internet protocol address.
  - Applies to nonresidents purchasing advertising services targeted at Indian residents or selling data collected from Indian residents or users with an Indian IP address.
  - Broad scope captures services not covered by other DSTs, including supply of digital content, sale of goods and services electronically, and cloud services.
- Interaction with the 2016 advertising levy:
  - The 2016 advertising levy remains in place and taxes any payment made by a resident to a non-resident for online advertising; payments already taxed under the 2016 levy are not subject to the 2020 levy.
  - The 2020 levy extends taxing rights to cover payments between two nonresidents if advertising services are targeted at Indian users (example: if Airbnb (a US company) pays Google to advertise to Indian users on Google’s search engine, that revenue would be subject to the DST).
- Companies in-scope:
  - Tax payable only by nonresident e-commerce operators; explicitly excludes all Indian companies or nonresidents with a PE in India.
  - Applies only to companies above the threshold of Rs20 million (approximately US$270,000) in India-based digital services revenue.
- Administration:
  - The nonresident e-commerce operator is responsible for charging and paying the tax (unlike the original advertising levy).

### VAT challenges and principles for digital transactions
- VAT is a consumption tax imposed commonly on the destination principle; taxing right is commonly located at destination or place of consumption.
- Digitalization intensifies challenges in determining place of consumption, especially for cross-border supplies of digital products that do not pass through border control.
- Specific challenges for VAT or sales tax design and collection:
  - Digital services provided directly to final consumers (movies, music, accounting services provided by multinational firms) lack a physical border trace and sellers often lack a domestic presence; consumer self-assessment is typically unenforceable in practice.
  - Imported services provided to businesses (B2B) are commonly subject to a VAT reverse charge where the domestic business accounts for VAT and can claim input tax credit.
  - Goods supplied by foreign-based online sellers: low-value consignments often have de minimis exemptions; increasing volumes make bringing these into the tax net difficult.
- Levelling the VAT playing field:
  - Ensuring non-resident competitors are liable for the same VAT as domestic providers can eliminate distortions and support local digital entrepreneurship.
  - Resident businesses with total turnover exceeding the VAT threshold selling online to resident consumers are required to register and charge VAT; local sellers using digital platforms must register and remit VAT.

### Policy options and country practices for VAT on digital services
- Over 60 countries have implemented arrangements to tax e-services and low-value imported goods; emerging international norm allocates VAT taxing rights to the jurisdiction of consumption using the vendor collection model.
- Legislative approaches:
  - Broad coverage (example: Australia) applying to “sale of imported services and digital products” and intangible supplies defined as “anything other than goods or real property.”
  - Specific lists of activities (example: Japan) covering audio-visual content, cloud computing, advertising.
  - Some countries initially list companies in scope (example: Indonesia), publishing periodic company lists; this can create distortions and administrative challenges.
- Administrative models:
  - Vendor collection model is the most common: liability rests with the nonresident provider who is required to register; simplified online registration and voluntary compliance above a mandatory threshold are typical.
  - Exceptions where liability falls on local payment providers exist (examples: Argentina, Azerbaijan, Bangladesh); a hybrid approach is used in Costa Rica.
  - Reverse charge regimes commonly apply for imported services to registered VAT payers; extensions may be needed to cover exempt-supply recipients (government entities, financial and education institutions) to prevent bias.
  - Marketplaces are increasingly made fully liable for VAT collection on low-value consignments (EU and United Kingdom examples), enabling reduction or abolition of low-value exemptions without unmanageable collection costs.
- Implementation details:
  - Customer location determination commonly uses a combination of payment profile, billing/residence address, and internet access (IP address or SIM country code); most countries require two pieces of nonconflicting information.
  - Thresholds for cross-border digital services registration typically at or below domestic mandatory-registration levels; some countries apply no threshold.

### Revenue potential and indirect benefits
- Direct short-term revenue potential of including imported digital services aimed at final consumers and purchases of goods online estimated between 0.02 and 0.11 percent of GDP.
  - Australia’s GST on digital services (introduced 2017) expected to generate AUD 350 million (0.02 percent of GDP) over two years.
  - Thailand expected to raise about THB3 billion (0.017 percent of GDP) from a 7 percent VAT on nonresident service providers in 2021.
  - Estimates based on survey data suggest charging VAT on remotely delivered digital services and some goods could directly increase overall VAT revenue by between 0.04 and 0.11 percent of GDP in Bangladesh, India, Indonesia, the Philippines, and Vietnam.
- Indirect effects and additional benefits:
  - Using information held by digital platforms can enhance compliance with VAT, other taxes, and other taxpayers; platforms can serve as tax collection agents.
  - Requesting reporting from digital marketplaces on income of suppliers operating through platforms can inform compliance management in sectors like tourism and mobility services, significantly contributing to revenues.
  - Introducing reporting obligations to obtain information on consumption and income via digital platforms can produce important additional benefits for governments.

*Source: https://www.imf.org/-/media/files/publications/dp/2021/english/dtaea.pdf*

### 2016. The budget initially estimated revenue collection of A$150 million during the first year (FY2017–18),

### Digital Services, Digitally Delivered Goods, and VAT

### Revenue estimates for digital services
- The budget initially estimated revenue collection of A$150 million during the first year (FY2017–18), followed by A$200 million in FY2018–19.
- Applying the standard VAT rate and assuming that 100 percent of transactions of digital media content, 10 percent of all e-commerce transactions, 5 percent of digital advertising, and 15 percent of e-services, mobility and travel services captured by Statista are provided by unregistered remote suppliers to final consumers and/or unregistered registered entities.

### Platform reporting, marketplace collection, and compliance
- Platforms can be relied on to widen the VAT net for domestic activities; Canada requires marketplaces to report information on property owners or suppliers using their platforms to revenue services from 2022 and to collect tax on supplies made through their platforms by all nonregistered domestic suppliers, including those below the VAT registration threshold.
- India requires platforms to remit GST to the government for suppliers whose turnover is below GST registration thresholds.
- Example compliance finding: In Croatia, a 2018 compliance campaign comparing domestic tax returns with digital platform data found about 40 percent of Croatian vendors using the platforms either did not register or declared significantly less income than received from platform-facilitated sales.

### VAT treatment of intermediary fees and place of supply
- Distinction required between consideration for the underlying good/service and the platform fee.
- Commission/intermediary fees charged to guests (consumers) should be subject to VAT; guidance that the service fee be remitted based on the place of consumption of the underlying good can prevent misallocation to the guest’s residence country.
- Liability for VAT on the underlying good/service (e.g., accommodation rental) usually lies with the seller/host, subject to domestic registration thresholds and input VAT credit rules.
- Controversy over VAT liability of ride-sharing: court challenges (including a United Kingdom judgment) may reclassify drivers as workers, which could lead to entire turnover being subject to VAT if platforms are classified as transportation companies with employed drivers.

### India: OIDAR/IGST and simplified compliance for MNEs
- IGST in India is chargeable on supply of Online Information Database Access and Retrieval (OIDAR) services to any person in India, whether registered or not, if the supplier of the services is located in India, including MNEs with a physical presence in India.
- OIDAR services include: (1) advertising on the internet; (2) providing cloud services; (3) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet; (4) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network; (5) online supplies of digital content (movies, television shows, music and the like); (6) digital data storage; and (7) online gaming.
- Place of supply of OIDAR services is defined to be the location of the recipient of services.
- OIDAR services supplied by MNEs located outside India to any registered entity in India are taxable under the reverse charge mechanism.
- For B2C supplies by MNEs with no physical presence in India, statutory burden for payment of IGST is cast upon such MNEs and a special compliance regime is established comprising: (1) a simplified registration scheme; and (2) a simplified reporting and payment system.
- Every registered OIDAR service provider providing B2C services from a place outside India to a person in India is required to file a return in Form GSTR-5A on or before the 20th day of the month succeeding the calendar month or part thereof in which the service is provided.
- Simplified compliance features: minimal information in GSTR-5A, exemption from filing annual returns, and allowance to remit tax payment through the SWIFT mode.

### International reform: Pillar 1 Amount A and formulary apportionment (FA) methodology
- Revenue estimates for Amount A use country by country reports (CbCR) and proceed by: (1) aggregating sales by origin; (2) applying an export share to split exported versus domestic sales; (3) using a bilateral trade matrix to approximate destination of exports; (4) aggregating exports by destination and adding domestic affiliate sales in destination.
- Aggregate routine profit is defined as 10 percent of aggregate unrelated party sales; the difference between profit and routine profit is defined as the residual.
- A portion (20 percent) of the residual is allocated to each jurisdiction based on that jurisdiction’s share of sales by destination for that MNE headquarter country.
- Each jurisdiction is assumed to contribute to the pool of residual profit in proportion to its current share of residual profit; the tax base under Amount A for a jurisdiction is the difference between their allocation of residual profit under sales by destination and their current allocation of the residual.
- For FA, profits and losses declared in each jurisdiction are aggregated to determine the global tax base and then apportioned to each jurisdiction using its share of the chosen factor (for example, employment, sales, or assets). The tax rate applied is either the Effective Tax Rate (ETR) from the data or, where the ETR is an outlier, the statutory tax rate.

### Detailed formulary apportionment results (selected entries from Annex Table 2.1; change in CIT revenue from MNEs, percent of GDP)
- Australia: Sales 0.07–0.02; Employment 0.38; Asset 0.38
- India: Sales –0.51; Employment 0.19; Asset –0.51
- Indonesia: Sales –0.10; Employment 0.77; Asset 0.08
- Thailand: Sales –0.38; Employment 0.44; Asset –0.22
- Vietnam: Sales –1.87; Employment –1.85; Asset –2.75
- Median: Sales –0.01; Employment 0.01; Asset –0.03
- Mean: Sales –0.08; Employment –0.02; Asset –0.08

*International Monetary Fund — Digitalization and Taxation in Asia (excerpt).*

### References

### References

### Digital taxation and policy
- Brondolo, John, and Mark Konza. 2021. “Administering the Value-Added Tax on Imported Digital Services and Low-Value Imported Goods.” IMF Technical Notes and Manuals, Washington, DC.
- Cui, Wei. 2018. “The Digital Services Tax: A Conceptual Defense.” Mimeo (Allard School of Law at the University of British Columbia).
- Cui, Wei. 2021. Digital Services Taxes in Developing Countries. Remarks made at IMF/WB Spring Meetings Conference on International Taxation.
- Cui, Wei, and Nigar Hashimzade. 2019. “The Digital Services Tax as a Tax on Location-Specific Rent.” CESifo Working Paper Series No. 7737.
- Devereux, Michael P., Alan J. Auerbach, Michael Keen, Paul Oosterhuis, Wolfgang Schön, and John Vella. 2019. “Residual Profit Allocation by Income.” Oxford University Centre for Business Taxation Working Paper WP19/01, Oxford, UK.
- Hufbauer, Gary Clyde, and Zhiyao (Lucy) Lu. 2018. “The European Union’s Proposed Digital Services Tax: A De Facto Tariff.” Policy Briefs PB18–15, Peterson Institute for International Economics.
- Köthenbürger, Marko. 2020. “Taxation of Digital Platforms,” EconPol Working Paper 41, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
- Organisation for Economic Co-operation and Development (OECD). 2020a. “Tax Challenges Arising from Digitalisation – Report on the Pillar One Blueprint.” Paris.

### VAT/GST, platforms, and e-commerce taxation
- Dale, Stephen, and Venise Vincent. 2017. “The European Union’s Approach to VAT and E-Commerce.” World Journal of VAT/GST Law 6(1): 55–61.
- Ecommerce DB. 2019. “In-Depth: B2B E-Commerce 2019.” Statista, New York.
- KPMG. 2021. Taxation of the Digitalized Economy – Developments Summary. https:// tax .kpmg .us/ articles/ 2021/ tracking -digital -services -taxes -developments .html. Accessed on May 24, 2021.
- Organisation for Economic Co-operation and Development (OECD). 2017. International VAT/GST Guidelines. Paris.
- Organisation for Economic Co-operation and Development (OECD). 2019. “The Role of Digital Platforms in the Collection of VAT/GST on Online Sales.” Paris.
- Organisation for Economic Co-operation and Development (OECD). 2020b. “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy.” Paris.

### Digital economy, platforms, and market structure
- Herrero, Alicia G., and Jianwei Xu. 2018. “How Big is China’s Digital Economy?” Bruegel Working Paper Issue 04, Bruegel, Brussels.
- Hvistendahl, Mara. 2019. “China’s Tech Giants Want to Go Global. Just One Thing Might Stand in Their Way.” MIT Technology Review, December 19.
- Kind, Hans J., Marko Köthenbürger, and Guttorm Schjelderup. 2008. “Efficiency Enhancing Taxation in Two-Sided Markets.” Journal of Public Economics 92(5–6): 1531–39.
- Laubscher, H. 2018. “The Prime Difference between Amazon and Alibaba.” Forbes.com, December 28.
- McKinsey Global Institute. 2019. “Digital India: Technology to Transform a Connected Nation.” March 27.
- Schindler, Dirk, and Guttorm Schjelderup. 2010. “Profit Shifting in Two‐Sided Markets.” International Journal of the Economics of Business 17(3): 373–83.
- Xu, Feifei. 2016. “Alibaba vs. Amazon: A business model comparison.” Louvain School of Management, Université Catholique de Louvain, Louvain-la-Neuve, Belgium.
- Statista. 2020. “Digital Market Data Sheet.” New York.
- Ecommerce DB. 2019. “In-Depth: B2B E-Commerce 2019.” Statista, New York.

### Regional and country studies, development, and policy context
- de Mooij, Ruud A., Li Liu, and Dinar Prihardini. 2019. “An Assessment of Global Formula Apportionment.” IMF Working Paper No. 19/213, International Monetary Fund, Washington, DC.
- Kinda, Tidiane. 2019. “E-Commerce as a Potential New Engine for Growth in Asia.” IMF Working Paper 19/135, International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2018a. “Regional Economic Outlook. Asia and Pacific—Asia at the Forefront: Growth Challenges for the Next Decade and Beyond.” Washington, DC.
- International Monetary Fund (IMF). 2018b. “The Digital Revolution in Asia: Disruptor or New Growth Engine (or Both)?” Regional Economic Outlook: Asia and Pacific Background Paper No. 4, Washington, DC.
- International Monetary Fund (IMF). 2019. “Corporate Taxation in the Global Economy.” IMF Policy Paper, Washington, DC.
- Sedik, Tahsin Saadi. 2018. “Asia’s Digital Revolution.” Finance & Development 55(3).
- United States Trade Representative (USTR). 2021. Section 301 Investigation - Report on India’s Digital Services Tax, January 2021.
- World Bank. 2021. World Development Report: Data for Better Lives. Washington, DC.

### Classification, measurement, and data tools
- Group of Twenty (G20). 2018. “Toolkit for Measuring the Digital Economy.” G20 Secretariat.
- United Nations. 2008. International Standard Industrial Classification of All Economic Activities Rev. 4. New York.

*Source: References section (pages 61–64) of the PDF content unit provided.*

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_Source: https://www.imf.org/-/media/files/publications/dp/2021/english/dtaea.pdf_