Parsing e-commerce tax options

Parsing e-commerce tax options

A new draft e-business bill has fans and critics, but many feel regulators need to cooperate.

Wholesale and retail online transactions, known as 'social commerce', was estimated to total 269 billion baht in 2016 - greater than the entire military budget for the year. (Bangkok Post file photo by Pattarapong Chatpattarasill)
Wholesale and retail online transactions, known as 'social commerce', was estimated to total 269 billion baht in 2016 - greater than the entire military budget for the year. (Bangkok Post file photo by Pattarapong Chatpattarasill)

E-commerce, the online trading phenomenon breaching global boundaries, has enabled companies and even individual vendors to increasingly engage in transactions with customers without any of the contacts traditionally associated with sales of goods and services.

With an estimated value that runs into trillions of baht a year, it's little surprise that the Revenue Department has been tempted to claim a piece of the online business pie.

The department last week announced its plan to catch up with the booming e-commerce business by levying a 5% withholding tax on all online purchase payments to be collected at the banks, which will then it to the tax-collecting agency.

The draft bill on e-business tax will be forwarded to the Finance Ministry this month. Pure e-commerce vendors, particularly retailers, are alarmed as such tax could lessen their price competitiveness against traditional sellers.

Possible loopholes

A banker, who requested anonymity, points to some possible loopholes in the plan.

First, banks can only deduct the tax when they can ascertain that the money being transferred to recipients payment for online purchases. This would render the banks incapable of taxing all e-commerce transactions if vendors do not register to declare themselves online sellers and such money transfers are online purchase payments.

Besides, if online vendors offer some form of incentive for buyers not to disclose the purpose of such payment, it would be almost impossible for banks to detect them, said the banker.

Another loophole is the payment by cash on delivery, which would make it near impossible for the Revenue Department to follow the transaction trail, the source said, adding that the government should provide incentives for online buyers to declare the purpose of their financial transaction.

Banks would have an easier time applying the withholding tax on well-known online vendors irrespective of the global locations. However, the Revenue Department has yet to provide practical guidelines on how banks would execute the scheme, said the banker.

Whether or not the guidelines will be comprehensive enough to stem all possible loopholes, another source said the department has insisted that it would not adopt the Indonesian model -- which forces all e-commerce operators to register with an assigned state agency or have their websites blocked. This, in practice, would not fully address the problem as operators could open new websites by using different URLs, the source said.

Draft bill

A draft bill on e-business tax will authorise the Revenue Department to access third-party data including that of financial institutions and web portals related to online marketplaces such as or Pantip. It will be able to use such data as another source to track tax payments of e-commerce operators, the source said.

Catching up to tax e-commerce transactions are a common challenge for revenue departments around the world, the source said, noting that some e-commerce operators are now registering in countries where tax regulations favour them or are unclear, such as Ireland and the Netherlands.

Prasong Poontaneat, director-general of the Revenue Department, said taxing e-commerce transactions of foreign operators with no presence in Thailand will not breach the country's double taxation treaties as Thailand signed a Paris contract that allows levying tax on sites not located here.

When the e-business tax is enforced, financial institutions are required to withhold 5% of money transfer amounts as tax, letting the transferors tick boxes on money transfer forms to determine if it is for either personal or commercial purposes so revenue officials can track back tax payments.

The Revenue Department will offer e-commerce operators a choice on whether they want payment of the 5% withholding tax to be included in their annual tax return filing. The department's computer system can detect the number of vendor's website visitors and will alert officials to check tax payments if visitors reach a certain level, he said.

Transaction trail

Paiboon Amonpinyokeat, founder and legal counsellor for P&P Law Firm, said the Bank of Thailand does not need to introduce a new regulation to impose an e-commerce tax because Section 76 bis of the Revenue Code's corporate tax law can already be applied to tax foreign firms.

Foreign technology companies such as Facebook, Google and Line that have subsidiaries in Thailand are obliged to pay tax.

The problem with taxing e-commerce is it is difficult to trace all the income from online transactions because Thai consumers and entrepreneurs always pay for advertising fees using credit cards or electronic funds transfer, he said. But since all transaction records and fund transfers are recorded by the Bank of Thailand, the Revenue Department should collaborate with the central bank in tracing online transactions, Mr Paiboon said.

A source from a financial technology firm who also requested anonymity, believes it is fair and proper to tax foreign firms that operate online businesses locally because they earn revenue from Thailand. But it is hard to identify the details of payment transactions between two parties as most foreign online firms use foreign banks to receive the money and Thai law has no enforcement over foreign banks.

A policy ordering payment transactions to be completed through local banks and local payment gateways could help sort the problem, suggested the source, although it could be a bit tricky with online merchants who sell through social media as most payments are made by bank transfers.

Stifling innovation

Bunyati Kirdniyom, director of government affairs for Vriens & Partners Pte Ltd, a Singapore-based advisory firm, said the withholding tax (WHT) is a deduction from payments made to suppliers who provide a service in the respective jurisdiction.

A WHT is enforced by most countries as a common tax practice imposed on both residents and non-resident people, he said.

But he added: "The nature of online or over-the-top content business models, which operate via the internet or digitally and across borders, will challenge the WHT philosophy, which was designed for the physical world."

Mr Bunyati said issues determining jurisdictional authority to impose tax on internet activities include where such service is being delivered and how to track each transaction.

To ensure fair tax collection and distribution in a digital, trans-border world, there has been a global discussion of possible taxation models based on origin of the service, destination of the service, and nationality of service providers or buyers. An unfair, fragmented and complicated tax landscape could stifle innovation and create unnecessary barriers to small domestic players and startups, he said.

"Certainly this is not something only one country can decide. Regulators need to collaborate in the digital world."

Fair competition

Worawut Oonjai, chief executive of COL Plc, the operator of Central Online, said the e-commerce and online service tax collection for foreign operators would increase fair competition for local operators.

The government should use the tax as an incentive, enforcing a lower tax for online purchases compared with offline to encourage operators to use electronic payments, increasing traceability and reducing tax vulnerability, he said.

Burin Kledmanee, chief operating officer of ReadyPlanet Co, a local digital marketing firm, and a member of the Digital Economy and Society Ministry's Electronic Transaction Committee, said the government should study the best practices of online tax collection in the US, Europe, Australia, South Korea and Japan.

"Both e-commerce and digital advertising in Thailand will continue to grow anyway, so we should grow our ecosystem together," said Mr Burin.

Pawoot Pongvitayapanu, president of the Thai E-commerce Association, said the tax policy might slow down the growth of e-commerce in Thailand, in particular social media sales by small merchants as these groups are still unaware of the need to pay tax, especially value-added tax.

VAT is applied to individuals and corporations whose sales value is above 1.8 million baht a year, regardless of whether sales are online or offline. The new tax regime might emphasise enforcement for this group, he said, but it would lead to fair competition for those who pay taxes correctly.

He suggested the government prepare a system supporting small online merchants covering e-receipts and delivering tax collection details to the government automatically, similar to the system in South Korea.

Citing an Electronic Transactions Development Agency study, Mr Pawoot said social commerce in Thailand, both wholesale and retail sales, totalled 269 billion baht last year, surpassing 57 billion through e-marketplaces and 17.5 billion from individuals' own websites/applications.

Facebook and Instagram are the two main channels of social commerce, with over 850,000 Thai merchants on Instagram.

"The government should educate these merchants about tax collection for online sales and have a preparation period, perhaps three months," said Mr Pawoot.

Nuttawit Polwattanasuk, co-founder of LNW Shop Co, a local e-marketplace operator with 510,000 merchants, said the government should offer a grace period before the law comes into force as online and small merchants still lack awareness of the VAT.

VAT collection could have a negative effect on those small merchants, and they may move to foreign e-commerce websites or platforms, said Mr Nuttawit.

Siripa Jungsawat, general manager of Uber Thailand, said it is looking forward to working together with authorities.

Vee Charununsiri, head of public affairs at Grab Thailand Co, said the company is legally registered and has been structured to be tax-compliant with the Revenue Department.

The company supports the government's e-commerce tax initiative.

"We see the bill benefiting Thailand's development in the long run," said Mr Vee. "The clear framework for implementation and step-by-step measures will help ensure good understanding among all stakeholders and the development of Thailand's digital economy."

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