IMF supports digital tax

To boost revenue collections

MANILA, Philippines — Expanding value-added tax (VAT) regimes to include imported digital services on digital transactions could help boost the Philippines’ revenue collections, according to the International Monetary Fund (IMF).

In a report titled “Digitalization and Taxation in Asia,” the IMF said that charging VAT on remotely delivered digital services and some goods to customers could directly increase the overall VAT revenue of the Philippines, Bangladesh, India, Indonesia and Vietnam by up to 0.11 percent of gross domestic product (GDP).

The IMF’s Asia-Pacific and Fiscal Affairs Departments stated in the 74-page report that the projection was based on 100 percent of digital media content transactions, 10 percent of all e-commerce transactions, five percent of digital advertising and 15 percent of e-services, mobility and travel services.

“This initial revenue gain can become larger through indirect effects,” it said.

The IMF said governments could realize potential additional benefits by including digital services and electronic commerce in the VAT net by using the large amount of information held by digital platforms to enhance compliance with VAT, other taxes, and other taxpayers using the platforms as tax collection agents.

“Options for this include requesting information collected by digital marketplaces on the income of suppliers operating through their platforms. This information can then inform compliance management, for example, in the tourism sector and of mobility services. This can significantly contribute to revenues,” the IMF said.

According to the multilateral lender, introducing reporting obligations to obtain information on consumption and income generated via digital platforms could produce important additional benefits for governments.

The IMF said digitalization in Asia is pervasive, unique and growing. The growth, the IMF said, is accelerated by the pandemic as internet users in Asia far exceed the numbers in other parts of the world.

It said extending the VAT to capture e-commerce and digital services more effectively could yield significant short-term revenue and other efficiency gains than imposing digital services tax (DST) or the global reform proposal under consideration by the Organization for Economic Cooperation and Development (OECD).

“Global tax reform proposals will create winners and losers in the region, although the overall revenue impact is likely to be modest. Investment hubs and low-tax jurisdictions are likely to lose revenues as less profit will be shifted toward them. Countries that do not host the headquarters of large multinational enterprises, but have a large user base of their customers, are likely to gain revenue from the reallocation,” the IMF said.

The IMF said that the  Philippines, Bangladesh, Thailand and Vietnam each have 50 to 100 million mobile connections compared to Japan’s 200 million, creating enormous scope for growth due to the economies’ digitalization.

However, the IMF said applying DST is expected to yield relatively low revenues of about 0.02 percent of GDP if the Philippines, Bangladesh, India, Indonesia and Vietnam follow the application of the new tax.

Furthermore, the IMF warned that taxpayers under DSTs that are primarily US companies could exacerbate the potential for retaliatory trade measures as 25 percent of total profits earned by multinational enterprises are American firms.