The taxation of digital services in Asia is undergoing rapid transformation as tax jurisdictions align their tax systems with global trends. Understanding these evolving requirements is crucial for U.S. businesses operating in or serving customers in Asian markets.
The new digital tax reality in Asia
With the recent introduction of a value-added tax (hereafter VAT) on digital services in the Philippines, the jurisdiction is increasingly aligned in taxing such digital services, like the EU, UK and jurisdictions like Mexico, Canada and Australia.
Scope and application
The rules apply to service providers, who must be aware of their obligations to register, collect and remit VAT, GST or consumption tax (Japan) amounts if their services qualify as digitally or electronically provided services in the respective jurisdictions.
Digital services definition
Although the definition of digital services varies by region or country, it broadly encompasses any service supplied over the Internet using IT, where the delivery is essentially automated.
For comparison, the EU definition of electronically provided services refers to services delivered over the Internet that are principally automated and involve minimal human intervention.
B2C vs B2B transactions
Value-added or consumption tax targets the local consumer (a nonbusiness person) using or consuming taxable services provided by a business in jurisdictions where such taxes are levied. These transactions are typically defined as B2C (business to consumer) arrangements, distinct from B2B (business to business) transactions where both parties are enterprises or businesses within a VAT, GST or consumption tax context. Under B2B scenarios, most jurisdictions employ a “reverse charge” system which essentially shifts the VAT or GST obligations back to the recipient of the services.
Provider location considerations
Critically, the location of the service providers is irrelevant to the tax collection, if applicable, within the country where the consumer is located.
Business status verification
Service providers typically require information on VAT and GST status, such as a valid VAT or GST registration, to determine whether the recipient is a business or consumer. The transaction must be treated as B2C without such information, requiring local VAT collection.
Registration requirements and thresholds
While the EU offers a centralized, EU-wide system for registration and filing returns covering any EU country’s VAT collections, jurisdictions outside the EU require country-specific registration to collect and remit local VAT amounts for taxable transactions.
Revenue thresholds
Some countries have implemented local revenue thresholds (for example, Thailand US$54K), but most countries’ rules and regulations do not include minimum amounts.
Tax rates by jurisdiction
The applicable rates vary per jurisdiction, ranging from 10% (Japan and Korea) to 18% in India, for example.
Platform providers of digital services
Digital service platforms play a crucial intermediary role in modern e-commerce, leading to specific VAT obligations. These obligations extend beyond traditional service provider responsibilities and create unique compliance requirements for platform operators.
Platform obligations
Similar to the EU, UK and Canada, most jurisdictions have extended VAT collection obligations to platform operators that distribute digital services, even when not the legal owner/provider of the service.
Collection requirements
These provisions typically shift the VAT, GST or consumption tax collection obligation to platforms serving consumers. While platform definitions vary by jurisdiction, generally, when a platform can set the terms and conditions and/or is authorized to collect payments, this collection obligation applies.
Compliance risks and liabilities
Although VAT-type taxes target consumers, providers must collect and remit the applicable tax. Failure to collect effectively transforms a consumer liability into a provider liability, as retroactive assessments for local VAT, GST or consumption tax will be issued to the provider, including penalties and interest. In most cases, retroactive VAT recovery from consumers is impossible as billing and collection occurred years prior.
Special note on U.S. businesses operating in Japan
The U.S./Japan Tax Treaty contains a unique provision making the Internal Revenue Service (IRS) the de facto collection agent for consumption tax liabilities that U.S. entities failed to collect from Japan-based customers. This is currently the only provision of its kind in any U.S. tax treaty that we are aware of, and we have recently observed its implementation.
To learn more about how BPM can assist with your tax compliance needs, contact us.
