Digitalization and Taxation in Asia

Prepared by a joint team comprised of

Era Dabla-Norris, Ruud de Mooij, Andrew Hodge,

Jan Loeprick, Dinar Prihardini, Alpa Shah,

Sebastian Beer, Sonja Davidovic,

Arbind Modi, and Fan Qi

Digitalization and

Taxation in Asia

Asia-Pacic and Fiscal Affairs Departments

DP/2021/017

INTERNATIONAL MONETARY FUND

Digitalization and

Taxation in Asia

Prepared by a joint team from the IMF Asia-Pacic and Fiscal Aairs

Departments, comprised of Era Dabla-Norris, Ruud de Mooij,

Andrew Hodge, Jan Loeprick, Dinar Prihardini, Alpa Shah,

Sebastian Beer, Sonja Davidovic, Arbind Modi, and Fan Qi

Asia-Pacific and Fiscal Affairs Departments

Cataloging-in-Publication Data

IMF Library

Names: Dabla-Norris, Era, project director. | Mooij, Ruud A. de, project director. |International Monetary

Fund. Asia and Pacic Department, issuing body. | International

Monetary Fund. Fiscal Aairs Department, issuing body. | International Monetary Fund, publisher.

Title: Digitalization and taxation in Asia / prepared by a joint team from the IMF Asia-Pacic and Fiscal

Aairs Departments, led by Era Dabla-Norris and Ruud de Mooij.

Other titles: International Monetary Fund. Asia and Pacic Department (Series). | International Monetary

Fund. Fiscal Aairs Department (Series).

Description: Washington, DC : International Monetary Fund, 2021. | Departmental paper series. | “Prepared

by a joint team from the IMF Asia-Pacic and Fiscal Aairs Departments, led by Era Dabla-Norris and

Ruud de Mooij, and comprising Andrew Hodge, Jan Loeprick, Dinar Prihardini (coordinator), Alpa Shah,

with contributions from Sebastian Beer, Sonja Davidovic, Arbind Modi, and Fan Qi. Research assistance was

provided by Hibah Khan and Biying Zhu. Soa Cerna Rubinstein supported the production of the paper.” |

Includes bibliographical references.

Identiers: ISBN 9781513577425

Subjects: LCSH: Technological innovations—Economic aspects—Asia. | Taxation—Asia. | Tax administration

and procedure—Asia.

Classication: LCC T173.8 D33 2021

Prepared by a joint team from the IMF Asia-Pacic and Fiscal Aairs Departments, led by Era Dabla-Norris

and Ruud de Mooij, and comprising Andrew Hodge, Jan Loeprick, Dinar Prihardini (coordinator), Alpa Shah,

with contributions from Sebastian Beer, Sonja Davidovic, Arbind Modi, and Fan Qi. Research assistance was

provided by Hibah Khan and Biying Zhu. Soa Cerna Rubinstein supported the production of the paper.

Publication orders may be placed online, by fax, or through the mail:

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is joint Asia-Pacic–Fiscal Aairs Departmental Paper presents research by IMF sta on issues of broad

regional or cross-country interest. e views expressed in this paper are those of the author(s) and do not

necessarily represent the views of the IMF, its Executive Board, or IMF management.

Contents

Glossary ��v

Executive Summary �� vii

Introduction �� 1

1� Digitalization in Asia �� 5

Asia’s ICT Sector ............................................................................................................ 6

Digitalization Beyond the ICT Sector ............................................................................6

How Is Digitalization in Asia Dierent? ........................................................................9

2� Income Tax for Highly Digitalized Businesses in Asia––Challenges and a Way

Forward �� 17

Challenges of Taxing Digitalized Businesses in Asia .....................................................17

Multilateral Reform ......................................................................................................18

Digital Services Taxes ...................................................................................................24

Alternative Policy Options ...........................................................................................34

3� Digital Services, Digitally Delivered Goods, and VAT �� 43

Digital Services in Asia .................................................................................................44

Policy Options and Country Practices..........................................................................45

Revenue Potential .........................................................................................................49

Annex 1� Methodology �� 55

Annex 2� Detailed Formulary Apportionment Results �� 59

References �� 61

Boxes

Box 1. Amazon and Alibaba––Comparison between an American and Asian Tech

Giant ......................................................................................................................14

Box 2. India’s Equalization Levy ..................................................................................40

Box 3. Ensuring Taxation of Intermediary Fees ............................................................51

Box 4. GST Compliance Mechanism for Supply of Digital Services by MNEs in

the Case of India .................................................................................................... 52

Tables

Table 1. Residual Prot by Headquater Jurisdiction, 2017...........................................20

Table 2. Residual Prot and Other Descriptive Statistics by Sector, 2017 ....................21

iii

Table 3. Digital Services Taxes in Asia ..........................................................................25

Table 4. e Economic Impact of DSTs ......................................................................28

Table 5. VAT on Digital Services––Approaches in Asia-Pacic ....................................46

Figures

Figure 1. A Digitalized Economy ...................................................................................6

Figure 2. Asia’s ICT Sector .............................................................................................7

Figure 3. Internet Access in Asia ....................................................................................8

Figure 4. E-Commerce in Asia .......................................................................................9

Figure 5. Asian Sales of E-Commerce Companies ........................................................10

Figure 6. Global Market Share: E-Commerce Companies ...........................................10

Figure 7. Turnover of Asia’s Tech Giants ......................................................................11

Figure 8. Sales, Productivity, and Prots of Asia’s Tech Giants .....................................11

Figure 9. Income Tax Expensed ...................................................................................12

Figure 10. Growth of Asia’s Tech Giants ......................................................................13

Figure 11. Top 20 Locations of Residual Prot ............................................................22

Figure 12. Potential Revenue Eects of Pillar 1, Amount A .........................................23

Figure 13. Facebook: Active Users and Average Revenue Per User ...............................30

Figure 14. Survey-Based Estimates of the Tax Base and Revenue Potential in 2019 ..... 31

Figure 15. MNE Activities at Home and Abroad and the Destination of Asian

MNE Prots ..........................................................................................................33

Figure 16. Change in Income Tax Revenue from Applying FA ....................................36

Figure 17. Total CIT Revenue Eects from Destination-Based RPA ............................36

Figure 18. Partial CIT Revenue Eects—from Elimination of Prot Shifting .............38

Figure 19. Partial CIT Revenue Eects—from Reallocation of Residual Earnings ....... 39

Figure 20. Increase in Digitally Delivered Services and Demand for Digital Media ..... 45

Figure 21. Survey-Based Estimates of Direct VAT Revenue Potential and VAT

Eciency in Asia....................................................................................................50

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Glossary

ADS Automated Digital Service

B2B Business to Business

B2C Business to Consumer

BEPS Base Erosion and Prot Shifting

CbCR Country by Country Reporting

CIT Corporate Income Tax

Destination country Country in which the purchaser is located (same as

market country)

DST Digital Services Tax

EL Equalization Levy

EU European Union

FA Formula Apportionment

FDI Foreign Direct Investment

G20 e G20 is the international forum that brings

together the world’s major economies

GDP Gross Domestic Product

GST Goods and Services Tax

ICT Information and Communications Technology

IF Inclusive Framework

Investment Hub Generally refer to countries with a high ratio of FDI

to GDP. For example, the OECD considers those

countries with inward FDI greater than 150 percent

of GDP to be an investment hub.

Market country Country in which the purchaser is located (same as

destination country)

IGST Integrated Goods and Services Tax

MNE Multinational Enterprise

OECD Organisation for Economic Cooperation and

Development

OIDAR India is chargeable on supply of Online Information

Database Access and Retrieval

PE Permanent Establishment

Prot shifting Shifting of where prots are booked for tax purposes,

and encompasses base erosion

Rents Earnings in excess of the normal required return

Residence country For a corporation (most frequently the location of

managerial functions; occasionally the place of

incorporation)

Residual prot Prots in excess of routine

Routine return Broadly equivalent to normal return, commonly as

identied by transfer pricing methods

RP Residual Prot

RPA Residual Prot Allocation

Source country Jurisdiction in which production of goods or services

occurs

User participation Contribution by the user of the product to the busi-

ness model

VAT Value-Added Tax

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Executive Summary

Digitalization in Asia is pervasive, unique, and growing. It stands out by

its sheer scale, with internet users far exceeding numbers in other regions.

is facilitates e-commerce in markets that are large by international stan-

dards, supported by innovative payment systems and featuring major cor-

porate players, including a number of large, home-grown, highly digitalized

businesses (tech giants) that rival US multinational enterprises (MNEs) in

size. Opportunity for future growth exists, as a signicant population share

remains unconnected.

Digitalization raises new tax challenges and existing rules can be perceived as

unfair. Existing income tax systems have been criticized as failing to con-

fer taxing rights on jurisdictions where highly digitalized businesses have a

large base of customers that generate value, but where they have no physical

presence. Increasingly digitalized businesses may also have relatively more

intangible assets (for example, trademark and patents), which are harder to

value and easier to relocate, enabling prot shifting under existing rules. is

may especially aect smaller, less developed economies. e nexus of digitali-

zation and tax also goes beyond income taxation, raising issues regarding the

eective value-added taxation of digital services, property rights over private

information, and the use of digital technology in tax design and revenue

administration.

Global tax reform proposals will create winners and losers in the region,

although the overall revenue impact is likely to be modest. New taxing rights

for market countries at the expense of residence countries, along the lines of

proposals discussed under Pillar 1 of the OECD-Inclusive Framework (IF)

will change the geographic distribution of tax revenue paid by MNEs in Asia.

Investment hubs and low-tax jurisdictions are likely to lose revenue as less

prot will be shifted towards them. Countries that do not host the headquar-

ters of large MNEs, but have a large user base of their customers, are likely to

gain revenue from the reallocation. Results are more ambiguous for countries

vii

that have both a large market and tax residence for large MNEs. For exam-

ple, the home countries of Asia’s tech giants could lose revenue if these rms

have to pay more tax in other countries where they are expanding. While

the revenue eects are likely to be modest for most countries under current

proposals, the rapid pace of digitalization can increase the importance of this

revenue reallocation eect over time.

Digitalization is increasing pressure on the century-old international tax

framework, which more fundamental reforms could address in the medium

term. e reforms currently being considered in the OECD-IF could be

a step toward more comprehensive reforms in the future. Systems that are

being discussed among tax experts include, for example, formulary appor-

tionment and residual prot allocation. ese approaches would cause a

much larger reallocation of tax revenue across countries, with the largest

losses expected for investment hubs. At the same time, these proposals could

deliver considerable simplication and closer alignment of prot attributions

to where production and sales take place. Depending on the design, these

reforms could also ease the pressure of international tax competition and

provide scope for increasing revenue raised from MNEs, including through

an increase in CIT rates as desired by countries.

Unilateral tax measures, such as digital services taxes (DSTs), adopted by a

number of Asian countries are likely to have small revenue eects. DSTs are

simpler in design and implementation than corporate income tax initiatives,

but risk introducing distortions of double taxation and trade retaliation. In

taxing gross revenue, they are blind to the protability of the ring-fenced

tech giants and therefore less ecient than alternative prot taxation reform

options. Countries with domestic tech giants may nd a DST less attractive

as the income of these rms is already taxed under the existing CIT regime.

A relatively narrow gross revenue tax base also results in limited revenue col-

lection—often estimated in the range of 0.01-0.02 percent of GDP, suggest-

ing that the choice to introduce a DST needs to be weighed against other tax

reform priorities. at said, revenue from DSTs may have higher buoyancy in

the future, given strong growth of digital economic activity, a trend that has

been accelerated by the COVID-19 pandemic.

Extending the value added taxes (VAT) to capture e-commerce and digi-

tal services more eectively could yield signicant short-term revenue and

other eciency gains. Capturing VAT on digitally provided services and

e-commerce supplied from abroad will help countries increase revenue

unilaterally. Applying VAT consistently on all digital imports also levels the

playing eld between domestic and foreign suppliers, and between goods

and services—thus enhancing eciency. e expected revenue eects from

eectively doing so are greater than from DSTs or the global reform proposal

currently under consideration under OECD-IF Pillar 1, in particular when

accounting for indirect returns from relying on marketplaces as a third party

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

viii

information source and as collection agents to expand the VAT base. ere is

scope to leverage administrative reforms in VAT on digital imports to sup-

port both the compliance management of residents and the implementation

of corporate tax reforms that shift taxing rights to the market country for

non-residents.

For many Asian countries, additional eorts in taxation are necessary to meet

their revenue mobilization needs. International tax reform towards greater

destination-based income taxation in combination with a global minimum

tax (Pillar 2 of the OECD-IF) would ease pressures from international tax

competition and allow countries to raise corporate income tax rates if desired.

Further revenue mobilization eorts might be required to nance future

spending needs. ese could focus on broadening the tax base by remov-

ing tax holidays, exemptions, and other preferential tax treatments. ese

are common in developing Asia but are often ineective and inecient and

could even become redundant under a global minimum tax. Digitalization of

tax administrations could further help revenue mobilization by addressing tax

evasion and widen the tax base for corporate taxes and VAT. Such compre-

hensive tax reforms, however, go beyond the scope of this paper.

Executive Summary

Digitalization has been impacting countries in Asia and this eect is set

to grow in the aftermath of the COVID-19 pandemic. Digitalization has

extended well beyond the information communications and technology

(ICT) sector, with widespread internet usage underpinning e-commerce,

ntech, as well as online nancial and other services. In addition to rms

selling goods and services through their own websites, online platforms and

marketplaces have rapidly emerged that connect rms with consumers and

consumers with each other. ese business models are supported by cutting

edge technologies, including articial intelligence, machine learning, and big

data. Local rms have emerged as major players, particularly in large mar-

kets such as China, Japan, and Indonesia, competing with US multinational

enterprises (MNEs) operating in the region. e potential for further growth

in internet usage and the shift away from in-person activities during the

pandemic is likely to fuel the growth of large, digitalized businesses in Asia

in coming years, as well as the adoption of digital technologies across the

entire economy.

e experience of digitalization varies across Asian countries depending on

demographics, geography, and the stage of economic development. G20

economies such as China, Japan and Korea have large ICT sectors, including

manufacturing, and well-established, locally headquartered, highly digitalized

businesses engaging in e-commerce and online services. India and Indonesia

are also rapidly developing markets for e-commerce and online services, with

emerging local rms. Advanced services-based economies such as Australia

and New Zealand are highly digitalized, although ICT-led manufacturing is

less prevalent. Additionally, Asia has city states that are hubs for ICT sec-

tor businesses and ntech, such as Singapore. In contrast, developing Asian

economies have lower rates of internet connectivity and are less likely to have

large, locally headquartered digitalized rms.

Introduction

e ability of highly digitalized rms to make cross-border sales without a

physical presence challenges traditional corporate income tax (CIT) rules.

ese rules give taxing rights over corporate prots to countries where rms

are headquartered and where they have a permanent establishment (for exam-

ple, factory or storefront). For highly digitalized businesses trading online

across borders, this can mean that the countries where sales are made (market

countries), or where online users are located have no taxing rights over the

rm’s income. ere are also challenges for countries with taxing rights under

existing rules because the assets of highly digitalized rms can be more con-

centrated in intangibles (for example, intellectual property) compared with

other businesses. Intangible assets can be more easily transferred to related

members of a corporate group in lower tax jurisdictions, allowing prot to be

shifted away from a country with higher tax rates.

Cross-border online sales of goods and services also place pressure on value

added tax (VAT) collection. ere is broad agreement across countries that

VAT should be paid where the nal consumer resides (see for example, the

OECD’s VAT/GST guidelines 2017). is is increasingly dicult to imple-

ment in a digitalized economy as VAT collections largely rely on locally regis-

tered rms remitting the tax. Enforcing VAT collection on, for example, the

purchase of online streaming services from a non-resident supplier is much

more challenging.

Multilateral discussions to resolve the challenges of taxing income in an

increasingly digitalized economy are conducted under the auspices of the

G20/OECD Inclusive Framework (IF). e IF consists of 139 members,

including the major Asian economies and many developing countries. Under

the so-called Pillar 1, countries are discussing a proposal to provide a new

taxing right to market jurisdictions, thus addressing the concern around tax-

ing rights in a digitalized economy.

While awaiting agreement in the IF, some countries have begun imple-

menting digital services taxes (DSTs), which typically tax the receipts of

non-resident rms from sales made to their residents. DSTs can take the form

of simple withholding taxes on payments (for example, for online advertis-

ing), similar to existing taxes on cross-border technical services. Alternatively,

they can be in the form of user-based turnover taxes that aim to tax the value

created by the ultimate users of digital services in a particular country.

is paper illustrates how digitalization has aected Asian economies and

their CIT and VAT systems, analyzing the impact of proposed reforms. It

builds on the IMF’s policy and analytical work in international taxation and

contributes to the policy debate by: (1) giving an overview of trends in digi-

A second pillar in these discussions deals with the introduction of an eective global minimum tax.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

talization in Asia and how this diers from other regions (Chapter1);

(2) discussing the implications of multilateral and unilateral tax policy

reforms aimed at taxing the income of companies in an increasingly digi-

talized economy (Chapter2); and (3) exploring how best to address VAT

challenges in the face of expanding online sales (Chapter3). It is important

to note that the nexus of digitalization and tax go beyond what is discussed

in the paper, including issues of property rights over private information and

the use of technology in tax design and revenue administration.

Introduction

is chapter describes the landscape of digitalization in Asia. Digitalization is

having a profound impact on Asia’s economy, underpinned by widespread inter-

net access. Digitalization extends well beyond the large ICT sector, with high

levels of e-commerce and automated digital services. Asia stands out in its large,

highly digitalized and locally headquartered tech giants, operating alongside US

MNEs. e rapid growth of Asia’s homegrown tech giants and the presence of

US MNEs highlights the importance of appropriate tax policies for these highly

digitalized businesses.

Digitalized economic activity in Asia encompasses both the ICT sector and

other types of digitalized businesses.

For the purposes of this paper, the ICT sector is dened to include manufac-

turing of computers, electronic and optical products, publishing and broad-

casting, telecommunications and computer programming, and information

services.

Beyond the ICT sector, nearly all businesses in the formal economy

approach a “digital asymptote” (Figure1), using digital technology to varying

degrees, ranging from the use of digital systems to facilitate online order-

ing of goods to the provision of purely digital services (for example, online

gaming, search, and social media). is paper gives particular attention to

large, highly digitalized businesses, referred to as “tech giants.” ese tech

giants rely heavily on digital technology to carry on business, despite their

dierent business models, ranging from ICT manufacturers and retailers that

have built large e-commerce platforms, to online marketplaces that facilitate

e-commerce between third parties.

e ICT sector is measured using industry-level national accounts data and the relevant International

Standard Industrial Classication codes (G20 2018, United Nations 2008) for computer programming and

information services (Div. 62 63); telecommunications (Div. 61); publishing and broadcasting (Div. 58 60);

and manufacturing of computer, electronic, and optical products (Div. 26).

Digitalization in Asia

CCHAPTERHAPTER

Asia’s ICT Sector

e ICT sector in Asia is among the world’s

largest. e sector accounts for more than

12, 7, and 6percent of total value added

in Korea, India, and Japan, respectively

(Figure2, panel 1), comparable in size to

most other OECD countries (IMF 2018a,

2018b).

China’s ICT sector is estimated

to be around 5.6percent of GDP (Herrero

and Xu 2018). e employment share of the

ICT sector in China’s urban areas is already

larger than in many OECD countries (Fig-

ure2, panel 2).

Asia’s ICT sector has grown rapidly, driven

by manufacturing, which has exhibited high

labor productivity. e strong growth of

the ICT sector’s real value added in Korea

and Japan is comparable to that of the United States and Europe (Figure2,

panel 3). China’s ICT sector is also estimated to have grown rapidly by about

10percent per year between 2013 and 2016 (Herrero and Xu 2018). Unlike

the United States and Europe, the ICT manufacturing sector in Korea has

recorded stronger growth than in ICT services and exhibited high labor

productivity (Figure2, panel 4), potentially reecting the region’s compara-

tive advantage in manufacturing relative to services. MNEs engaging in ICT

manufacturing may also provide digital services and engage in e-commerce

(for example, Apple, Samsung).

Digitalization Beyond the ICT Sector

Asia’s unrivalled level of internet connectivity, which has underpinned the

economy’s digitalization beyond the ICT sector, creates enormous scope for

future growth. Reecting their population size, China, India, and Indonesia

taken together have more than 2billion active mobile broadband connec-

tions, compared with approximately 500million in the United States (Fig-

ure3). Japan has more than 200million connections, while Bangladesh, the

Philippines, ailand, and Vietnam also each have 50–100million mobile

connections. e number of xed broadband connections is more than

three times as large in China as in the United States. Considerable potential

Although fully comparable data are not available, McKinsey Global Institute (2019) estimate that India’s

ICT sector accounted for around 7percent of GDP in 2017–18, mainly reecting IT and digital communi-

cations services.

Source: United Nations Conference on Trade and Development.

Note: ICT = information and communications technology.

Figure 1. A Digitalized Economy

E-commerce

(online sales, etc.)

Digital services;

online platforms

ICT sector

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

appears possible for further growth, particularly in China, Indonesia, and

South Asia, where the number of internet users as a share of the population

remains well below the level in the United States, as well as in other major

emerging market economies.

D26: Computer, electronic and optical products manufacturing

Total ICT sector

D58T60: Publishing, audiovisual and broadcasting activities

D61: Telecommunications

D62T63: IT and other information services

Non-ICT sector

Other ICT sector (incl. manufacturing)

IT and other information services

Non-ICT sector

Other ICT sector (incl. manufacturing)

IT and other information services

Computer, elect. and optical manufacturing

ICT sector

Publishing, audiovisual and broadcasting activities

Telecommunications

IT and other information services

Sources: OECD Structural Analysis Database (STAN, 2020 ed.); McKinsey Global Institute^; and Herrero and Xu (2018).^^

Note: In panel 1, ^2017–18 estimate, incl. IT & digital comms. services; electronics manufacturing. Breakdown unavailable.

^^2016 estimate, incl. electronic manufacturing, IT & telecommunications services. Breakdown unavailable.

^^^Europe incl. FRA, DEU, ITA and UK.

In panel 2, ^^estimate for 2010 in urban areas only. Breakdown unavailable.

**Data for computer, elect. and optical manufacturing only.

***Europe incl. FRA, DEU, ITA and UK.

In panel 3, *data for KOR are for 2005–2015 and sourced from the 2018 update of the STAN database.

**Data on the ICT sector in JPN include only ICT manufacturing.

***Advanced Europe incl. FRA, DEU, ITA and UK.

In panel 4, *data for KOR are for 2005–2015 and sourced from the 2018 update of the STAN database.

**Data on the ICT sector in JPN are missing except for ICT manufacturing.

***Advanced Europe incl. FRA, DEU, ITA and UK.

Figure 2. Asia’s ICT Sector

250

200

150

100

1. Value Added of ICT Sector

(Percent of total, 2017, or latest year available)

2. Employment in ICT Sector

(Percent of total, 2017, or latest available)

3. Real Value Added Growth of ICT Sector, 2005–2017

(In percent change)

4. Labor Productivity Growth of ICT Sector, 2005–2017

(In percent change)

160

140

120

100

KOR IND^ JPN CHN^^ AUS &

NZL average

USA Europe

average^^^

MEX KOR CHN^^ AUS & NZL

average

JPN** USA Europe

average***

KOR* JPN** USA Advanced

Europe***

MEX KOR* JPN** USA Advanced

Europe***

MEX

Digitalization in Asia

Online sales are more common in some Asian economies than in other

regions, including e-commerce exports. Business-to-consumer (B2C)

e-commerce in China and Korea is larger than in the United States, while

in Japan it is of similar size to other G7 economies (Figure4, panel 1).

Cross-border e-commerce is also substantial, with B2C e-commerce exports

in China and Japan exceeding those in some G7 economies (Figure4, panel

2). ese trends have continued during the pandemic. For instance, in 2020

alone, e-commerce sales grew by 30–50percent in Indonesia and Singapore,

some of the fastest growth rates even in comparison to other advanced econo-

mies (Figure4, panels 3 and 4).

Large and highly digitalized businesses—tech giants—thrive beyond the

ICT sector. Firms providing e-commerce and ntech services are closest to

the digital asymptote in ICT, nance, other professional services, wholesale,

and retail trade (Sedik 2018). Public companies from China (Alibaba, JD,

Meituan), Japan (Rakuten), and Singapore (Sea Limited) are among the

largest in Asia’s e-commerce space (Figure5) (Hvistendahl 2019, Ecommer-

ceDB 2019). Private companies including Korea’s Coupang and Indonesia’s

Go-Jek are also important players. ese local rms generate levels of reve-

nue in Asia similar to large US rms, including Amazon, Walmart, and their

local subsidiaries.

Asia

Non-Asia

Asia

Non-Asia

Source: International Telecommunications Union.

Figure 3. Internet Access in Asia

1600

1400

1200

1000

800

600

400

200

100

1. Active Mobile Broadband Connections

(2019, in millions)

2. Internet Users

(2019, in percent of population)

CHN IND IDN Other

Asia

Total

Europe

Total

North

America

Total

ZAF BRA CHN IDN IND BGD USA RUS TUR BRA MEX

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

How Is Digitalization in Asia Different?

Asia stands out from other regions in having home-grown tech giants that

rival US MNEs in size. China has several of the largest e-commerce com-

panies in the world, both measured in terms of market share or total sales.

For instance, China’s Alibaba Group and JD.com have about 38percent of

global e-commerce market share by merchandise volume (Figure6), although

the total value of Alibaba’s transactions is smaller than that of Amazon

(Box1). Alibaba operates China’s most-visited online marketplaces, Taobao

(consumer to consumer [C2C]) and TMall (business to consumer [B2C]),

while JD.com’s marketplace has a large in-house delivery network. Japan’s

Rakuten and Singapore’s Sea Group (trading as subsidiary Shopee) are other

major players in e-commerce. Asia is also home to some of the world’s largest

providers of digital services other than e-commerce, such as China’s Tencent

Non-Asia

Asia

Non-Asia

Asia

Non-Asia

Asia

Singapore

Indonesia

Sources: Statista; United Nations Conference on Trade and Development; and IMF staff calculations.

Figure 4. E-Commerce in Asia

1. E-Commerce Sales

(B2C, percent of GDP, 2017)

2. Cross-Border E-Commerce Sales

(B2C, percent of merchandise exports, 2017)

3. E-Commerce Sales

(Annual percentage change, 2017–20)

4. E-Commerce Sales

(Annual percentage change, 2020)

605030 40201002018 2019 2020

CHN UK KOR USA CAN FRA JPN DEU ITA IND

Germany

Japan

USA

New Zealand

Russia

South Korea

Australia

Brazil

Italy

Spain

South Africa

China

Mexico

Singapore

Vietnam

Malaysia

India

Cambodia

Philippines

Thailand

Turkey

Indonesia

UK USA CHN JPN FRA CAN DEU ITA KOR NLD

Digitalization in Asia

(operating the WeChat communications, social media, and payment plat-

form) and Baidu (China’s largest internet search engine) (Figure7).

Unlike US MNEs, available evidence suggests that Asia’s homegrown tech

giants operate mainly within their domestic markets. While large US tech

giants generate the majority of their revenue outside the United States (Fig-

ure8, panel 1), major e-commerce providers such as Japan’s Rakuten derive

the bulk of their income from the Japanese market (Figure8, panel 2). is

also appears to be the case for China’s e-commerce giants. Expansion beyond

domestic markets is occurring, sometimes through joint ventures and acqui-

sitions of foreign rms. High prole examples include Alibaba’s purchase of

Singapore’s Lazard Group e-commerce rm, recent acquisitions by Singa-

pore’s Sea Group, facilitating expansion into ntech, as well as acquisitions in

recent years by Indonesia’s Gojek to expand its range of online products.

Asia’s homegrown tech giants appear to rely on intangible assets as much as

MNEs in the United States, and their protability is comparable. Firms that

derive value from intangible assets, such as intellectual property, can be more

dicult to tax since it is easier to shift these assets across borders to lower

tax jurisdictions. Intangible assets are also dicult to value for the purposes

of transfer pricing, whereby transactions within corporate groups, includ-

ing between subsidiaries and parent companies, are valued for tax purposes.

Using revenue per employee as a proxy for the degree of intangibility, it

appears that some of the Asian tech giants eclipse large US MNEs such as

Asian HQ

Non-Asian HQ

Source: Pitchbook Data Inc. Data have not been reviewed by PitchBook analysts.

*Japan only.

**Republic of Korea only.

Alibaba

Amazon*

Meituan

VIPshop

Rakuten

Pinduoduo

Sea Limited

ebay**

Figure 5. Asian Sales of E-Commerce Companies (Public)

(Revenue, FY 2019, US$ billions)

Asian HQ

Non-Asian HQ

Sources: Statista; and Activate.

Figure 6. Global Market Share: E-Commerce

Companies (Public)

(Percent of total, by gross merchandise volume, 2019)

Alibaba

Amazon

Pinduoduo

ebay

Other

Suning.com, Rakuten, Apple,

Walmart, Vip.com, and Sea Limited

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Asian HQ

Non-Asian HQ

Asian HQ

Non-Asian HQ

Source: Pitchbook Data Inc. Data have not been reviewed by PitchBook analysts.

Figure 7. Turnover of Asia’s Tech Giants

300

250

200

150

100

180

160

140

100

120

1. Total Sales: E-Commerce Companies (Public)

(FY19, US$ billions)

2. Total Sales: Internet Companies (Public)

(FY19, US$ billions)

Amazon

Alibaba

Meituan

VIPshop

Rakuten

ebay

Pinduoduo

Sea

Limited

Google Facebook Tencent Netﬂix Baidu Uber

Sales outside USADomestic sales in USA Sales in other countriesDomestic sales in country of HQ

Non-Asian HQ

Asian HQ

Non-Asian HQ

Asian HQ

Sources: Statista; and Pitchbook Data Inc. Data have not been reviewed by PitchBook analysts.

Note: MNEs = multinational enterprises.

In panel 1, *Sales in both USA and Canada.

In panel 2, *E-commerce sales only, 2019.

Figure 8. Sales, Productivity, and Proﬁts of Asia’s Tech Giants

100

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

100

1. Domestic vs Foreign Sales: US MNE’s (Public)

(Percent of total, FY19)

2. Domestic vs Foreign Sales: Asian Co’s (Public)

(Percent of total, FY19)

3. Labor Productivity of E-Commerce Co’s (Public)

(Revenue per employee, US$ millions, FY19)

4. Return on Equity: Internet & EComm. Companies (Public)

(Percent, average over FY17–FY19)

Pinduoduo ebay VIPshop Rakuten Alibaba JD Amazon

eBay Facebook Netﬂix* Uber Groupon Amazon

VIPshop

Pinduoduo

Baidu

Meituan

Suning

Tencent

Alibaba*

Rakuten

Tencent

Facebook

Amazon

VIPshop

ebay

Alibaba

Google

Rakuten

Suning

Baidu

Digitalization in Asia

Amazon on this metric (Figure8) and are

broadly as protable, when judged by return

on equity in recent years.

Some of Asia’s largest home-grown tech

giants also appear to have income tax rates

comparable to those of US MNEs. Figure9

shows tax rates computed as income tax

expensed in a nancial year, as a percent of

pretax income, for a selection of large Asian

and US tech giants. Although this may not

capture tax paid precisely, it indicates that

tax outcomes for Asia’s tech giants can be

similar to large US digitalized companies.

e rapid growth of Asia’s homegrown tech

giants and the presence of US MNEs high-

lights the importance of appropriate tax pol-

icies for these highly digitalized businesses.

Asian e-commerce and internet giants Alib-

aba, JD, and Baidu have emerged as major players only in the last 10 years,

rivalling the turnover of Amazon, Google, and Facebook (Figure10, panel

1). Asian giants have also recorded solid growth in recent years (Figure10,

panel 2), comparable to large US MNEs. With continued expansion, revenue

collection from both local and foreign tech giants will become increasingly

important and appropriate tax policies will need to be in place to ensure that

revenue is distributed across countries in a manner that is perceived to be fair.

Asian HQ

Non-Asian HQ

Source: Pitchbook Data Inc. Data have not been reviewed by PitchBook analysts.

Suning

VIPshop

Rakuten

Facebook

Alibaba

Tencent

Amazon

Google

Pinduoduo

ebay

Figure 9. Income Tax Expensed

(Percent of pretax income, average during FY18–FY19)

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Amazon

Alibaba

Google

Tencent

Facebook

Baidu

Asian HQ

Non-Asian HQ

Source: Pitchbook Data Inc. Data have not been reviewed by PitchBook analysts.

Figure 10. Growth of Asia’s Tech Giants

300

250

200

150

100

–5

1. Sales of Internet Companies (Public)

(FY10, FY15 and FY19, US$ billions)

2. Proﬁt Growth: Internet Companies (Public)

(Percent, average during FY15–FY19)

FY19 FY15 FY10

Facebook

Amazon

Alibaba

VIPshop

Suning

Google

Tencent

Rakuten

ebay

Baidu

Digitalization in Asia

Alibaba is a Chinese tech giant with websites that serve as platforms for other sellers,

while Amazon has become an integrated retailer. Beginning in the late 1990s, Amazon

and Alibaba both developed comprehensive e-commerce websites (Laubscher 2018, Xu

2016). Alibaba’s websites have traditionally been a platform for third party sellers, with-

out marketing Alibaba’s own products or providing delivery services (Box Table1.1).

Amazon invested in an extensive delivery network for its goods and services, as well

as selling its own products via its website. e two tech giants have converged more

recently in some business decisions, as Alibaba jointly founded Cainiao Network in

2013, as a platform for businesses oering delivery services. Both Amazon and Alibaba

have also recently acquired traditional retail outlets, in Whole Foods (Amazon) and

Hema Fresh (Alibaba).

Amazon has signicantly higher turnover and is more protable. Although Alibaba

facilitates a higher volume of merchandise trade, Amazon has signicantly higher rev-

enue and larger prots. is may reect Amazon’s diversication, as the share of Ama-

zon’s revenue contributed by online e-commerce has declined from 65percent to about

50percent between 2016 and 2019, as its cloud computing services (AWS) and other

businesses have grown rapidly. E-commerce continues to account for more than 80per-

cent of Alibaba’s revenue (PitchBook Data, Inc).

Alibaba is an intangible business with signicant potential to expand internationally

similar to Amazon. Alibaba has less than a quarter of Amazon’s employees, given the

absence of an integrated retail and delivery network. is reects a less tangible business

model with signicant scope to increase use of its online platforms by foreign buyers

Box Table 1.1. Comparison between an American and Asian Tech Giant

Amazon Alibaba

Founded 1995 1999

Subsidiaries Amazon.com (B2C).

AWS for cloud computing.

Wholefoods traditional retail.

TMall (B2C) and Taobao (C2C).

Cainiao Network: delivery co platform.

Hema Fresh traditional retail

Foreign operations Localized versions of Amazon.com

operate in 20 countries.

Alibaba.com (B2B)

Aliexpress (B2C)

Lazard for e-commerce in SE Asia.

Revenue FY19 US$ 280.5 billion US$ 56.1 billion

Foreign Revenue FY19 31% 10.1%

Gross Profit FY19 US$ 74.7 billion US$ 25.3 billion

ROE

(FY17-19 avge)

21.2% 18.1%

Profit growth (FY15-19 avge) 37.2 % 32.1 %

Employees (2019) 798,000 116,519

Income tax expense (% pretax income,

FY18-19 avge)

17.7% 13.8%

Source: PitchBook Data Inc. Data have not been reviewed by PitchBook analysts.

Box 1. Amazon and Alibaba—Comparison between an American and Asian Tech Giant

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

and sellers. Progress has been limited so far, with most revenue generated by its Chinese

websites, unlike Amazon’s websites in multiple countries.

Alibaba’s tax obligations appear to be similar to those of Amazon in recent years. Aliba-

ba’s income tax expense (percent of pretax income) was 17.7percent on average during

FY2018 and FY2019, compared to 13.8percent for Amazon. Although an imperfect

measure of income tax paid, these gures do not suggest that either company enjoys a

signicant tax advantage over the other.

Box 1. Amazon and Alibaba (continued)

Digitalization in Asia

is chapter focuses on the international tax challenges stemming from a highly

digitalized economy, rather than domestic tax challenges related to prot shifting.

Under the proposed multilateral solution by the OECD Inclusive Framework,

investment hubs, including those in Asia, would lose revenue, while those with

a large user base or high-income consumers will likely gain. Other multilateral

policy alternatives go farther, calling for a complete replacement of the existing

CIT regime. While highly digitalized businesses are not explicitly targeted by the

OECD proposals, they remain some of the most aected. In the interim, some

countries in the region have introduced a DST on the receipts of non-resident

rms from the sale of services to residents. ese taxes raise low levels of revenue,

suggesting that the choice to introduce a DST needs to be weighed against other

reform priorities.

Challenges of Taxing Digitalized Businesses in Asia

e existing approach to taxing highly digitalized businesses operating inter-

nationally has been perceived as unfair by governments and civil society

organizations. e view held by many governments is that their citizenry is

remotely contributing to the rents generated by digital service providers from

other countries. First, increasingly sophisticated technology has facilitated

a large surge in both business to business (B2B) and business to consumer

(B2C) remote cross-jurisdictional sales/exports, challenging the concept of a

permanent establishment (PE) which requires a physical presence to generate

taxing rights for income taxes. Second, many governments claim that infor-

mation collected by companies on the personal preferences and habits of the

customer or “user” as they consume digital services—which is then processed

and monetized through personalized advertising and product development—

is contributing signicantly to the prots of these companies, without ade-

quate compensation to the users. Highly digitalized businesses may also

Income Tax for Highly Digitalized Businesses

in Asia—Challenges and a Way Forward

CCHAPTERHAPTER

have relatively more intangible assets, which are harder to value and easier

to relocate (Beer and Loeprick 2015), enabling prot shifting under existing

transfer pricing rules.

e impact of international tax policy reforms in Asia could dier from other

regions, given the unique landscape of digitalized businesses. Reducing the

importance of physical presence in determining a company’s income tax lia-

bility could increase the ability of Asian countries to tax foreign MNEs oper-

ating in Asia with few tangible assets. However, the home countries of Asia’s

tech giants could also lose revenue if these rms have to pay more tax in

other countries where they are expanding. e consequences for revenue col-

lection could be non-trivial, given that home-grown tech giants are growing

rapidly and face similar implicit tax rates to US MNEs. Some Asian countries

are also turning to DSTs—withholding taxes or user-based turnover taxes on

digital activities—as a unilateral means of taxing tech giants and other highly

digitalized businesses. is paper rst discusses multilateral tax reform pro-

posals and implications for the region before turning to digital services taxes

in Asia, potential trade-os, and economic implications.

Multilateral Reform

e OECD-led IF has proposed multilateral reform as a solution for taxing

an increasingly digitalized economy. e rst pillar of the policy proposal

seeks to adapt the international corporate tax system to new digitized busi-

ness models, by reallocating part of residual prot to market (or “destina-

tion”) countries. It would establish new taxing rights without requiring a

physical presence (new “nexus”). is reects a fundamental shift from exist-

ing norms by going beyond the arm’s length principle and moving toward

formulary methods when reallocating prots to the new nexus, thereby

addressing some of the challenges in taxing digitalized businesses. Notably,

this new taxing right would be overlaid on top of the existing system of inter-

national taxation.

e following are key elements of Pillar 1:

• A new taxing right for market jurisdictions over a share of residual profit

calculated at a consolidated MNE group (or segment) level (“Amount

Some countries consider the DSTs discussed in the following section, merely as an interim solution

until international agreement is achieved. Indeed, countries such as Belgium, Czech Republic and Hungary

have delayed the implementation of their DSTs, anticipating agreement on a multilateral solution can be

reached by mid-2021.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

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 equates broadly to profits that

would be earned by an entity undertaking that activity on an outsourced

basis. There are different ways of calculating routine profits, but for this

purpose it is likely to be defined as some percentage (perhaps 10percent)

of revenue from unrelated party sales; the residual is any profit above this.

• A (separate) fixed return for certain baseline marketing and distribution activi-

ties taking place physically in a market jurisdiction, in line with the existing

arm’s length principle (”Amount B”). This does not create a new taxing

right, rather it secures a taxing right that already exists. It presents a simpli-

fication of existing rules and may help effective implementation of taxing

rights, wherein rules to ensure a minimum return to activities are currently

not well enforced, such as in developing Asian countries.

• Processes to improve tax certainty aimed at dispute prevention and resolution.

e second pillar introduces minimum taxation of inbound and outbound

investment. Pillar 2 applies more broadly and does not have a special treat-

ment for digital businesses and is not covered in this paper. However, some

countries (including the US)

see Pillar 1 and Pillar 2 as a package, with

acceptance of Pillar 1 predicated on acceptance of Pillar 2. Notably, by plac-

ing a oor on the CIT rate, Pillar 2 is expected to raise more revenue than

Pillar 1. Broader revenue implications of Pillar 1 for Asia are discussed below

and extend beyond the digital economy.

Implications of Amount A for Asia

MNEs headquartered in the Asia-Pacic region generate a signicant share

of the global residual prot covered by “Amount A.” Table1 reports on the

share of residual prots by country of headquarter for MNE groups with

annual revenue larger than EUR 750million (USD 850million). e size

and distribution of residual prots are reported separately for all industries,

ICT industries, and online retailers. Although these classications do not

directly map to the denition of consumer-facing businesses and automated

e OECD-IF argues that not all the residual is generated by the market jurisdiction (for example, some

reects risk-taking by the MNE), hence only a portion of the residual prot is reallocated.

For economists, routine returns may resemble a normal return on investment and “residual” prots, resem-

ble rents (earnings in excess of the minimum required by the investor).

For instance, the Made in America Tax Plan would bring the international minimum tax provisions (GILTI

and BEAT) closer in line with the OECD-IF’s Pillar 2 proposal. e plan envisages a higher minimum tax rate

of 21percent compared to the OECD-IF.

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

digital services, they are nonetheless indicative.

Assuming that routine prots

are 10percent of revenue (that is, a 10percent protability threshold), global

residual prot across all industries is USD 1.5trillion. MNEs headquartered

in the US account for the bulk of residual prots (33percent), but a sizeable

share (32percent) are earned by MNEs headquartered in Asia-Pacic, with

China, Hong Kong SAR, Korea, and Japan playing a prominent role. Nar-

rowing the scope to the ICT industry shrinks the size of residual prots but

maintains the importance of MNEs headquartered in Asia-Pacic.

e ICT sector is relatively protable compared with other industry sectors,

disproportionately contributing to residual prot. e ICT sector is one

of the most protable industries as measured by the return to total assets,

and its residual prot as a share of total prot also ranks high compared to

other sectors (Table2). Although the sector falls within the narrow scope of

“Amount A,” even without this ringfencing, the high level of protability

means that rms in the sector are more likely to be included in the tax base.

e sector accounts for about 16percent of the global residual prots, which

is similar to the level of the nancial and real estate sector, but with a con-

e denition of consumer-facing business is not yet nalized.

Table 1. Residual Proﬁt by Headquarter Jurisdiction, 2017

All industries (2017) ICT industry (2017)

Country

Share of

Global RP

(%)

Mean

RP/EBT

(%) Country

Share of

Global RP

(%)

Mean

RP/EBT

(%)

United States 33.1 18.0 United States 53.3 24.4

China 12.1 13.1 Hong Kong SAR 7.6 29.6

United Kingdom 8.0 11.0 China 6.7 23.2

Hong Kong SAR 5.9 32.1 Japan 6.6 11.6

South Korea 4.0 8.7 India 3.2 43.2

Japan 3.9 5.1 Germany 2.3 20.9

France 3.5 9.5 Canada 2.0 35.3

Germany 2.9 7.5 Netherlands 1.4 9.6

Canada 2.1 17.7 Australia 1.2 26.9

Russia 2.0 25.1 Spain 1.2 16.1

Other Asia Pacific 5.9 14.5 Other Asia-Pacific 5.7 18.8

Rest of the World 16.7 12.9 Rest of the World 8.8 12.9

Total 1,457 USD billions Total 236 USD billions

Online Retailers (2017)

Country

Share of

Global RP

(%)

Mean

RP/EBT

(%)

United States 65.1 10.1

Japan 26.8 2.9

China 8.1 7.4

Total 1.45 USD billions

Sources: S&P Capital IQ and IMF staff estimates.

Note: EBT = earnings before tax; RP = residual proﬁt.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

siderably smaller number of companies. e average return on assets in the

sector is twice as large as in the nancial sector. e median rate of return

ratio indicates divergence of protability within the ICT group.

Under the current system of international taxation, residual prots across

all industries are reported mainly in large economies and investment hubs.

Figure11 shows the location of residual prot for MNEs headquartered in

25 economies (including Australia, China, India, Indonesia, Japan, Singa-

pore, and the United States) for all sectors, not just highly digitalized rms.

Together, these MNEs account for 71percent of total global residual prot.

With a protability threshold based on revenue (that is, the current de-

nition of residual prot under Amount A), about 44percent of the resid-

ual prot from these MNEs are declared in China and the United States,

followed by the Netherlands, Canada, and Puerto Rico. Other Asia-Pacic

economies with a sizeable share of residual prot include Australia, Hong

Kong SAR, and Singapore. Regionally, Europe has the largest share of resid-

ual prot (35percent) followed by Asia Pacic (31percent) and the Amer-

icas (29percent).

e presence of investment hubs potentially reects the

extent of prot shifting that occurs under the current regime. at said, these

results should be interpreted with caution, as the prot measure available can

include income from equity investment in aliates (for example, dividends

from subsidiaries) that are not subject to tax in the home country under cur-

rent rules, and not subject to redistribution under Pillar 1.

However, as noted above using consolidated data, digital rms account for a sizeable share of residual prots,

with the ICT sector alone responsible for 16percent of total residual prots. Hence the analysis presented here

should be viewed as illustrative. Indeed, digital rms are deemed to have greater opportunities for prot shift-

ing, given the importance of intangibles in their production process

Although the share of residual prot is evenly shared across the three continents, aliates located in Asia

tend to be more protable than their counterparts in other regions, earning a return on tangible assets of

17percent. e median aliate in Europe earns a 15percent return, and those in the Americas and Mid-

dle East earn a return of 8.5percent. e lowest returns are observed in Africa, with a return on assets of

only 4percent.

Table 2. Residual Proﬁt and Other Descriptive Statistics by Sector, 2017

Industry Sector

Number of

Companies

mean

EBT/Assets (%)

median

EBT/Assets (%)

mean

RP/EBT (%)

Share of Global

RP (%)

Agriculture, Forestry and Fishing 25 8.3 8.3 12.6 0.2

Construction 298 5.6 4.7 5.2 1.0

Finance, Insurance and Real Estate 899 4.6 3.1 17.9 16.3

Manufacturing 2694 8.3 6.7 12.4 42.8

Retail Trade 608 8.1 6.2 3.7 2.1

Services 719 8.0 6.2 15.0 14.0

Transportation, Communications and Utilities 1160 5.9 4.5 20.2 20.3

Wholesale Trade 697 6.2 4.5 2.8 2.6

ICT 501 8.3 6.3 19.4 16.2

Sources: S&P Capital; and IMF staff estimates.

*ICT has overlaps with other sectors, so the sum of the share of Global RP is not 100 percent.

Note: EBT = earnings before tax; RP = residual proﬁt.

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

e location of residual prots is sensitive to the precise method of calcula-

tion. Using a protability threshold based on returns to tangible assets (in

this case 10percent of their value), the United States emerges as the top loca-

tion for residual prots while China accounts for only 4percent of residual

prot. is reects the importance of tangible assets in the creation of prot

for China (for example, manufacturing) compared to the United States.

e global revenue eect of Amount A is small, increasing CIT revenue by

about 0.5percent (OECD 2020a), but implications for individual jurisdic-

tions can be signicant. e revenue increase is driven by the reallocation

from jurisdictions with low taxes toward jurisdictions with higher taxes.

However, only a proportion of the residual prot will be reallocated. Using

a protability threshold of 10percent of unrelated party sales and assuming

only 20percent is available for reallocation, then the pool of residual prots

to be reallocated is estimated to be relatively small at USD 98billion, limit-

ing the size of the revenue increase (OECD 2020). For individual jurisdic-

tions, the impact on tax revenues depends on their current share of residual

prot relative to their share of sales. e OECD estimates that low-income

countries would increase their CIT revenue by approximately 1percent

(or 0.02percent of GDP) and middle-income countries by 0.5percent

(0.02percent of GDP).

e revenue impact for high-income countries show

Results are presented in OECD (2020a) as the percentage change in CIT revenue. IMF sta converted this

change in CIT revenue into percentage points of GDP for ease of comparison with the other results pre-

sented in this paper.

Sales deﬁnition

Asset deﬁnition

Source: OECD country by country reports for 2016; and IMF staff estimates.

Figure 11. Top 20 Locations of Residual Proﬁt

(Percent of total)

China

United States

Netherlands

Canada

Puerto Rico

Bermuda

Australia

Hong Kong

SAR

Singapore

Ireland

Sweden

British Virgin

Islands

Cayman

Islands

Bahamas,

The

India

Norway

United

Kingdom

Indonesia

Peru

Vietnam

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

greater variability, they could lose or gain a small amount of revenue. Invest-

ment hubs unequivocally lose revenue, by as much as 3.9percent of current

CIT revenue (0.2percent of GDP).

Under an expanded scope, which includes rms in all industries, investment

hubs and developing economies in the Asia Pacic region could lose revenue

(Figure12). Discussions surrounding the scope of Amount A are ongoing,

with a possibility that the scope would be based on a size threshold, rather

than type of business activity.

In this case, the estimates presented here could

be closer to the expected impact. e range reects assumptions regarding

e top 100 largest MNE groups by revenue have revenue greater than USD 67billion, with an average rev-

enue of USD 127billion, and an average residual of USD 1.7billion. e headquarters of these MNE groups

are dispersed equally across Asia, Europe, and the Americas. e average size, in terms of revenue, in each

region is similar, but the average MNE group headquartered in the Americas have more than twice the residual

prot (USD 3.4billion) of the average Asian MNE (USD 1.6billion). e average residual prot of European

is the lowest at USD 305million.

Sources: OECD Country by Country Reports for 2016; and IMF staff estimates.

Note: The range reﬂects assumptions regarding the 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). Increasing

the 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. This is because

it is assumed that each jurisdiction’s ‘contribution’ to the pool to be reallocated is in proportion to the jurisdiction’s current share of residual proﬁt. So, with a higher

proﬁtability threshold, the residual proﬁt becomes more concentrated in select countries.

Figure 12. Potential Revenue Effects of Pillar 1, Amount A

(Percent of GDP)

0.00 0.100.05–0.20 –0.05–0.10–0.15

Australia

Bangladesh

Bhutan

Brunei Darussalam

Cambodia

China

Fiji

Hong Kong SAR

India

Indonesia

Japan

Korea

Lao P.D.R.

Macao SAR

Malaysia

Maldives

Mongolia

Myanmar

Nepal

New Zealand

Papua New Guinea

Philippines

Samoa

Singapore

Solomon Islands

Sri Lanka

Thailand

Timor-Leste

Vietnam

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

the protability threshold (10percent or 20percent of unrelated party sales)

and share of residual prot to be reallocated (10percent or 20percent). For

instance, with a 10percent protability threshold and with 20percent of

residual prots reallocated, Vietnam could lose about 0.11percent of GDP

in revenue, driven by the prot reallocation of Japanese MNEs. Whereas

with a higher protability threshold, revenue eects are minimal. Similarly,

emerging economies such as India, Indonesia, and Malaysia could lose about

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

high-income countries such as Australia, Japan, and Korea, as well as large

markets such as China, gain revenue under the range of assumptions consid-

ered here. Singapore and Hong Kong SAR could lose about 0.15percent of

GDP in revenue. It is unsurprising that revenue losses are projected in these

investment hubs since they currently account for a disproportionate share of

residual prot compared to their market share.

Distributional eects dier

with the current proposal where the relative size of the in-scope sectors devi-

ates from the relative size of all MNEs. Annex1 provides an overview of the

methodology used to develop these estimates.

Digital Services Taxes

e use of unilateral measures to tax digital services is linked to wider global

discussions on expanding market (or “source”) country taxing rights. In a

context wherein direct taxation of prots is dicult, digital services taxes––

analogous to royalties imposed on the extraction of resource-rich countries––

allow countries to share in the rents of highly digitalized businesses. Data,

often proclaimed as the oil of the 21st century, have been a key driver for

new economic activity in recent decades. Such an analogy can be expanded

to the tax realm—if data on a country’s citizens are viewed as a collective

national asset, then just as the rents from natural resource extraction are

taxed in the host country in which they are located, the same could be

argued for personal data (IMF 2019, Aslam and Shah 2020). And, just as in

the extractive industries (Cui 2018, 2019; IMF 2019), a royalty instrument

(a tax on turnover) can substitute when direct taxation of rents is dicult,

especially where hard-to-value intangibles play a large role or capacity is lim-

ited to monitor cost-based prot shifting. Current DSTs, including in Asia

(Table3) take on the avor of (highly targeted) user-based royalties (Aslam

and Shah 2020).

For these estimates, residual prot is dened as prot 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. e

estimates assume that this reallocation is “funded” by countries relinquishing the residual prot to which they

currently have taxing rights.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

DSTs essentially attempt to overcome the “PE problem,” whereby a lack of

physical presence precludes governments from staking a claim to corporate

prots on a source basis. Since bilateral tax treaties preclude countries from

unilaterally adjusting taxing rights, countries have started to look for alterna-

tives outside the purview of income taxation. e key measures employed can

be categorized as follows:

• Withholding taxes on payments to non-residents for digital services. These

are levies on payments to non-residents for digital services and are similar

in concept to existing withholding taxes on cross-border technical services

(for example, accounting, management, and subcontractor services). While

initially such taxes focused on B2B payments for online advertising, they

have since expanded in-scope to cover other digital services as well as some

B2C transactions (typically relying on financial institutions as withhold-

ing agents). These withholding tax obligations have been justified as an

Table 3. Digital Services Taxes in Asia

Country Status Date Name Rate (%) Scope Threshold

Payment

Obligation

India Implemented April

2020

EL 2 Revenues received by non-

residents for online provision

or facilitation of sales of goods

and services to the Indian

market, advertising targeted at

Indian users, and sale of data

collected from Indian users

Companies generating

India-based digital services

revenue > INR 20 million in

a financial year

Paid by non-

resident

e-commerce

operators.

India Implemented March

2016

EL 6 Revenues received by non-

residents for online advertising

services supplied to Indian

residents

Aggregate payments to

nonresident > INR 100,000

in a financial year

Charged and

withheld by

resident payors

Malaysia Implemented May

2019

WHT 6 All income from e-commerce

transactions deemed to be

derived in Malaysia

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 the provision of

a tax treaty

The digital PE conditions

will be 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

DST 3 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

Sources: KPMG (2021); Avalara; and IMF reports.

Note: DST = digital services tax; EL = equalization levy; ETT = electronic transaction tax; WH = withholding tax.

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

attempt to equalize (income tax) treatment on non-residents vis-a-vis resi-

dent service providers in a world with increasing cross border remote sales.

Tax rates on payments in scope vary widely at relatively high levels of 5 to

15percent globally.

• User-based taxes: DSTs typically apply to both residents and non-resident

companies, but their high global turnover and domestic revenue threshold

means that they in effect target a few large foreign MNEs.

An increas-

ing number of countries globally are opting for broader user-based DSTs,

motivated by the desire to capture some of the value being generated by

their citizens for highly digitalized businesses. Such DSTs target revenue

generated through interaction with users in their jurisdiction from a range

of digital services (whether for a payment or through the provision of a

free service).

Such DSTs are levied on a gross basis at relatively low rates,

ranging from 1.5 to 7.5percent on revenues from the sale of the digital

services in scope.

• Digital Permanent Establishment: A number of countries have proceeded

with the expansion of domestic rules to establish a taxing right for virtual

permanent establishments. A taxable permanent establishment to which

income tax obligations apply is deemed to exist when an MNE’s activities

exceed a global turnover and local sales and user thresholds.

However,

few countries have clearly articulated rules for revenue attribution to such

virtual PEs, and many countries will be constrained in applying a revised

PE definition, due to existing tax treaties.

Several countries in the region (Table3) have begun to adopt measures

that target income from digital activities generated in their jurisdiction by

non-residents. Larger middle-income countries without home-grown tech

giants appear to have been first-movers in the region. Countries that are

home to tech MNEs, primarily China, Japan, and Korea, have, thus far,

shown little interest in enacting DSTs. DSTs implemented to date or under

consideration differ significantly in terms of design (rates, scope, threshold,

and nature of payment obligation). For instance, Indonesia introduced a rule

to establish a taxing right for virtual permanent establishments in 2020. A

user-based DST has been implemented in India, with the new Equalization

High global revenue thresholds result in common DSTs, eectively capturing mainly important US MNEs,

which has been argued to create de facto discrimination (see Hufbauer and Lu 2018, and USTR 2021). e

eective targeting of US MNEs by DSTs, however, is a consequence of their market dominance and may be

temporary (Avi Yonah 2020).

is type of tax is typied by the 2018 European Commission draft directive for the taxation of digital

services, versions of which have subsequently been unilaterally introduced by EU members. e proposed DST,

which has since served as a model for a number of EU members states, imposes a 3percent levy on revenues

from certain specied digital activities, which users have “co-created.”

In cases where a double tax treaty does not allow for the creation of a virtual PE, an “electronic transaction

tax” is supposed to be applied, though this measure is not yet eective/specied.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Levy in 2020 (Box2). Similarly, while DSTs commonly target advertising

and intermediary services, in the case of India, they also cover the provision

of digital content and the sale of goods.

Assessment of DSTs: Potential Trade-offs and Impacts

DSTs introduced to date in the region and elsewhere reect large dierences

in design and create potential trade-os. eir broader economic and welfare

impact depends on market structures and the role of automated digital ser-

vice (ADS) providers (Table4). For instance, while digitalization is an econo-

mywide phenomenon, recent country proposals and reforms have singled out

specic digital activities as the subject of taxation. is approach of “ring-

fencing” risks driving an inecient wedge between “digital” and “non-digital”

activities. Moreover, in choosing revenues over prots as the base, these taxes

are less likely to tax only the pure economic rent and therefore risk distort-

ing production or disincentivizing investment.

e level of taxation must

therefore be calibrated accordingly. ere is also a risk of pass-through of the

tax burden to consumers, particularly in a monopolistic setting.

Withholding taxes targeting B2B payments to non-residents are easy to

implement, but also to avoid. Typically, governments require the purchaser

of a service or, in some cases, nancial intermediaries, to remit the taxation

on the payment made to the nonresident service provider. While this implies

a narrow focus on selected transactions, these withholding taxes have the

appeal of being easy to introduce and administer and as such are the most

widespread to date. Examples include the initial Indian Equalization Levy

introduced in 2016, as well as more recent withholding requirements on

payments for specic digital services in Malaysia and Vietnam. However,

while simple to design and administer, such taxes can potentially be avoided.

For example, if a resident company sets up an oshore related entity to make

the payments to the non-resident service provider, it may be possible to avoid

withholding taxes altogether.

DSTs based on user contribution have both a broader scope and greater

associated revenue potential but entail more complex design issues and

administrative requirements. Centering the design of a DST on user contri-

Rents—that is, earnings in excess of normal required returns—are an attractive tax base because they can

be taxed without distorting a company’s behavior. However, taxing rents is dicult in practice, since some costs

are hard to observe and provide deductions for and many sources of rent are not location specic; therefore,

taxing them risks driving them elsewhere.

ATAF (2020) proposes a hybrid approach that would deal with abuse risks by determining the DST

charge as the higher amount between the direct payments made and a country’s share in apportioned global

segment revenue of a company in scope (for instance, the share of a country’s advertising views in global total

advertising views).

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

butions requires clear rules to determine the location of the user and meth-

ods for determining the tax base. Without any direct measure of user value,

DSTs tend to approximate the user contribution of a country based on sales

revenues. User based DSTs tend to include revenue thresholds to determine

in scope businesses. High thresholds may result in targeting a few interna-

tional rms and risk retaliation, while too low a threshold may deter entry

by smaller rms.

Moreover, since the tax is payable by the non-resident

MNE, the introduction of a DST comes with requirements for registration

and regular ling of returns and payment of tax due, which entails collec-

tion challenges.

e modied Indian Equalization Levy introduced in 2020 is the broadest

user-based DST adopted globally to date, but the incidence can be dicult

to assess. e Indian approach builds on the European model,

but expands

its scope to cover all (B2B and B2C) digital sales of its own goods, content

Potentially contributing to further market concentration in the tech sector.

In 2018 the EU Commission proposed a DST of 3percent on the gross revenue from activities relying on

user participation such as selling online advertising space and intermediary activities that allow users to interact

and sell goods and services.

Table 4. The Economic Impact of DSTs

Issues… ...and opportunities

Taxing rights and revenue

Introduction of (unliteral) DSTs risks international double taxation if not

creditable against corporate income tax payable in-home jurisdictions.

International tax rules aimed at profit are particularly hard to apply to

providers of automated digital services operating two-sided platforms

(Schindler and Schjelderup 2010). DSTs allow countries to capture

uncompensated value generated by a country’s citizens, and to share

in the rents from digitalized businesses, while taxation of profits

is difficult.

Efficiency and social welfare

When taxing some activities on a gross rather than a net basis distortion

may result. Taxation of loss makers risks disrupting innovative business

development/disincentivizing investment in these sectors. It is common

for developers of ADS to initially have and use aggressive pricing

strategies to gain market share/user participation.

In practice, production decisions of ADS service providers may not be

influenced at the margin; for profitable businesses taxing revenue is

not significantly different from profit-based taxation where the marginal

cost of providing additional services is minimal, as is arguably the case

for many ADS (Cui and Hashimzade 2019; Koethenbuerger 2020). In the

context of heavily concentrated market power, which is typical for two-

sided digital platforms, taxation may have positive welfare effects (Kind

and others 2008).

By targeting only some activities an inefficient wedge may be driven

between activities in and out of scope (Aslam and Shah 2020).

To the extent that the levy reduces any tax-induced comparative

advantage that foreign suppliers may enjoy over domestic suppliers,

equalizing the tax treatment could ease production inefficiencies.

If the burden of tax is passed onto customers, increases in the cost of

advertising opportunities on platforms may lead business to revert to

less efficient marketing strategies.

Incidence effects are complex in two-sided markets (IMF 2019). Firms

may aim to shift some burden to the untaxed side: a tax on advertising

creates an incentive to raise the price charged (or reduce the subsidy

provided) to users; the price of advertising services may even fall.

Cui

and Hashimzade (2019) show that when the marginal cost is non-zero,

the incidence of a tax on platform revenue will fall on both the platform

and the advertisers/producers, but the effect on consumers

is ambiguous.

As noted by Wei Cui (2021), concerns of potential double taxation of DSTs are also mitigated by the expectation of the economic incidence primarily

falling on consumers.

On tax incidence in two-sided markets, see also Bourreau and others (2018) and Kind and others (2008).

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

provision, cloud, software, nancial and education services. It also explic-

itly excludes Indian residents from the scope of the tax, rather than opting

for a high global turnover threshold. However, the incidence of the levy is

hard to assess. Where service providers charge consumers directly, some of

the tax may be passed on, depending on market conditions including the

substitutability of digital and non-digital providers. MNEs operating with a

business model of providing free services and generating revenue from sell-

ing advertising opportunities can potentially share the tax burden with third

party advertisers. In addition to the new rate of 2percent on activities in

scope of its new DST, India also maintains a higher 6percent rate on B2B

payments received by nonresidents for advertising services provided in India.

To the extent that this tax reduces any tax-induced comparative advantage

that foreign suppliers may enjoy over domestic suppliers, equalizing the tax

treatment may ease production ineciencies. However, if the tax is passed

on to customers, the tax might arguably perpetuate production ineciencies

by targeting a business input (advertising expenses) that may be of particular

importance for smaller rms benetting from targeted cost-eective online

advertising opportunities

The Potential DST Tax Base in Asia

Although widely touted as an important source of revenue, understand-

ing the potential tax base of the DST in Asia is important for determining

revenue potential. e region is highly populous, constituting a sizeable user

base, but with lower value per user than Europe and the Americas. Whether

taxing rights are determined based on the value of its users has an impact on

revenue potential. For digital businesses, the value of users is correlated with

their purchasing power, propensity to spend, and activity on the platform.

For instance, user data from Facebook indicates that the Asian region consti-

tutes a sizeable and rapidly growing user base, albeit with relatively low value

associated with each user of the platform (Figure13).

Surveys suggest that digital sales are sizeable for the region, although heavily

concentrated in a small number of countries.

e scale of China’s digital

activity dwarfs the rest of the region. However, even without China, the

And the potential Asian user base and revenue is much larger, as Facebook is not (yet) operating in China.

e Statista surveys cover market participants as well as consumers—for India, Indonesia, ailand, and

Vietnam. Reported results for the other economies are extrapolated using indicators of purchasing power of

consumers and digital maturity in the economy. E-commerce includes sale physical goods via a digital channel

(from all types of devices) to a private end user (B2C) with cross-border purchases attributed to the country of

the buyer. E-services capture sales of services and digital goods (event ticket reservation, dating, food deliv-

ery, etc.) with an online checkout process. Digital media captures spending on audiovisual media contents

and applications distributed online. Digital advertising captures advertisement spending for online channels.

(Statista 2020).

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

regional DST base is comparable to Europe and the Americas (Figure4).

Larger, middle- and high-income economies dominate (Figure14), in par-

ticular Australia, India, Indonesia, Japan, Korea, and Singapore. For small,

low-income countries in the region (Brunei, Myanmar), however, the tax base

remains negligible.

At present, applying a DST is expected to yield relatively low revenues.

For example, the initial Indian Equalization Levy introduced in 2016 and

applied on payments for advertisement services, resulted in collections of

about 0.02percent of GDP from 2016–2020.

Estimates of the revenue

potential for DSTs in the region drawing on Statista’s consumer and market

surveys suggest equally limited revenue potential, even with a wide scope of

digital services covered.

For example, in Bangladesh, India, Indonesia, the

Philippines and Vietnam, the application of a DST resembling India’s cur-

rent Equalization Levy, would have yielded revenue of about 0.02percent of

GDP in 2019. is corresponds to an equally modest expectation for DST

revenues in the EU and the United Kingdom.

e revenue potential of a

See https://www.avalara.com/in/en/blog/2020/09/india-digital-tax-or-equalisation-levy-a-timeline.html.

Assuming that 40percent of the e-commerce, 70percent of digital media, 100percent of digital advertis-

ing, 10percent of e-services, online tourism and online mobility revenues estimated by Statista are in scope

and applying the rates of the Indian DST (2percent on gross revenue in scope, 6percent on gross adver-

tising revenue).

e European Commission has estimated annual revenue yield from its DST 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). e United Kingdom estimates that 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. USTR (2021) nds an

Worldwide

US and Canada

Europe

Asia Paciﬁc

Rest of World

Worldwide

US and Canada

Europe

Asia Paciﬁc

Rest of World

Source: Facebook (2020).

Asia accounts for a large share of Facebook’s of users, but revenue per user is signiﬁcantly below world average.

Figure 13. Facebook: Active Users and Average Revenue Per User

2,500

2,000

1,500

1,000

500

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

2009 10 11 12 13 14 15 16 17 18 2009 10 11 12 13 14 15 16 17 18

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

withholding tax resembling the 2016 version of the Indian Equalization Levy

is even smaller, amounting to about a fth of the DST’s potential.

However, given the current low base, revenue is likely to have high buoyancy

in the future (Figure10, Chapter1). Moreover, the pandemic and associated

lockdown measures are accelerating the development of digital economic

activity, including transactions and sales of digital goods and services. is

trend would likely have a bearing on future revenue potential.

Future Directions and Implications

e future role of DSTs in Asia is unclear. Global trends, the uncertainty of

ongoing international negotiations, and the experience of countries in the

region following India’s lead in introducing withholding taxes resembling the

initial equalization levy, suggest that DSTs may become more widespread.

e implementation of DSTs could also be facilitated by ongoing eorts

in several countries to eectively capture VAT on digital goods and services

supplied from abroad as these require similar investments into administrative

infrastructure and compliance management of nonresidents (see Chapter3).

equally moderate tax revenue potential when assessing tax liabilities for US rms as a result from the Indian

DST: in aggregate, the 86 US rms that are likely 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 propos-

als, or announced their intention to introduce unilateral direct tax measures aimed at digital services,

see KPMG (2021).

Digital media

E-services

Digital revenue (% of GDP) RHS

E-commerce

Digital advertising

E-commerce

Digital media

Mobility services

Travel & tourism E-services

Share of GDP (RHS)

Digital advertising

Source: Statista (2020).

Figure 14. Survey-Based Estimates of the Tax Base and Revenue Potential in 2019

120

100

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

A tax base concentrated in larger, richer economies ... ... with modest revenue at around 0.02 percent of GDP.

Australia

Bangladesh

Bhutan

Brunei

Darussalam

Hong Kong

Indonesia

Myanmar

Philippines

Singapore

South Korea

Sri Lanka

Thailand

Vietnam

India

Japan

Malaysia

Mongolia

2019 Revenue USD Billions

700

600

500

400

300

200

100

0.10

0.08

0.06

0.04

0.02

0.00

Bangladesh India Indonesia Philippines Vietnam

USD million

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

e approach to DSTs in the region has been varied. Adoption in the region

to date has varied depending on whether or not countries have home-grown

tech giants. Similarly, investments in a DST are unlikely to become a pri-

ority for low-income countries with limited digital activities. However, in

the future, as the global economy recovers, specically targeting important

revenue sources could become relevant for some low-income countries. is

is particularly likely to be the case for commissions for online facilitation of

hospitality services for economies heavily dependent on tourism.

e immediate impact of a proliferation of DSTs in the region and beyond

would likely be limited for Asian technology MNEs. While sizeable, Asian

MNEs appear to earn the bulk of their returns in their home/residence coun-

tries. For instance, Chinese MNEs make 87percent of their sales domesti-

cally, while Korean and Japanese MNEs derive 65 and 61percent of their

revenue from the domestic market, respectively (Figure15).

In the short term, taxpayers under DSTs would primarily be US MNEs,

potentially exacerbating the potential for retaliatory trade measures. On aver-

age, 25percent of prots earned by foreign MNEs are made by US MNEs

(Figure15). For countries such as Bangladesh, India, Indonesia, the Philip-

pines, Singapore, and Vietnam, US MNEs dominate, accounting for more

than 50percent of prots earned by foreign MNEs. DSTs, however, open

the door to retaliatory trade measures. For instance, the United States Trade

Representative (USTR) estimates that more than 70percent of digital service

companies subject to the Indian DST are US based and classied the tax as

discriminatory (USTR 2021). is classication allows for the imposition of

duties on Indian goods as part of a potential package of retaliatory measures

against countries operating DSTs.

Regional and bilateral coordination of DSTs could help reduce collection

costs and trade tensions. DSTs expand taxing rights over digital services

provided by nonresidents to market countries. Available information and

initial country experiences suggest that while the immediate revenue potential

is small, implementation of these taxes results in non-negligible administra-

tive and compliance costs. Regional coordination of central design features,

including on the scope of the rules, key denitions, as well as registration,

reporting and payment obligations could thus help ensure that compliance

costs associated with DSTs do not become barriers to market entry.

More-

For instance, Malaysia expanded the scope of its tourism tax charged per room per night in 2020 to cover

accommodation booked through online platforms and will impose the tax on resident and nonresident digital

platform service providers from July 2021.

Similar to taris announced following an investigation of France’s DST. ese were announced in July

2020, scheduled to go into eect in January 2021 (but have been temporarily suspended).

e African Tax Administration Forum (ATAF) for instance proposed model legislation for Digital Services

Taxes to its member states.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Australia

Korea

China

Singapore

India

United States

Indonesia

Europe

Japan

Other

Sources: IMF, World Economic Outlook; and OECD country by country reports.

Note: MNEs = multinational enterprises.

Share of unrelated party sales from the domestic market

100

Figure 15. MNE Activities at Home and Abroad and the Destination of Asian MNE Proﬁts

Chinese, Indian, and Indonesian MNEs make most of their sales at home... ... while US MNEs account for an important share of proﬁts earned by

foreign MNEs in Asia.

GDP per capita (current USD)

Mongolia

Brunei

Timor-Leste

American Samoa

Bangladesh

Sri Lanka

Guam

Tonga

Vanuatu

Samoa

Solomon Islands

Nepal

Maldives

Bhutan

Marshall Islands

Australia

Myanmar

Macao SAR

Lao P.D.R.

Cambodia

China

India

Thailand

Hong Kong SAR

Japan

Taiwan POC

Korea

Philippines

Malaysia

Singapore

Indonesia

Vietnam

Fiji

New Zealand

Papua New Guinea

0.00

0.03

0.77

3.45

0.22

0.13

0.00

0.02

0.03

0.05

0.62

0.67

0.81

1.65

1.47

0.50

4.72

0.24

0.32

0.92

0.69

4.93

20.12

0.58

0.57

0.38

0.91

3.17

11.48

0.89

0.52

0.57

2.37

1.43

0 20 40 60 80 100

120,000

100,000

80,000

60,000

40,000

20,000

–

Bermuda

Ireland

Luxembourg

Netherlands

Sweden

Austria

Belgium

Denmark

Finland

France

Norway

Singapore

Australia

Canada

Italy

Japan

Korea

United States

Chile

Mexico

Poland

Slovenia

South Africa

China

India

Indonesia

Distribution of foreign MNE proﬁt by headquarter country

Proﬁt of foreign MNE (percent of GDP)

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

over, the proposed introduction of a new article into the UN Model Tax

Convention to deal with income from ADS could allow for bilateral coor-

dination of DSTs. e proposal builds on the existing tax treaty framework

guiding international tax rules and could eventually contribute to lowering

the risk of retaliatory taris between source/market and residence countries of

digital service providers.

Alternative Policy Options

Other policy options for taxing prots in an increasingly digitalized econ-

omy are more far reaching. e scope of these alternative options is wider

than digital businesses, given the diculties and ineciencies associated

with ringfencing digital business. Digitalization will continue and pervade

the economy, making ringfencing irrelevant in the future. In addition, other

sectors exhibit similar challenges, for example, pharmaceutical companies also

rely on hard-to-value intangibles. Importantly, unlike Pillar 1, these alter-

native policies reform the entire existing international taxation architecture,

rather than acting as an addition to existing norms. Following is a discussion

of two policy alternatives that could potentially address the key concerns with

the taxation of multinational prots in an increasingly digitalized economy:

formulary apportionment and residual prot allocation.

27,28

While digital

businesses are not explicitly targeted, their tax treatment is likely to be mark-

edly dierent under these two alternative reform options since their business

models enable a signicant disconnect between where prots are currently

booked and the location of factors of production or sales.

Formulary Apportionment

Formulary apportionment (FA) can address many of the challenges faced by

the current requirement to consider each aliate of an MNE group as a sepa-

rate entity (and hence the need to value intra-group transactions). Under this

approach, the revenue of the MNE group is consolidated across all aliates

and then allocated across countries based on each country’s share of the allo-

cation factor or key. e allocation key can be supply-based (assets, employ-

ment, or payroll) or demand-based (sales, user value). Each country can then

Other policy alternatives, such as a destination-based cash-ow tax, are discussed in IMF (2019) and Auer-

bach and others (2017).

ese alternatives, initially proposed by tax practitioners and academics, have gained traction with policy

makers (for example, the G24’s proposal for fractional apportionment), outlined in the Intergovernmental

Group of 24’s submission to the OECD on possible solutions to the tax challenges of digitalization. India was

the rst to propose such a solution, which was then endorsed by other members.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

apply its own tax rate or credits to the apportioned base.

Elements of FA

are included in Pillar 1, namely, the consolidation of prots to compute the

residual prot and the apportionment of this prot using a formula (in the

case of Pillar 1, the apportionment key is sales). However, under FA, all the

MNE’s consolidated prot is subject to apportionment rather than just a pro-

portion of residual prot. By calculating the tax base at a consolidated level,

FA eliminates the issues associated with arm’s-length pricing, which holds

the prospect of signicant simplication and removes prot shifting.

e

inclusion of demand-based factors in the formula, such as sales, can poten-

tially improve the perceived “fairness” of taxing rights, as is envisaged under

Amount A of Pillar 1.

At the global level, introducing FA can lead to a loss in CIT revenue, if CIT

rates remain unchanged. By allowing MNEs to consolidate prots and losses

across subsidiaries, FA leads to a loss in the aggregate tax base. e revenue

loss from FA is partially oset by a reallocation of the tax base from low-tax

to high-tax countries, as prot shifting is mitigated. at said, the global

revenue loss is based on existing CIT rates and can potentially be recouped

through an increase in those tax rates—although the scope and desirability of

this will dier across countries and will also depend on the allocation for-

mula. e scope for higher rates is more likely, for instance, if allocation is

based on destination sales, as the intensity of tax competition will be reduced.

High-income countries in the Asia-Pacic stand to benet from a sales-based

apportionment, while developing countries benet from employment-based

apportionment (see Annex2 for a full set of results). is is broadly consis-

tent with what is observed globally (Figures 16 and 17). Two data sets are

used for the analysis. e rst, from the US Bureau of Economic Analysis,

provides a detailed snapshot of the operation of US MNEs, allowing the

revenue eects under a wide range of apportionment formulas to be consid-

ered; this dataset is used despite its narrow focus on US MNEs. e second

is based on country-by-country reports which cover large MNEs from 25

countries with broader coverage of developing countries. High-income coun-

tries such as Australia and New Zealand gain revenue under a sales-based

formula applied to US MNEs, as well as non-US MNEs. Similarly, develop-

ing countries such as India, Malaysia, and the Philippines gain revenue from

an employment-based formula. Hong Kong SAR and Singapore, prominent

investment hubs, lose revenue from moving to FA. Singapore loses regardless

FA is commonly used to distribute CIT revenue at the subnational level, for instance, in countries such as

Canada, Germany, Japan and the United States. e European Commission has proposed such an approach

for the EU, in the form of the ’Common Consolidated Tax Base’, wherein the weights are a composite of sales,

assets, employment, payroll, and data.

See de Mooij and others (2019) for a detailed discussion of the benets and drawbacks of formu-

lary apportionment.

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

of the apportionment factor and under both data sources, while Hong Kong

SAR loses revenue under all but one apportionment factor. Revenue eects

under FA are larger than for Amount A because FA reallocates the entirety of

an MNE’s group prot, rather than a proportion of it.

Emps Sales

Assets

CD CCCTB VA Employment Payroll Sales Assets

Sources: CbCR for 2016; OECD; US Bureau of Economic Analysis; and de Mooij and others (2019).

Note: The Common Consolidated Corporate Tax Base (CCCTB) is a weighting based on assets, sales, employment and payroll, this estimate excludes the data factor.

VA stands for value added and is based on the reported series from the BEA. The Cobb Douglas (CD) weighting is based on assets and payroll, an alternate measure

of value added. Income brackets follow the World Bank deﬁnition and refer to the median country in the income group.

Figure 16. Change in Income Tax Revenue from Applying FA

1. U.S. MNEs

(Percent of GDP)

2. Large MNEs

(Percent of GDP)

–1.5 –1.0 –0.5 0.0 0.5 1.0–1.5 –1 –0.5 0 0.5 1 1.5

High income

Upper middle

Lower middle

Low

Australia

China

Hong Kong SAR

India

Indonesia

Japan

Korea

Malaysia

New Zealand

Philippines

Singapore

Taiwan POC

Thailand

High income

Upper middle

Lower middle

Australia

China

Hong Kong SAR

India

Indonesia

Japan

Korea

Malaysia

New Zealand

Philippines

Singapore

Taiwan POC

Thailand

Australia

Bangladesh

Bhutan

China

India

Japan

Cambodia

South Korea

Laos

Mongolia

Malaysia

New Zealand

Philippines

Singapore

Thailand

Source: Beer and others (2020).

Figure 17. Total CIT Revenue Effects from Destination-Based RPA

Revenue change (in percent of GDP)

–4

–3

–2

–1

5 6 7 8 9 10 11 12

log(GDP per capita)

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Under FA, rms at either end of the digitalization spectrum face the same

treatment, but there would be signicant changes to the taxation of highly

digitalized rms compared to others.

Firms would pay part of their tax

where consumers, or factors of production, are located. For highly digitalized

rms, the ability to make cross-border sales without physical presence means

a signicant disconnect exists between where taxes are currently paid and the

location of consumers. FA does not allocate taxing rights to the location of

intangibles, driving the disconnect between the current distribution of taxes

and those under FA even further for digitalized rms.

Residual Prot Allocation

e Inclusive Framework Pillar 1 proposal belongs to a wider family of

schemes that treat routine and residual prots dierently for tax purposes.

e schemes have in common that the taxing right of a routine return would

be allocated to jurisdictions where production takes place. e excess of a

group’s earnings over its total routine prots, the residual, would then be

allocated based on some formulaic approach. e OECD-IF Pillar 1 com-

putes routine returns as a percent of sales and suggests redistributing a share

of the resulting global residual. However, other proposals exist, and routine

returns could be computed as a xed percentage of tangible asset stocks, cost

of goods sold, or by retaining traditional transfer pricing methods for func-

tions within a group that are believed to be “routine.” An important dier-

ence between these proposals and the OECD-IF Pillar 1 approach is that the

latter would retain current arrangements and subject large companies, where

turnover exceeds a certain threshold, to a residual prot allocation (RPA)

scheme. Countries would thus need to surrender taxing rights of large com-

panies’ excess prots to avoid double taxation. In contrast, an RPA scheme

that replaces current arrangements could yield signicant simplication gains

by assigning taxing rights over the routine component and allowing residuals

to be negative.

e revenue impact from introducing an RPA scheme is likely to be sizeable,

especially for Asia.

Assuming that routine returns amount to 10percent of

tangible asset stocks,

micro data suggest the global residual could amount

to USD 3trillion––much more than the residual prot that is considered in

the OECD-IF’s blueprint—and half of this amount is currently declared in

16 Asian economies. is design of the RPA would have a disproportionate

FA regimes generally have special treatment only for the extractives and nancial sectors.

A discussion of negative residuals can be found in Beer and others (2020).

e following analysis is based on Beer and others (2020).

Routine prots correspond broadly to a normal return on investment. Commonly, a return to tangible

assets is chosen at a level which is suciently high to encompass a return to all assets (including intangibles).

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

eect on highly digitalized rms, and others

which have a heavy reliance on intangi-

ble assets, since their return on tangible

assets will be elevated. For these rms, it

represents a fundamental change to where

they pay tax. Less tax will be paid where

intangibles are located, and more tax will be

paid in market countries. Figure17 illus-

trates revenue eects from introducing an

RPA mechanism that allocates the taxing

right of residual prot in proportion to

destination-based sales, which is believed to

be an ecient apportionment factor given

its unresponsiveness to corporate tax rate

dierentials. It shows that ve Asian econ-

omies, with relatively low average income

(Bangladesh, India, Laos, and Mongolia)

would tend to benet from such a reallo-

cation scheme, while many others, including Australia, Malaysia, and Singa-

pore, would tend to lose. Revenue losses are largest in Singapore, where the

decline in corporate revenues could exceed 55percent of current CIT collec-

tions (2.5percent of GDP).

Revenues are impacted because of the elimination of prot shifting. Although

transfer pricing rules aim to ensure a reasonable allocation of prots across

the subsidiaries of an MNE group, considerable leeway exists in determining

where residual prots end up in practice. RPA schemes, in contrast, depart

from the presumption that subsidiaries are independent entities for which

a fair remuneration can be established and use information on consolidated

returns, with allocation of the residual based on FA. Figure18 provides

illustrative revenue estimates from eliminating prot shifting, which are very

sensitive to the underlying assumptions. Overall, CIT rates in Asia are com-

paratively low, and many countries could lose if reported prots were no lon-

ger relocated for tax reasons. However, revenue eects vary widely and while

Singapore could lose up to 7.5percent of current CIT collections (0.4per-

cent of GDP), India would stand to gain 5percent (0.2percent of GDP).

e revenue impact also reects the relocation of excess prots. Figure19

illustrates the revenue eect from reallocating residual returns once prot

shifting has been eliminated. e reallocation would increase revenues in

countries with large destination-based sales, which is positively correlated

with trade decits, and reduce revenues in high-income countries and

investment hubs. For instance, Laos would gain about 30percent of cur-

Australia

Bangladesh

Bhutan

China

India

Japan

Cambodia

South Korea

Laos

Mongolia

Malaysia

Nepal

New Zealand

Philippines

Singapore

Thailand

Source: Beer and others (2020).

Figure 18. Partial CIT Revenue Effects—from Elimination of

Proﬁt Shifting

–0.4

–0.3

–0.2

–0.1

0.1

0.2

0.3

CIT rate (in percent)

Change in revenue due to elimination of proﬁt shifting

(in percent of GDP)

2015 25 30 35

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

rent revenues (0.5percent

of GDP) while Singapore

could lose about 50percent

(2.1percent of GDP).

Under a destination-based

RPA scheme, countries

would have scope to increase

taxes on corporations.

Destination-based RPA

schemes could address some

of the challenges of taxing

highly digitalized rms, as

well as broader challenges

with prot shifting and tax

competition. By shifting

taxing rights to countries

where consumers are located

(’market’ countries), countries have scope to tax their share of prot at a

relatively higher rate than under the current system, without inducing adverse

eects, since MNEs that wish to access their market have little choice but to

pay the tax.

For countries that tend to lose revenue from RPA, such higher

tax rates could partly oset loss in revenue, although further revenue mobi-

lization eorts might sometimes be needed too. If a global minimum tax is

implemented as well, countries could enjoy further revenue gains. is might

also hold for low-tax jurisdictions, which are the likely losers of RPA, since

they could raise their tax rates up to at least the global minimum, without

aecting MNEs. e success of this strategy would rely on the jurisdiction’s

ability to attract and retain foreign investment, based on its broader (non-tax)

comparative advantages.

ere could be an incentive to sell to a third-party distributor located in a low-cost jurisdiction. Sourcing

rules could be introduced to mitigate this new form of tax avoidance.

Australia

Bangladesh

Bhutan

China

India

Japan

Cambodia

South Korea

Laos

Mongolia

Malaysia

Nepal

New Zealand

Philippines

Singapore

Thailand

Sales (in percent of tax base)

Change in revenue due to reallocation of residuals

(in percent of GDP)

–3

–2.5

–2

–1.5

–1

–0.5

0.5

1.5

50 150 250 350 450 550 650 750

Source: Beer and others (2020).

Figure 19. Partial CIT Revenue Effects—from Reallocation of

Residual Earnings

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

e 2016 Levy

In 2016, India introduced an equalization levy in the form of 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. e tax

applies to any nonresident receiving payments from Indian residents of more than

INR 100,000 (approximately USD 1,500) in a nancial year. For this version of the

levy, the burden of compliance is placed on the domestic recipient of services, with the

Indian purchaser of the digital advertising services being responsible for withholding

and remitting the digital advertising tax to the Indian government. is levy resulted

in collections of INR 7billion, about USD 100million (<0.01percent of GDP and

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

e 2020 Levy

In March 2020, the Indian government introduced a new levy applying a 2percent

charge on revenue generated by nonresident companies from a range of digital services

oered in India.

In-scope Activities. e companies subject to the DST must pay the tax on revenue

they derive 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. It also applies to any nonresident who

is purchasing advertising services targeted at Indian residents, or selling data collected

from Indian residents or users with an Indian IP address. e broad scope of activities

eectively captures a wide range of services, including those that are not captured under

other DSTs, such as the supply of digital content, the sale of goods and services elec-

tronically, and cloud services.

With respect to B2B online advertising payments, the 2016 advertising levy

still remains in place. e 2016 levy taxes any payment made by a resident to a

non-resident for online advertising, regardless of the location of the recipient or viewer

of the advertisement, and the 2020 levy does not apply to payments already taxed

under the 2016 levy. However, the 2020 levy extends the scope of India’s taxing rights

to cover payments between two nonresidents if the advertising services are targeted at

Indian users. As noted in USTR (2021), “if an Indian company were to pay Google

(a US company) to advertise on Google’s search engine, that revenue would be subject

to the 2016 digital advertising tax, and therefore not subject to the DST. However, if

Airbnb (a US company) were to pay Google to advertise to Indian users on Google’s

search engine, that revenue would be subject to the DST.”

Box 2. India’s Equalization Levy

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Companies in-scope. e tax is payable only by nonresident e-commerce operators, spe-

cically excluding all Indian companies or nonresidents with a PE in India. In addition,

the tax applies only to companies above the threshold of Rs20million (approximately

US$270,000) in India-based digital services revenue.

Administration. Unlike the original levy on advertising, the nonresident e-commerce

operator is responsible for charging and paying.

Box 2. India’s Equalization Levy (continued)

Income Tax for Highly Digitalized Businesses in Asia—Challenges and a Way Forward

Changes in business models and consumption patterns due to digitalization pose

challenges for the VAT, but the policy concerns dier from those discussed previ-

ously for the CIT. Adopting and implementing a framework for eectively levying

VAT on the import of digitally delivered services and goods can improve general

compliance and revenue collection, including for other taxes, and help ensure a

level playing eld for domestic businesses.

e value-added tax on digital transactions does not involve any fundamental

rethink of taxing rights, but rather the development of a mechanism to give

eect to the destination principle in the case of digital transactions. e VAT

is a tax on consumption imposed commonly on the destination principle,

which means that the taxing right is commonly located at destination or the

place of consumption. It is often harder for services than for goods to deter-

mine the place of consumption, and the digital economy is exacerbating the

challenge of eectively imposing the taxing right in the case of cross-border

supplies of digital products that do not pass through any border control.

Challenges for VAT or sales tax design and collection arise in relation to

intangible services and some categories of goods/services supplied online

and/or with their supply facilitated by platform intermediaries. ey

include the following:

• Digital services provided directly to final customers/consumers, such as

movies, music, and accounting services provided by multinational firms.

Such digital services pose challenges as there is no physical trace of the

transaction at the border, and sellers often do not have a domestic pres-

As provided for in the OECD (2017) VAT guidelines. A major reform along these lines was introduced in

the EU in 2015 to ensure taxation at destination on intra-EU supplies, which previously was based on origin

(the location of the supplier). See Dale and Vincent (2017).

Digital Services, Digitally Delivered Goods,

and VAT

CCHAPTERHAPTER

ence. While non-registered businesses and final consumers are sometimes

theoretically required to self-assess VAT, this tends to be an unenforceable

obligation in practice.

• Imported services provided to businesses. B2B supplies provided by

non-residents are commonly subject to a VAT reverse charge whereby the

domestic business is required to account for the VAT on the imported

service. It can then take an input tax credit (for the self-billed VAT) when

calculating its VAT liability.

• Goods supplied by foreign-based online sellers. E-commerce makes it

easier for foreign companies without a domestic presence to supply goods

to consumers. Currently, it is common for countries to provide a general

de minimis exemption threshold for low-value consignments, allowing for

tax-free supplies. Volumes of these transactions have increased as a result of

digitalization and bringing such transactions into the tax net can be diffi-

cult where goods are imported as personal items.

Adopting and implementing a framework for eectively levying VAT on the

import of digitally delivered services and goods helps ensure a level play-

ing eld for domestic businesses. Resident businesses with a total turnover

exceeding the VAT threshold and selling online directly to resident consum-

ers are required to register and charge VAT on their sales. Local sellers of

goods and services that use digital platforms to access consumers are simi-

larly required to register and remit VAT. With some evidence of e-commerce

activities being particularly benecial for the productivity of small rms in

Asia (Kinda 2019), several countries pursue an explicit and ambitious agenda

for the digital transition, including the promotion of digital entrepreneur-

ship, aimed at encouraging these activities. Levelling the VAT playing eld

for domestic providers of digital services and goods, by ensuring that their

non-resident competitors are liable for the same VAT, can eliminate distor-

tions and contribute to supporting local digital entrepreneurship.

Digital Services in Asia

VAT reform is important due to the rapid growth in digitally delivered

services in Asia. Over the last decade, these more than doubled and now

account for almost half of all service trade in Asia (Figure20). Although an

Requiring the individual consumers to register and fulll the necessary steps to remit VAT on a one-o

purchase on the internet is challenging (see Box4).

Without an agent or bill of entry that would help identify VAT and customs duty payments due and the

responsible taxpayer.

Levelling the playing eld is preferable to pursuing this objective with new tax incentives for digital startups.

In Vietnam, for instance, in 2020 incentives aimed at innovative startups were introduced, including a reduc-

tion of the corporate tax rate to 10percent for 30 years (Decree No.94/2020/ND-CP).

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

important part of these activities is related to business-to-business transac-

tions and does not translate into additional VAT revenue, a non-negligible

share is linked to supplies made to nal consumers. And supplies of some

digitally delivered services to consumers have been strongly aected by social

distancing measures introduced as part of the COVID-19 policy response,

with notable increases in demand for the remote supply of digital entertain-

ment services, for example (Figure20).

Policy Options and Country Practices

Emerging country practices can provide guidance on policy reforms and

administrative arrangements to ensure eective VAT collection on digital

services. Arrangements have been implemented by more than 60 coun-

tries, including a growing number in Asia (Table5) for both e-services and

low-value imported goods. e emerging international norm is to allocate

taxing rights under the VAT to the jurisdiction in which consumption occurs

based on the vendor collection model (see below).

e customer’s location is commonly determined by a combination of the information on the customer’s

payment prole (credit card information, bank account details), residence (billing address or home address),

and their internet access (the internet protocol of the device used or the country code of their SIM card [if

transaction made through a mobile device], location of the consumer’s xed landline). Most countries require

two pieces of nonconicting information to make this determination.

Australia China Hong Kong SAR

Macao SAR Taiwan Province of

Japan Korea, Republic of

Indonesia

Malaysia

New Zealand Philippines

Singapore Thailand

Vietnam

Netﬂix

Viu

iFlix

Sources: United Nations Conference on Trade and Development; and Google Trends.

Note: Streaming example for Indonesia.

Figure 20. Increase in Digitally Delivered Services and Demand for Digital Media

100

2005 07 09 11 13 15 17 19 2016

16 17

17 18 18 18 19 19 20 20

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Streaming service searches (100 = peak popularity)

Digitally delivered services doubled in the past decade … … and demand for media streaming rose during the pandemic.

1. 2.

USD millions

Digital Services, Digitally Delivered Goods, and VAT

e usual rst step is to update VAT legislation to ensure coverage of remote

supplies directly to consumers. Activities covered by such legislation can

either be broadly or specically dened. e OECD VAT Guidelines set

out principles that apply broadly to all internationally traded services and

intangibles which should be taxed according to the rules of the jurisdic-

tion of consumption, removing the need to dene a specic subcategory of

Table 5. VAT on Digital Services—Approaches in Asia-Paciﬁc

Country/ year of

adoption Threshold Scope of Services Collection Method

Reverse

Charge

for B2B

Australia (2017) AUS$75,000 Intangible supplies, anything other than goods or

real property

Vendor Collection Model Yes

Bangladesh

(2019)

BDT 30 million Streaming or download media and web-based

services

Collection by local payment provider Yes

India (2017) No threshold for

nonresidents

For Indian residents:

INR-10 lakh in

annual sales

A service is mediated over the internet or an

electronic network and the nature of which

renders their supply essentially automated

and involving minimal human intervention,

and impossible to ensure in the absence of

information technology

Includes streaming/downloads of music, e-books,

films; cloud-based or downloadable software;

membership fees to online sites, dating portals;

online gambling services; online advertising

Vendor Collection Model Yes

Indonesia (2020) Annual revenue

600m IDR, or

50m monthly

revenue; and 12,000

users annually/1000

users monthly

Foreign digital service providers and

intermediaries included on a government list

Vendor Collection Model Yes

Japan (2015) JYP 10 million per

annum

E-books, streaming media, apps, cloud-based

services and online gaming, services that post

online ads; voice and data telephony services

are excluded

Vendor Collection Model Yes

Singapore

(2020)

Global annual

turnover of at least

SDG 1 million,

making B2C supplies

of digital services to

non-GST registered

customers in

Singapore exceeding

$100,000

Supplies of downloadable digital content,

subscription-based media, software programs,

electronic data management services, support

services performed via electronic means to

arrange or facilitate transactions, which may

not be digital in nature (for example, service

or booking fee charged to the suppliers or

customers)

Vendor Collection Model Yes

Thailand

(September

2021)

THB 1.8m

(more than €60,000)

per annum

A service that includes incorporeal property

delivered through the internet or other electronic

means, where the service is, in essence,

performed automatically, and where the service

cannot be performed without information

technology; focus on streaming services and

online games

Vendor Collection Model Yes

Vietnam (2020) None Download or streaming media, apps, e-books

and online journals, e-learning, software-as-a-

service provisions, gaming, and online gambling

Collection by local payment provider Yes

Sources: KPMG (2021); Avalara; and IMF reports.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

digital services that should be in scope. Australia takes this approach: its tax

legislation applies broadly to the “sale of imported services and digital prod-

ucts” and species that intangible supplies are “anything other than goods

or real property.” e legislation includes digital services, but also applies

more widely to activities such as consulting services.

Other countries such as

Japan have taken the approach of setting out more denitive lists of activi-

ties in their legislation, covering the provision of audio-visual content, cloud

computing and advertising. Many countries are updating and revising their

approaches as international practice crystallizes,

including on the treatment

of intermediary fees (Box3).

Some countries decided initially to list companies in scope rather than

activities, which brings its own challenges. is approach has been taken

by Indonesia

through the periodic publication of company lists. e tar-

gets were initially the largest companies providing digital services. Indonesia

then gradually expanded the list to include more companies.

While the

idea of targeting just a few large players initially may help address concerns

on administrative burdens created by the new rules, it comes with its own

challenges of needing to identify relevant companies and creates distortions

between included and excluded suppliers. A self-assessment approach seems

more viable in the long-run. Increasing adoption of similar rules globally and

initial country experience suggests that perceived reputational costs associ-

ated with non-compliance tend to be large enough to ensure registration and

constructive engagement with major companies.

Imported services provided to registered VAT payers are usually subject to

reverse charge rules or, where this is not the case, countries are in the process

of implementing such rules. For example, Singapore implemented reverse

charge regimes for B2B supplies of imported services. Issues can, however,

arise regarding the treatment of large entities (government entities, nancial

and education institutions, and so forth) that make exempt VAT supplies.

Where the recipient uses imported services wholly or partly to make exempt

supplies, there is an incentive to source services, such as virtual learning oer-

e EU broadly denes the nature of in-scope digital or electronically supplied services to be covered under

new VAT legislation. e EU VAT Directive, species electronically supplied services to mean “services deliv-

ered over the internet or an electronic network and the nature of which renders their supply essentially auto-

mated and involving minimum human intervention, and impossible to ensure in the absence of information

technology.” A list of examples is provided in the accompanying VAT regulation, along with selected exclusions.

In some cases, exemptions are explicitly carved out for example, online gaming (Norway), professional ser-

vices provided over email (EU), and the provision of education and health services through digital means, areas

that are typically zero-rated in domestic legislation in these countries.

Other examples outside the region include Argentina and Costa Rica.

e Indonesian Directorate General of Taxation issued the rst list in July 2020. is included companies in

the spotlight of the digital tax debate, namely Amazon, Google, Netix, and Spotify. Four subsequent lists were

published between July and November, bringing the total number of in scope businesses to 46.

Digital Services, Digitally Delivered Goods, and VAT

ings, from abroad to limit unrecoverable input VAT. An extension of reverse

charge rules to cover these entities can help prevent the bias.

e most common administrative approach to implement these legal changes

is the vendor collection model (Brondolo and Konza 2021).

Under this

model, in line with the OECD guidelines, the liability of payment of the

tax by and large rests with the nonresident provider of the service, who

is required to register. Countries rely on voluntary compliance through a

simplied registration process for nonresident providers with activity above

a mandatory registration threshold.

is typically requires issuing guid-

ance on making payments for the VAT due through a simplied online

registration and compliance process.

Modelling these on approaches intro-

duced by other countries is advisable to minimize compliance costs for large

digital providers.

Several countries are planning on making marketplaces fully liable for VAT

collection on low-value consignments. In the EU and the United Kingdom,

the decision to remove the low-value goods exemption threshold has been

accompanied with guidelines making marketplaces the deemed supplier for

low value imported goods facilitated by them.

e same requirement could

allow countries in Asia to reduce or abolish their exemption threshold for

low-value imported goods without incurring unmanageable collection costs.

ere are some exceptions. In Argentina, Azerbaijan, and Bangladesh, for example, the liability falls not on

the non-resident supplier but on the local payment provider. Where that is the case, specication of transac-

tions for which payment providers need to withhold VAT is required, likely narrowing the scope of covered

supplies in practice. While this approach can thereby help address compliance management challenges, it is

unlikely to be a desirable long-term solution in most countries. A hybrid approach is pursued in Costa Rica,

where the government does allow voluntary compliance by companies on the in-scope list, but if they do not

comply, the payment is withheld by card issuers (for example, Visa, MasterCard).

resholds for cross-border digital services for VAT registration are typically at the same level or below the

domestic requirement for mandatory registration. Some countries do not include a threshold, even if one exists

in domestic legislation (for example, Moldova), or a modied lower threshold may apply. As part of its general

rules, Indonesia provides for a second threshold related to customer trac levels, which is used in conjunction

with the monetary threshold—the threshold is reached if the amount of trac or access in Indonesia exceeds

12,000 users annually or 1,000 users monthly. As discussed above, currently, however, registration requirements

are in practice limited to companies directly referenced in regularly published ocial lists.

No input credits can be claimed by foreign registrants in the simplied registration process. Consequently,

abuse risks are less of a concern than with regular registrants. If a foreign service provider wants to claim input

tax credits for supplies made in another country, the usual requirement is to establish a place of business in the

country and to go through the regular registration process.

From July (January) 2021, the EU (and United Kingdom), require platforms to withhold and remit VAT

on low-value parcels on behalf of sellers.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Revenue Potential

Estimates suggest that the direct short-term revenue potential of including

imported digital services aimed at nal consumers and purchases of goods

online ranges between 0.02 and 0.11percent of GDP. When Australia

introduced its GST on digital services in 2017, it was expected to generate

AUD 350million (0.02percent of GDP) over two years.

In ailand the

expectation is to raise about THB3billion (0.017percent of GDP) from

the implementation of a 7percent VAT on nonresident service provid-

ers in 2021.

Estimates based on survey data suggest that charging VAT

on remotely delivered digital services and some goods to customers could

directly increase overall VAT revenue by between 0.04 and 0.11percent

of GDP in Bangladesh, India, Indonesia, the Philippines, and Vietnam

(Figure21).

is initial revenue gain can become larger through indirect eects. Gov-

ernments can realize potential additional benets from including digital

services and e-commerce in the VAT net by (1) using the large amount of

information held by digital platforms to enhance compliance with VAT,

other taxes, and other taxpayers and (2) using the platforms as tax collection

agents. Options for this include requesting information collected by digital

marketplaces on the income of suppliers operating through their platforms.

is information can then inform compliance management, for example, in

the tourism sector and of mobility services. is can signicantly contribute

to revenues.

Introducing reporting obligations to obtain information on

consumption and income generated via digital platforms can thus produce

important additional benets for governments.

Australia introduced 10percent GST on cross-border sales of services and digital products imported by

Australian consumers on July 1, 2017, following enactment of Tax and Superannuation Laws Amendment Bill

2016. e budget initially estimated revenue collection of A$150million during the rst year (FY2017–18),

followed by A$200million in FY2018–19.

https://www.avalara.com/vatlive/en/vat-news/thailand-vat-on-digital-services-near.html.

Applying the standard VAT rate and assuming that 100percent of transactions of digital media con-

tent, 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 nal

consumers and/or unregistered registered entities. For details on the Statista survey see also discussion

in section 2 on Digital Services Taxes.

In Croatia, for instance, a compliance management campaign launched in 2018 drew on a compari-

son of domestic tax returns with digital platform data regarding hotel and lodging accommodation sold on

behalf of Croatian suppliers. About 40percent of Croatian vendors using the platforms covered in the cam-

paign either did not register or declared signicantly less income for tax purposes than they received from

platform-facilitated sales (World Bank 2021).

Recent guidance provided by OECD (2020b) on model reporting rules for platform operators provide a

useful reference framework. See also OECD (2019) on the dierent approaches to leveraging the prominent

role of digital platforms for the collection of VAT.

Digital Services, Digitally Delivered Goods, and VAT

ere is also potential to rely on platforms to widen the VAT net for domes-

tic activities. Canada, for instance, announced revisions to VAT rules for

accommodation/hospitality services facilitated by marketplaces/platform

providers. ey include both a requirement for marketplaces to report infor-

mation on the property owner or suppliers using their platforms to the reve-

nue services from 2022. In addition, there is a requirement to collect tax on

supplies made through their platforms by all nonregistered domestic suppli-

ers, including those considered to be small suppliers below the current VAT

registration threshold.

is practice has also been adopted in India

where

platforms are required to remit GST to the government for suppliers whose

turnover is below GST registration thresholds (Box4). is practice is not

common but may evolve and become more widespread in the coming years

as it is a particularly attractive option for countries in the region with large

compliance gaps driving low VAT eciency (Figure21). Relatedly, it would

be an eective means to mitigate potential negative impacts on VAT revenue

from the growth of small suppliers in the sharing economy.

Fall Economic Statement, 2020, Annex4

https://www.budget.gc.ca/fes-eea/2020/report-rapport/anx4-en.html.

rough the use of P2P platforms, increasingly ecient small businesses may better compete with and

displace larger incumbents. If the rise of the sharing economy means that incumbents are being displaced and

replacement P2P activity remains below tax thresholds, governments risk losing revenue as income and prots

are dispersed across many smaller businesses instead of concentrated in large protable companies (Aslam

and Shah 2017).

Bangladesh Cambodia Indonesia Nepal

Philippines Sri Lanka Thailand

Digital advertising

Digital media

E-commerce

E-services

Mobility services

Travel & tourism

Share of GDP (RHS)

Sources: Statista; and Tax Policy Assessment Framework.

Note: Statista estimates are for 2019.

Figure 21. Survey-Based Estimates of Direct VAT Revenue Potential and VAT Efﬁciency in Asia

0.7

0.6

0.8

0.9

0.3

0.4

0.2

0.5

0.1

Bangladesh India Indonesia Philippines Vietnam 2000

03 06

09 12 15 18

Expanding VAT regimes can contribute directly to revenue collection ...

... and indirectly, by improving compliance/VAT c-efﬁciency.

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

USD million

1. 2.

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Some of the largest peer-to-peer platforms operating in Asia include Alibaba and

DiDi Chuxing in China, Ola in India, Grab in Indonesia, and some US platforms

that operate across the region: Airbnb, Amazon, BlaBlaCar, and Uber. One area that

often requires clarication is the approach to intermediation services provided by

such platforms.

In the context of goods or services provided through a digital marketplace/intermediary,

it is necessary to distinguish between the consideration for payment of the underlying

good or service and the fee associated with the use of the digital platform.

In terms of commission/intermediary fees, some marketplaces charge service fees only

to sellers, which would commonly apply reverse charge rules in a cross-border context.

Sometimes fees are, however, charged to both sellers and consumers. For example,

in the case of Airbnb, both hosts and guests are charged fees. e guest’s service fees

should be subject to VAT, but it is not always clear who gets to tax this fee. Given

the importance of tourism activity for many countries in Asia, clear guidance that

the service fee needs to be remitted based on the place of consumption of the under-

lying good can help ensure that the fee is not allocated to the country where a guest

normally resides.

e VAT treatment of the underlying good/service (for example, provision of rental

accommodation), a taxi ride, or the sale of a physical good through a digital platform

would usually be dealt with under existing domestic legislation, with the seller of the

physical good/service liable to register and remit VAT, subject to domestic registration

thresholds and a credit provided for the VAT paid on a fee for using the platform. In

the case of accommodation rental services through platforms such as Airbnb, similarly,

the liability for payment of VAT on the accommodation lies with the host, if they meet

VAT registration thresholds.

Signicant controversy remains as to the VAT liability of ride-sharing companies, with

Uber being at the center of a number of national court challenges. Since Uber classies

itself as an intermediation service provider, the company considers itself to be simply a

service provider to drivers, who are self-employed individuals; Uber does not book their

income as its own. Since most drivers would not earn enough income through the app

per year to meet VAT registration thresholds, limited VAT is collected in most coun-

tries from Uber drivers. However, this might change due to a recent court challenge in

the United Kingdom, which dened Uber drivers as workers.

If Uber is classied as a

transportation company with employed drivers, its entire turnover from the provision

of services would be subject to VAT. Legislation is evolving in this area, and we may see

changes and dierentiated treatment depending on the type of platform in future.

See https://www.supremecourt.uk/cases/docs/uksc-2019-0029-judgment.pdf for judgement details.

Box 3. Ensuring Taxation of Intermediary Fees

Digital Services, Digitally Delivered Goods, and VAT

Integrated Goods and Services Tax (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 are dened as “services whose delivery is mediated by information

technology over the internet or an electronic network and the nature of which renders

their supply essentially automated and involving minimal human intervention and

impossible to ensure in the absence of information technology and includes electronic

services such as: (1) advertising on the internet; (2) providing cloud services; (3) provi-

sion of e-books, movie, music, software and other intangibles through telecommunica-

tion 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.” Since the place of supply determines the taxable jurisdiction

under any VAT-type consumption tax, the place of supply of OIDAR services is dened

to be the location of the recipient of services.

OIDAR services supplied by MNEs located outside India, to any registered entity in

India is taxable under the reverse charge mechanism. However, where the services are

directly provided to the consumers by MNEs with no physical presence in India, it is

not practicable to require the individual consumers to register and fulll the necessary

compliances under the IGST for a one-o purchase on the internet. erefore, the stat-

utory burden for payment of IGST is cast upon such MNEs and a special compliance

regime established to enable them to fulll their compliance obligations and minimize

the risk of revenue leakage.

In case the OIDAR B2C services are arranged or facilitated by an intermediary located

outside India, the intermediary is treated as the supplier of the said service, except when

the intermediary satises the following conditions:

1. e invoice issued by the intermediary clearly identies the nature of the service

and its supplier in the foreign jurisdiction.

2. e intermediary neither collects or processes payment in any manner nor

is responsible for the payment between the service recipient and the supplier

of such services.

3. e intermediary involved in the supply does not authorize delivery.

Box 4. GST Compliance Mechanism for Supply of Digital Services by MNEs in

the Case of India

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

4. e general terms and conditions of the supply are not set by the intermediary

involved in the supply but by the supplier of services.

e special compliance regime comprises: (1) a simplied registration scheme; and (2) a

simplied reporting and payment system.

Typically, in cases where the OIDAR ser-

vice provider and receiver are both located in India, the general registration rules apply.

However, where the service provider is located outside India but provides OIDAR

services B2C, the MNE service provider is required to obtain registration through a

representative in India or directly, under the simplied registration scheme.

Every registered OIDAR service provider providing B2C services from a place outside India to a

person in India is required to le 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. e simplied form calls

for minimal information with a view to minimizing the cost of compliance. Toward this objective, such

service providers are also exempted from ling annual returns. Similarly, they have also been allowed to

remit the payment of tax through the SWIFT mode. However, other categories of OIDAR service pro-

viders (like those supplying OIDAR services from India) are required to le (1) regular monthly returns

(GSTR 1, 2, 3, or 3B) prescribed for general categories of registered persons and (2) annual returns.

Box 4. GST Compliance Mechanism for Supply of Digital Services by MNEs (continued)

Digital Services, Digitally Delivered Goods, and VAT

Pillar 1, Amount A

Revenue estimates are derived using data in country by country reports

(CbCR). In 2017, more than 60 tax jurisdictions have required large MNEs

headquartered in their jurisdictions to report on their income, taxes paid, and

other indicators of economic activity such as employment, assets, and sales

by origin (for both related and unrelated parties) on a country by coun-

try basis. Of these, 25 countries have publicly released their CbCRs on an

aggregate basis.

Estimating sales by destination begins with sales by origin for each

parent-country and aliate-pair from the CbCR data (say, sales of US MNE

aliate located in Mexico). en the export share is applied to determine the

component that is exported and the component that is sold domestically in

Mexico. e export share is taken either from the OECD Analytical Activi-

ties of MNEs database (dierentiating between exports by domestic MNEs

and foreign MNEs) or from the country’s national accounts. For the exported

component, the bilateral trade matrix, from the World Bank’s World Inte-

grated Trade Solution, of the producing country (that is, Mexico), is used to

approximate the destination of these exports. ese exports are then summed

by destination country. e exports are then added to the domestic sales

made by a US MNE aliate in that country (if any). For example, Mexican

exports to Nicaragua would be added to any US MNE aliate sales made

directly in Nicaragua.

To estimate the revenue eects of Amount A, the authors rst aggregate the

global prots and losses of MNEs by headquarter country. Sales to unrelated

parties are also aggregated by MNE headquarter country. Aggregate routine

prot is then dened as 10percent of aggregate unrelated party sales. e

dierence between prot and routine prot is dened to be the residual.

Annex 1. Methodology

A portion (20percent) of the residual is then allocated to each jurisdiction

based on that jurisdiction’s share of sales by destination for that MNE head-

quarter country. For example, India’s share of US MNEs residual prot is

determined by its share of US MNE sales.

Since Amount A is a reallocation of the tax base, jurisdictions must also

relinquish part of their taxing right. at is, each jurisdiction is assumed to

“contribute” to the pool of residual prot to be reallocated. is contribution

is in proportion to the jurisdiction’s current share of residual prot. In prac-

tice, each group can nominate the aliate(s) and hence jurisdiction(s) that

will pay the new tax liability under Amount A.

For each jurisdiction, the tax base under Amount A is the dierence between

their allocation of residual prot under sales by destination and their current

allocation of the residual. To estimate tax revenue eects, the authors assume

that the statutory CIT rate is applied to this tax base.

e total change in revenue for a jurisdiction is the sum of revenue

changes across each headquarter country included in the dataset (that

is, 25 countries).

Formulary Apportionment

Revenue estimates are derived using data from published country by country

reports, as well as data from the US Bureau of Economic Analysis (BEA) on

the activities of US MNEs.

US Bureau of Economic Analysis

e BEA publishes annual data on the aggregate nances and operations of

US-based MNEs, with separate statistics for US parent companies and their

foreign aliates in 199 countries. For majority-owned aliates in 52 coun-

tries, there is detailed information on the foreign income tax paid, the prot

they report, and the level of xed assets in each country. It is data on these

aliates that are used for this analysis.

Regarding information on sales, the BEA provides information on sales by

origin as well as partial data on sales by destination. Specically, for each

country where an aliate is located, it reports goods and services supplied

to unaliated persons in either the United States, the host country, or other

foreign countries. For about 10percent of sales to unaliated persons, the

destination country is not specied in the BEA data. However, in the bench-

mark survey years, data are provided on the destination region (that is, Can-

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

ada, Europe, Latin America and Other Western Hemisphere, Africa, Middle

East, and Asia-Pacic) for these sales. To allocate sales to countries within

each region specied by the BEA, data on bilateral exports is used.

To estimate the revenue eects of formulary apportionment, prots and

losses declared in each jurisdiction are rst aggregated to determine the tax

base at the global level. is is then apportioned to each jurisdiction using its

share of the factor under consideration. For example, under the employment

factor, India’s share of global US MNE prot is determined by its share of

total employment by US MNEs. e tax rate applied to this tax base is either

the Eective Tax Rate (ETR) calculated from the data, or where the ETR is

an outlier, the statutory tax rate for that country is used.

Country by Country Reports

e same CbCR data set used to estimate the revenue eects under Amount

A is also used to estimate the revenue eects of FA.

To estimate the revenue eects of formulary apportionment, prots and losses

declared in each jurisdiction are aggregated by MNE headquarter country to

determine the tax base. is is then apportioned to each jurisdiction using its

share of the factor under consideration, by MNE headquarter country. For

example, India’s share of a Chinese MNEs prot is determined by its share of

Chinese MNE sales. e tax rate applied to this tax base is either the ETR

calculated from the data on prot-making rms, or where the ETR is an

outlier, the statutory tax rate for that country is used.

Annex 1. Methodology

is annex shows the revenue eects of formulary apportionment for indi-

vidual economies. e table on the next page presents the change in CIT

revenue collected from MNEs if there is global adoption of formulary

apportionment (percent of GDP). e results are presented based on var-

ious apportionment factors, using the CbCR data set. For example, the

Employment column shows the change in total CIT revenue from MNEs, if

the share of employees in each economy is used to allocate the consolidated

prot of the MNE.

Annex 2. Detailed Formulary

Apportionment Results

Annex Table 2.1. Detailed Formulary Apportionment Results

Sales Employment Asset

Australia 0.07 –0.02 0.38

Bangladesh 0.00 –0.04 –0.02

Bhutan –0.07 –0.11 –0.13

Brunei Darussalam 0.04 0.01 0.02

Cambodia 0.09 0.05 0.02

China –0.02 0.11 –0.03

Fiji 0.04 0.43 0.25

Hong Kong SAR –0.20 –1.00 –0.91

India –0.51 0.19 –0.51

Indonesia –0.10 0.77 0.08

Japan –0.07 –0.70 –0.05

Korea –0.28 –0.54 –0.19

Lao P.D.R. 0.05 0.10 0.06

Macao SAR 0.48 –0.05 0.05

Malaysia –0.08 0.58 –0.12

Maldives –0.19 –0.21 –0.12

Marshall Islands 0.00 0.00 0.00

Mongolia –0.04 0.08 0.15

Myanmar 0.05 0.02 0.03

Nepal –0.08 –0.15 –0.15

New Zealand 0.10 0.14 –0.17

Papua New Guinea 0.20 0.19 1.95

Philippines –0.01 0.79 –0.06

Samoa 0.00 –0.01 –0.01

Singapore –0.02 –0.30 –0.22

Solomon Islands 0.36 0.29 0.14

Sri Lanka 0.06 0.05 –0.03

Taiwan Province of China –0.07 0.15 –0.05

Thailand –0.38 0.44 –0.22

Timor-Leste –0.04 –0.04 –0.07

Tonga 0.00 –0.01 –0.01

Vanuatu 0.00 0.00 0.00

Vietnam –1.87 –1.85 –2.75

Median –0.01 0.01 –0.03

Mean –0.08 –0.02 –0.08

DIGITALIZATION AND TAXATION IN ASIADIGITALIZATION AND TAXATION IN ASIA

Aslam, Aqib, and Alpa Shah. 2017. “Taxation and the Peer-to-Peer Econ-

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