The Asian digital media market is projected to reach $165.1 billion in 2022. As it offers a promising revenue opportunity, it is not surprising that many European sellers are looking to the Asia-Pacific (APAC) countries to expand their customer base. Tax considerations should be an important factor in any international expansion plans, as the cost of meeting tax compliance obligations in some APAC countries may not be insignificant.
Part one of this article discussed VAT/GST rules for foreign providers of digital services that apply in India, Indonesia, and Japan. Part two examines the special tax regimes of Malaysia, Singapore, South Korea, and Taiwan.
Malaysia levies two types of indirect taxes—sales tax and service tax—which replaced the Malaysian GST in September 2018. Sales tax is a single-stage tax applied to sales of locally manufactured taxable goods as well as to taxable goods imported for domestic consumption. Service tax is charged at 6% on any taxable services provided in Malaysia by a registered person or self-assessed on any imported taxable services.
With effect from Jan. 1, 2020, foreign businesses providing digital services are liable to register for service tax if the total value of digital services provided to customers in Malaysia within a period of 12 months exceeds 500,000 Malaysian ringgit ($107,500).
The 12-month period can be determined based on either the historical or the future method. The historical method uses the value of digital services in any month plus the value of digital services provided during the 11 months preceding that month. For the future method, the value of digital services in any month plus the expected value of digital services for the 11 months succeeding that month must be calculated. A business may have reasonable grounds to expect its value of digital services to exceed the threshold if they have signed a written contract to provide digital services or received purchase orders from customers.
An application for registration must be submitted not later than the last day of the month following the month in which the threshold has been exceeded. The effective date of registration is the first day of the month following the month in which the application is made.
Malaysia uses the same definition of digital services as the EU. “Digital services” are defined as any services that are delivered or subscribed over the internet or other electronic network which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.
The obligation to collect 6% service tax applies to both business-to-business (B2B) and business-to-consumer (B2C) sales. Business recipients that generally apply the reverse-charge mechanism to account for tax on services purchased from abroad are exempted from doing so if service tax has already been collected by the foreign seller. If a sale of digital services is facilitated by an online marketplace, the marketplace (and not the seller) is required to register and collect service tax.
Service tax returns (form DST-02) need to be submitted every quarter by the end of the month following the quarter. If supplies of digital services are made in foreign currencies, they must be converted to Malaysian ringgit using one of the following conversion rates: the daily conversion rate; the conversion rate at the end of each taxable period; or the conversion rate at the time of submitting the DST-02 return.
Foreign businesses are required to issue invoices or other documents containing the basic transaction details: date of invoice, seller’s registration number, a description sufficient to identify the digital services provided, the total amount payable excluding service tax, the rate of service tax, and the total service tax chargeable shown as separate amount.
With effect from Jan. 1, 2020, foreign businesses may be required to register under the overseas vendor registration (OVR) regime and collect GST on B2C sales of digital services to customers in Singapore. The registration obligation applies to foreign sellers whose annual global turnover and the value of digital services made to non-GST registered customers in Singapore exceeded S$1 million ($695,000) and S$100,000 respectively, in a calendar year, or are expected to exceed these amounts in the next 12 months.
The Singaporean definition of digital services is identical to that under EU VAT law. Currently, digital services are subject to the standard rate of 7%, but the Singapore government has announced that the standard rate will be raised in two stages, to 8% from Jan. 1, 2023 and to 9% from Jan. 1, 2024.
Upon registration for GST, foreign businesses are required to submit a simplified GST return quarterly stating the value of digital services and tax charged on these services. If supplies of digital services are made in foreign currencies, the relevant amounts must be converted into Singapore dollars using the prevailing exchange rate, which is reflective of the Singapore money market at one of the following time periods: the time of supply, the end of taxable period, or the time of filling the GST return. Foreign businesses are not required to issue GST invoices. However, a simplified GST invoice or a receipt must be issued if requested by the customer.
Foreign businesses are not required to charge GST on supplies of digital services made to GST-registered customers that have provided their GST registration numbers. The GST-registered customers will have to account for tax on these overseas purchases if they fall within the scope of reverse charge. If digital services are supplied to customers in Singapore via an electronic marketplace, the operator of the electronic marketplace (and not the seller) is required to charge and account for GST.
From Jan. 1, 2023, GST will be extended to cover all imported remote services. “Remote services” are defined to mean any services where, at the time of the performance of the service, there is no necessary connection between the physical location of the recipient and the place of physical performance. Examples of such services include advisory, consulting, and research services. Similar rules already apply in Australia and New Zealand.
Foreign providers of digital services have been required to charge 10% VAT on their sales to South Korean consumers (B2C) since July 1, 2015. There is no registration threshold—a foreign business must apply for the simplified business operator registration via the NTS Hometax system within 20 days from the date when it begins business operations in South Korea. A competent tax office will allocate a simplified business operator registration number within five days of application.
South Korea defines a digital service as any of the following:
- Any game, audio or video file, software or other works that are manufactured or processed in the form of code, letters, voice, sounds or images,
- Services to run advertisements,
- Cloud computing services, or
- Intermediary services that result in goods or services being leased, used, or consumed in South Korea.
Digital services are subject to the standard rate of 10%.
VAT returns must be submitted on a quarterly basis by the 25th of the month following the reporting quarter end. All amounts must be reported in Korean won. Amounts received in foreign currency must be converted into Korean won using the exchange rate of the Seoul Money Brokerage Services as at the last day of the relevant filing period. Foreign businesses with the simplified business operator registration are not required to issue VAT invoices on their B2C sales.
Foreign businesses are not required to register in South Korea if they sell exclusively to Korean businesses (B2B sales). If a Korean customer provides its VAT registration number, the foreign business can easily check its validity on the NTS Hometax website to confirm the business status of its customer. If sales of digital services are facilitated by online marketplaces, the marketplace operator must register and collect Korean VAT instead of the foreign seller.
All sales of goods and services in Taiwan, as well as the importation of goods into Taiwan, are subject to business tax. There are two types of business tax: VAT and gross business receipts tax (GBRT). VAT is a general tax, whereas GBRT is only applicable to specified sectors,such as financial institutions and small businesses.
With effect from May 1, 2017, foreign businesses providing digital services to Taiwanese individuals (referred to as “foreign e-commerce operators”) are required to register for VAT if their sales of these services exceed NT$480,000 ($15,000) for the previous year or the current year.
An application for tax registration must be submitted via the eTax portal. All required documents (for example, certificate of registration with domestic tax authorities, certificate of incorporation) written in any language other than Chinese must be accompanied by a Chinese translation.
Digital services are defined as:
- Services downloaded via the internet saved to computers or mobile devices,
- Services used online without being saved into any devices (including online games, advertisements, audiovisual content and interactive communication), or
- Other services supplied through the internet or other electronic tools.
All digital services are taxed at the standard rate of 5%. The obligation to collect VAT applies only to B2C sales.
VAT returns must be filed bimonthly prior to the15th day of the following bimonthly period. If the sales revenues are in currencies other than New Taiwan dollars, the amount should be converted to New Taiwan dollars at an exchange rate announced by the Bank of Taiwan on the last date of the bimonthly VAT filing.
Taiwan has unique and very complex e-invoicing requirements. When Taiwan introduced the rules on cross-border digital services in 2017, foreign suppliers were exempted from the obligation to comply with the e-invoicing requirements. However, this exemption was removed in 2021.
Foreign businesses providing digital services to Taiwanese individuals are now required to issue electronic government uniform invoices (eGUIs) and send them to the tax administration. Every invoice must be identified with a preassigned eGUI number requested from the tax administration. The government assigns eGUI numbers to registered businesses every two months. E-invoices must be digitally signed and sent to the Ministry of Finance’s invoicing platform within two days after their delivery to customers (which typically occurs in a pdf format).
It is not possible for foreign businesses to connect directly to Taiwan’s invoicing system. Only Taiwan-based businesses can do so. Foreign businesses must use an approved third-party provider to receive eGUI numbers and to report invoice details to the tax administration.
Sales of digital products often trigger tax compliance obligations abroad. Over 90 countries require foreign businesses to charge VAT/GST digital services provided to local customers. The obligation for sellers to register and account for VAT/GST in a country where they are not located creates numerous challenges (particularly when such a requirement arises in multiple jurisdictions) and is especially burdensome for small and medium-sized enterprises which have limited human and financial resources to deal with foreign tax compliance obligations.
In theory, international online sales of digital products should be easy. In 2017, the Organisation for International Cooperation and Development issued recommendations for countries wishing to collect VAT/GST from foreign sellers. The OECD guidance recommends implementing a simplified registration regime for B2C suppliers of services and intangibles, involving intermediaries in the tax collection process whenever possible, using electronic procedures for registration and return submission, and eliminating invoicing obligations.
Many APAC countries follow the OECD recommendations and limit the compliance obligations of foreign sellers to what is strictly necessary for effective tax collection, applying a number of measures that make it easy for foreign businesses to register and collect local tax:
- Scope of services: While most countries limit the tax collection obligation to digital services, some (Singapore, Australia, New Zealand) expand the scope to all remote services provided to local consumers. This eliminates classification problems, i.e. whether a service is digital or non-digital.
- Customer status: Although most APAC countries require foreign sellers to collect GST/VAT only on B2C sales, Malaysia and Indonesia extended this requirement to B2B sales. This means that foreign businesses will not have to determine the customer status and can apply tax to all sales.
- Single tax rate: APAC countries generally do levy reduced tax rates, meaning that foreign suppliers do not have to figure out which rate to apply.
- Registration thresholds: Some countries (Malaysia, Japan, Singapore) provide generous registration thresholds, exempting small foreign businesses from any local tax obligations.
However, a few APAC countries have implemented quite burdensome compliance obligations that significantly increase the cost of doing business there—for example, the mandatory use of tax representatives in Japan and mandatory e-invoicing in Taiwan.
Complex tax registration and compliance procedures create barriers that may lead to non-compliance or to certain suppliers declining to serve customers in countries that impose such burdens. It is unclear why some countries forgo tax revenue that could be collected if tax compliance was made easier.
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 & operation lead at Stripe.