Asia to see disparate impacts from global digital tax reforms, IMF reports

By Doug Connolly, MNE Tax

Asia has a substantial digital market and is home to some of the world’s biggest tech companies, but global tax reform efforts to address digitalization of the economy would likely have modest revenue effects in the region on the whole, according to a September 14 report from the International Monetary Fund. However, the effects would be uneven across countries, and the impact of the changes could grow over time.

Tech industry in Asia

Asia has home-grown large digital businesses that rival the US tech giants in size, the IMF report notes. China alone has several of the largest e-commerce companies in the world, measured by market share and total sales. For instance, Alibaba, which operates online marketplaces in China, has a 38% market share of global e-commerce (although with smaller total transaction value than Amazon).

However, while the US tech giants largely operate globally, their Asian rivals mainly operate within domestic markets. Nonetheless, the Asian companies have comparable profitability to the US companies and seem to rely on intangible assets to the same extent.

The information and communications technology sector accounts for more than 12% of total value added in South Korea, 7% in India, and 6% in Japan. In China, the sector is estimated to be about 5.6% of GDP, and in urban areas of the country the sector’s employment share is larger than in many OECD countries.

Across the region, Australia and New Zealand have highly digitized service economies, but they are less prominent in tech manufacturing than China, Japan, and South Korea. India and Indonesia also have rapidly growing e-commerce markets and are seeing growth of some emerging local firms, while Singapore serves as a hub for the tech sector’s businesses. Several less-developed Asian countries have lower rates of internet connectivity and few local tech firms.

Global tax reform implications

Global tax reforms under the OECD/G20 Inclusive Framework negotiations would likely have modest effects on tax revenues in the region, according to the report. Nonetheless, the reallocation of taxing rights for a portion of multinational profits under Pillar 1 would change where tax revenue is paid in the region, and there would be winners and losers from such reforms. Moreover, the revenue effects would likely increase over time with the pace of digitalization.

Gaining the ability to tax US and other foreign businesses operating digitally in the region – with few tangible assets that would currently create a significant taxable presence – would result in some revenue gains for Asian countries. However, countries that are home to their own tech giants could also lose some revenue if those firms see additional taxation in countries where they are expanding.

Investment hubs and low-tax jurisdictions in the region like Hong Kong would likely lose revenue, while countries with large bases of digital customers but limited headquarters of large multinationals like Australia would stand to gain revenue. Results would be less clear for countries like China that have both large markets and significant residence of large multinational companies.

The OECD-led global tax reforms are also tied to the removal of unilateral digital services taxes and could decrease revenues overall for countries implementing such taxes. Within the region so far, India and Malaysia have implemented digital services taxes, while Indonesia has enacted such a tax but not yet implemented it. New Zealand and Vietnam are also considering such taxes. Countries in the region that are home to large tech companies – like China, Japan, and Korea – have shown less interest in digital services taxes.