Digital services can be easily distributed to customers all over the world, and this opens up attractive business opportunities across borders. Unfortunately, however, international online business is not without hurdles. Some digital companies find themselves prevented from venturing into international markets even though these offer great opportunities and significant sales potential. According to a survey by the German Chamber of Industry and Commerce, VAT/GST compliance costs and risks were named as one of the top five obstacles to international expansion.
EU businesses expanding their operations into the Asia-Pacific (APAC) region may be confronted with VAT/GST rules that are completely different from the ones that they are familiar with. The APAC region is far from uniform when it comes to tax compliance, as tax registration and collection obligations vary significantly from country to country.
This article discusses the VAT/GST rules for foreign providers of digital services enacted by some APAC countries. Part One focuses on India, Indonesia, and Japan.
The Indian indirect tax system is quite complex, with GST being levied by both central and state governments on a common base and local businesses facing potential registration obligations in multiple states. Luckily, foreign providers of digital services are not affected by this complexity, as they are required to register only once and charge one type of tax—integrated goods and services tax (IGST), which is equivalent to the sum of central tax (CGST) and state tax (SGST) that is levied on Indian intra-state sales.
The Indian legislation refers to digital services as OIDAR services: online information and database access or retrieval. The IGST Act defines OIDAR services 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.” This definition closely mirrors that for electronically supplied services under the EU VAT legislation.
A foreign business providing OIDAR services to a non-registered recipient in India is required to collect IGST on the sale. For business-to-business (B2B) supplies of such services, GST is payable by the Indian GST-registered recipient under the reverse-charge mechanism. There are no registration thresholds.
The foreign supplier is obliged to register under the simplified registration scheme with the Principal Commissioner of Central Tax Bengaluru West by submitting form GST REG-10. Alternatively, a representative in India can be appointed to register and remit IGST on behalf of the foreign supplier. An application for tax registration needs to be made at least five days prior to the commencement of business activities in India.
GST returns (form GSTR-5A) must be submitted by the 20th day of every month. Although India has very strict invoicing rules requiring invoices to be reported to the invoice registration portal, these rules do not apply to foreign providers of OIDAR services.
The Indian law contains a special rule for online platforms (referred in the GST law as “e-commerce operators”) facilitating supplies of goods and digital services. E-commerce operators are required to register both for GST and for tax collected at source (TCS), regardless of their turnover. If an e-commerce operator receives payments for sales of goods or services facilitated through its online platform, it must deduct 1% of the net value of taxable supplies before transmitting the funds to the sellers. TCS must be transmitted to the tax administration by the 10th day of the following month, together with form GSTR-8 that provides details of sales that were subject to TCS.
The Indonesian VAT regime for foreign providers of digital services has three distinctive features: website traffic must be sufficient to meet the registration threshold; there is no obligation to register until the foreign service provider is asked to do so by the Indonesian tax administration; the obligation to collect tax applies to both B2B and business-to-consumer (B2C) scenarios.
As from July 1, 2020, foreign businesses who sell digital services to Indonesian customers may be appointed as VAT collectors if they meet either of the following thresholds: sales in Indonesia exceed 600 million Indonesian rupiah ($39,400) in a year or 50 million rupiah in a month; or website traffic in Indonesia exceeds 12,000 users in one year or 1,000 in one month. If a seller meets these thresholds, it may ask to be appointed as a VAT collector, but there is no obligation to do so. The seller may wait until it is approached by the tax administration. The tax administration publishes official notifications on a regular basis to announce the appointments of VAT collectors.
The obligation to collect VAT applies to both B2B and B2C scenarios. Although Indonesian businesses are generally required to self-assess 10% VAT under the reverse charge rule on services received from abroad, this does not apply if the seller has been appointed as a VAT collector and charged tax on the sale.
If a foreign business sells digital services through an online marketplace that is appointed as a VAT collector, the operator of the online marketplace is responsible for tax collection. If the same business also sells directly to Indonesian customers, it must collect VAT on these direct sales, provided that it is appointed as a VAT collector. VAT collectors are required to submit a quarterly VAT return by the end of the month following the end of the quarter. Foreign businesses selling to Indonesian customers are not required to issue electronic invoices via the e-Faktur system.
In October 2015, Japan extended the scope of its consumption tax to digital services provided by foreign businesses to Japanese consumers.
The liability for Japanese consumption tax depends on whether a digital service is classified as B2B or B2C. In contrast to other countries, Japan focuses on the nature of the service or the terms of the service contract, rather than the status of the customer, when deciding whether a sale should be regarded as B2B or B2C. There are no “consumption tax numbers” (similar to EU VAT identification numbers) that would indicate that a customer is a business.
Foreign companies that provide B2B digital services to Japanese businesses are not required to charge consumption tax. However, they must clearly indicate that the service recipient will have to account for the tax under the reverse-charge mechanism.
Foreign businesses that provide B2C digital services are required to register in Japan if their taxable sales exceed the registration threshold of 10 million Japanese yen ($69,000) in the base period; and their taxable sales or salaries paid exceed this threshold in the specified period. For sole proprietors, the base period refers to the calendar year two years prior to the current one (for example, the base period for 2021 is 2019). For corporations, the base period is the fiscal year two years prior to the current one. The specified period refers to the first six months of the previous calendar year (for sole proprietors) or the fiscal year (for corporations).
There is a simplified procedure for the registration of foreign businesses providing B2C digital services. However, such businesses are required to appoint a tax representative in Japan if they do not have an office located in Japan. The tax administration maintains a list of all foreign providers of digital services that have registered for consumption tax.
Part Two of this article will discuss requirements in Korea, Taiwan, Singapore and Malaysia.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Aleksandra Bal is indirect tax technology and operation lead at Stripe.