NO-VAT DIGITAL SERVICE A HUGE REVENUE LOSS
COUNTRIES in the East Asian region, including the Philippines, are losing “substantial” tax revenues by failing to apply current valueadded tax (VAT) rules to digital services, according to the World Bank.
In its “World Development Report 2021: Data for Better Lives,”
the Washington-based World Bank said the revenue at stake from administrative failures of developing countries to apply the current VAT rules is signi cant even in the short term and this could become substantial because of the rapid expansion of data-driven platforms, especially amid the Covid-19 pandemic.
While more than 80 countries already require non-resident providers of digital services to register and collect the VAT, the World Bank said many low- and middle-income economies have not made the administrative adaptations needed to capture the VAT from third-party sellers through platform businesses.
“Evidence from East Asia indicates that the rapid growth of B2C [business to consumer] e-commerce has resulted in equally signi cant growth in the tax potential of the sector, with the indirect tax potential growing some eightfold, rising from US$0.46 billion in 2015 to US$3.7 billion in 2019,” the report said.
For instance, the World Bank said the gross VAT revenue of the B2C digital economy in Indonesia is estimated to be about 0.39 percent of
GDP in 2021, and it is projected to grow to around 0.65 percent of GDP in 2025.
“Assuming only half the amount of this estimated potential is collected [allowing for policy and administrative gaps], this would still translate into gross VAT revenues of some US$2.3 billion in 2021, increasing to US$4.6 billion by 2025,” it added.
e World Bank said the slow pace of adoption of these administrative reforms in low- and middle-income countries can sometimes be blamed on resource constraints and the needed investments in information technology (IT) systems.
However, it said nancial constraints are “often less of a challenge” than the organizational transformations that revenue authorities must undergo to enable successful implementation. ese include streamlining business processes to enable seamless data sharing and appropriate sta ng for IT management, analytics, and compliance.
In taxing the digital economy, the World Bank also recommended countries to adopt several tax policy reforms.
“In considering proposals to tax the digital economy, policy-makers in all countries should seek those that ensure equitable taxation of data-driven businesses, unlocking a potential revenue source for attening the debt curve after the Covid-19 pandemic. ey should also ensure that those sectors that have gained the most from the crisis are contributing their fair share,” it said.
World Bank also urged countries to strengthen their capacity to collect indirect taxes by adopting existing international guidelines for VAT collection and making the necessary investments in administrative capacity to ensure that VAT is collected on physical goods purchase online and on digital goods and services from both resident and non-resident companies.
Moreover, it said countries should also collect nancial information from online marketplaces on the income/sales of sellers on their platforms.
“When combined with other third-party data, data on digital transactions can shed light on the VAT and wider tax compliance of numerous economic actors,” it said.
ere is also a need, it added, for countries to seek global agreement on direct taxation and to minimize the impact of ad hoc taxation, such as the risk of trade war.
Further, the World Bank said countries should also leverage datadriven tax administration through creating data-sharing ecosystem. It also said policy-makers should ensure that new international data sources are available to developing countries.