E-commerce expansion complicates tax obligations

Bui Ngoc Tuan - Tax partner, Deloitte Vietnam

Overall, the country’s gross merchandise value is expected to reach a total value of $14 billion in 2020, equivalent to a 16 per cent increase on-year. Furthermore, the overall e-economy will likely reach $52 billion in value by 2025, re-accelerating to approximately 29 per cent compounded annual growth rate.

Data provider Statista also forecast that Vietnam’s e-commerce market value reached around $12 billion last year, ranking only after Indonesia, Thailand, and Singapore in Southeast Asia. Consequently, the share of e-commerce in total retail sales has been increasing fast in the country, while the online channels has surpassed modern retail channels in terms of growth in the fast-moving consumer goods market.

Besides global and regional e-commerce giants, streaming services provider Netflix – already present in Vietnam – has also jumped on the e-commerce bandwagon by selling merchandise related to its original TV shows such as The Witcher and Stranger Things. Though the online store has only been launched in the United States, its expansion into other countries and territories could be on the cards.

To minimise the increasing pressure to address a plethora of tax issues arising from cross-border e-commerce, the Ministry of Finance (MoF) has drafted a circular guiding the implementation of some articles of the Law on Tax Administration 2019 and Decree No.126/2020/ND-CP dated last October on tax management of the government. Chapter 9 of the draft circular introduces a tax collection mechanism for overseas individuals and organisations doing business in Vietnam, under the form of cross-border e-commerce or digital services, which earn income from online goods supplies and service provision to individuals and organisations in Vietnam.

The regulations show strong efforts from the MoF to manage cross-border e-commerce transactions and to collect tax from overseas vendors. However, for the majority of transactions under the business-to-customer model – for which the payment for goods and services are personal bank transfer or debit/credit cards – there would be many practical challenges for the tax authorities to manage and collect taxes from such overseas suppliers.

In observing the local e-commerce market in Vietnam, typically an online shop may have many bank accounts to facilitate bank transfer from individual customers. As these are personal bank accounts, even local commercial banks would find it hard to identify if they link to business accounts to assist the tax authorities to collect taxes.

Similarly, vendors selling goods across the borders may maintain a number of bank accounts in different banks and different locations to facilitate payments. Using certain technologies, the State Bank of Vietnam and local commercial banks may be able to group the counter accounts as overseas bank accounts. However, there is still no specific technical guidance for either commercial banks or tax authorities to identify and deem such overseas bank accounts related to cross-border transactions to impose the collection mechanism.

Therefore, without having a proper process to identify and notify the overseas vendors/suppliers for full compliance, tax authorities’ withholding tax in the following tax filing period on those unidentified-business bank accounts may cause troubles to customers. Positively, the vendor will come back and request the customers to top-up the payment to cover the withheld tax amount.

Negatively, the vendor will regard it as an incomplete (or under-paid) transaction, and then will not ship goods to the customers. In either case, the customers will feel frustrated in trying to complete the transaction.

Commonly, price of goods on website is normally on net value as applicable to all customers regardless of where they are from. Assuming that the overseas vendors fully comply with Vietnam tax regulations, they will tend to setup their system to top-up the possible tax to be paid to Vietnam tax authorities; or if not registered they will let the banks withhold such deemed taxes. Eventually, the tax that Vietnam would like to collect from the overseas vendors would be borne by Vietnamese customers. This practice may have impacts to customer behavior and commercial transactions.

Another challenge is the habit of using credit cards. Many Vietnamese people have short-term travel or study overseas whilst still using credit cards opened at banks in Vietnam. Technically, although the purchase is made overseas, it may still be recorded as a payment from a Vietnamese bank to overseas bank accounts.

Under current regulations, these transactions are not subject to withholding tax in Vietnam. The authorities should consider this situation in the technical guidance for commercial banks and tax authorities in Vietnam to avoid mistakenly withholding the taxes.

Given huge volume of off-shore personal e-commerce transactions, to fully comply with the requirements from the tax authorities, commercial banks will need to further make investment in technologies to automate the tax withholding transactions. The tax authorities also need to work closely with the banks to form a practical process for reconciliation of its offshore account database with those maintained by the banks to manage the completeness of withholding process. Otherwise, there is yet regulation in place to whether or not penalize the banks if the withholding amounts would be different with the estimation from the tax authorities.

In Vietnam, with its various stages of lockdowns, users turned to the internet for solutions to their sudden challenges. A significant number tried new digital services: 41 per cent of all digital service consumers were new (higher than the Southeast Asian average), with 94 per cent of these new consumers intending to continue their behaviour post-pandemic.