As Asia emerges from the economic crisis of the late 1990s, an important feature of its economic resurgence over the past year has been the investment activity in internet start-ups in Asian stock markets.
The International Data Corporation (IDC) forecasts that there will be 77.2 million internet users in Asia (excluding Japan) by 2003, compared with 12.9 million as at the end of 1998. Revenues from e-business transactions in the non-Japan Asian region are expected to grow from $723 million in 1998 to $51.3 billion in 2003, representing a 135% annual compound growth rate.
For any e-business looking to expand into the Asia-Pacific region, there are a number of taxation issues that need to be considered, not only from the perspective of the e-business trader itself but also from that of its customers. This article highlights some of these tax issues.
Most countries in Asia will impose tax on income derived from business transactions carried within their borders, either by a fixed business presence or by employees of the foreign trader. An important issue is whether the mere presence of a foreign trader s website (that is, the web server and the computer programs that run the website) in the country without any other type of presence is sufficient to trigger this taxable presence test, so that the country can impose tax on the income generated from transactions conducted through the website. This is currently being debated internationally by major trading nations through the forum of the Organization for Economic Cooperation and Development (OECD).
Although the current attitude in many Asian countries is probably that a website by itself is not a taxable presence without something more, a lot will also depend on what actual functions the website is performing. Many Asian countries, such as Australia and Japan, are likely to closely follow the OECD s future pronouncements on this issue.
To service the Asia-Pacific region, foreign traders may choose to set up a regional head office or a local presence in each country. Tax incentives may be available to e-business traders in various Asian countries which will help them to minimize their global tax bill. Singapore has an approved cyber trader incentive, which offers a 10% concessionary tax rate on all offshore e-business income earned by companies set up in Singapore together with generous investment allowances on capital expenditure. Hong Kong will only impose 16% profits tax on e-business income derived from sources within its boundaries. Even Australia offers an additional 25% tax deduction for the costs of eligible research and development.
Most countries in Asia will impose withholding taxes on certain payments by residents to non-residents such as dividends, interest and royalties. Some countries will impose withholding taxes on technical service fees. Where customers in these Asian countries make payments for the download of digitalized goods, such as computer software, music and video images, the issue arises as to what is the nature of these payments for tax purposes.
Where the transaction is characterized as a sale, then arguably it will not be subject to tax in the customer s country if it is not attributable to a taxable business presence there (see above). Some countries, however, may regard such payments as being in the nature of a royalty, and therefore subject to a withholding tax on the gross payment if it is made to a non-resident e-commerce trader.
In cases where the customer does not withhold the tax from the payment and the tax authorities have no recourse against the foreign trader to collect the tax due, they will collect the tax from the customer and may impose penalties for failure to withhold. Hence an e-business trader needs to be aware of the likely tax treatment of its revenue streams from the perspective of its customers tax systems.
Many countries around the world, including Australia, Japan, the PRC, Singapore and Taiwan, also impose transaction taxes such as a value-added tax (VAT) or a goods and services tax (GST). These are taxes are based on the value of each sales transaction or provision of service which takes place.
Where the sales transaction or provision of service takes place in a country with a customer there, they may be subject to VAT or GST. If so, the foreign trader may be required to charge the VAT or GST to the customer and pay the tax to the local tax authority. This would require the foreign trader to register with the local tax authority for VAT or GST collection purposes. For example, a Hong Kong e-business trader selling goods through a website to a PRC customer may be required to charge VAT on the sales transaction and remit the VAT to the PRC tax authorities.
Other countries may require the customer himself to self assess the VAT payable on the transaction and pay that to the local tax authorities. Because of the diversity of indirect tax systems in Asia, the e-business trader will need to carefully consider their indirect tax requirements for each country in which their customers are located.
The nature of the transaction conducted through a website is also important for indirect tax purposes, as the taxing points may change depending on whether the transaction is treated as a sale of a good or as provision of a service.
The setting up of a website will require costs such as software development costs, computer hardware purchases. It will be important that the e-business trader can match up the expenses with the revenues generated by the website to minimize the amount of taxable net income on a group basis. For example, it would be inefficient if the e-business trader was paying taxes on revenues booked in high tax jurisdictions in Asia, but was incurring tax losses in low tax jurisdictions.
Where expenditures are recharged to operating companies by way of management fee or cost recharges, most tax authorities in the region will require the existence of supporting documentation to support that these re-charges are calculated on normal commercial terms or 'at arm s length'. Some relatively high tax countries in Asia such as Australia and Japan are particularly vigilant about cross-border transfer pricing.
Alex Yuen is a Senior Tax Manager at PricewaterhouseCoopers.