How to Tax in Asia’s Digital Age

IMF Blog, September 14, 2021

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Digitalization powers fintech, e-commerce, and online services, enabling mobile money transfers, online purchases, and global interactions.
Asia has roughly two billion internet users.
Asia hosts locally headquartered tech giants including Alibaba, JD.com, Tencent, Rakuten, and hosts foreign tech giants such as Facebook.
Taxing tech giants is challenging because many are digitally but not physically present in a country; existing international norms for taxing profits are described as outdated and unfair.
Collecting taxes on cross-border digital services and small parcel e-commerce deliveries is also a challenge.

As of August 2021, the United States and most major Asian economies were among the 134 members of the Inclusive Framework led by the Organization for Economic Co-operation and Development (OECD-IF).
Members agreed to allocate taxing rights on profits to countries where consumers and users are located, reflecting the digital presence.
Under the agreed global reforms, a portion of profits from multinationals with global sales above EUR20 billion (roughly the 100 largest global companies) will be allocated across countries in proportion to local sales and taxed under local laws.
Details remain under discussion; the agreed changes could spur more comprehensive reforms applied to all companies and to a larger share of profits.

Investment hubs such as Singapore and Hong Kong SAR could lose up to 0.15 percent of GDP in corporate tax revenue because the profits currently declared in these countries by multinationals exceed the local share of total sales.
High-income countries with large domestic markets—Australia, China, Japan, Korea—would gain revenue under the proposed reallocation.
Developing countries such as Vietnam could lose revenue under the current scope of the agreed reallocation.
If reforms are applied more comprehensively to all companies and a larger share of profits, a much larger reallocation of tax revenue across countries is expected, with the largest losses for investment hubs in Asia and expected gains for several developing economies.

Some Asian countries have introduced digital services taxes—examples include withholding taxes on payments for cross-border digital services or user-based turnover taxes on digital activities.
Digital services taxes may become redundant if a new global system for profit taxation is adopted.
Digital services taxes are easier to implement but:
- Don’t raise much revenue.
- Can distort business decisions.
- Remain vulnerable to tax avoidance.
- Can complicate trade relations because they are usually applied only to large firms headquartered abroad.
A digital services tax similar to India’s Equalization Levy would have yielded only 0.02 percent of GDP in 2019 for Bangladesh, Indonesia, the Philippines, and Vietnam.

More than half of all services trade in Asia is digitally delivered, complicating VAT collection when services cross borders.
Cross-border e-commerce sales of goods have often been exempt from VAT when shipped internationally in small parcels.
Requiring nonresident suppliers of digital services and e‑commerce marketplaces to register with local tax authorities and remit VAT on their sales could raise revenue between 0.04 and 0.11 percent of GDP in some countries in Asia.
Estimated additional VAT revenue from such measures:
- $166 million in Bangladesh
- $4.8 billion in India
- $1.1 billion in Indonesia
- $365 million in the Philippines
- $264 million in Vietnam

The agreed global reforms could change where tech giants and other global giants pay taxes, making the international tax system more robust for the digital age.
Asian countries can invest in digitalization of tax administration to:
- Reduce tax evasion.
- Boost revenue mobilization.
- Make tax collection more efficient.
As online activity expands, taxation in a digitalizing economy will become increasingly important; countries are continuing to shape the agreement in the OECD-led Inclusive Framework.

IMF Blog: How to Tax in Asia’s Digital Age (Era Dabla-Norris, Andrew Hodge, Dinar Prihardini), September 14, 2021