Dr Raymon Krishnan and Ms Renette Lee
Starting 1 July, e-commerce giant Amazon stopped shipping directly to Australian addresses from its US and other international sites. Instead, a reduced but growing selection of goods retailed by Amazon on its US site is listed on Amazon.au, the local site of the e-commerce multinational corporation.
Amidst outcry from online shopping enthusiasts, the online giant’s move was in response to a decision by the Australian government to impose a 10 per cent tax on all imported goods into Australia, i.e. the removal of its De Minimis threshold (DMT) for consumption tax. Businesses with a local annual turnover of AU$75,000 or more are required to register with the Australian Taxation Office.
The DMT is a government-imposed limit under which imports are exempted from taxes, import charges and most customs duties, with limited clearance processes and data requirements. Previously, the tax was imposed only on imported items worth more than AU$1,000; imported goods below this amount remained duty-free up until 1 July 2018.
“Supporters of a DMT removal have commonly cited lost tax revenue from e-commerce as an issue.”
The moves attempt to maximise tax revenue from what governments consider a major untapped source: digital trade. E-commerce is certainly a potential avenue for garnering additional tax revenue, especially since the worldwide e-commerce market is expected to grow to USD$4.479 trillion by 2021. Yet, it is essential to consider that the boom of e-commerce has been aided by the very absence of rigorous taxation policies across digital borders.
Australia’s DMT removal signifies an unusual measure of protectionism in the age of e-commerce; it is a stance that many other countries are considering adopting. This presents a unique situation with regards to DMT, as technology giants (like Amazon) striving for liberalisation stand at crossroads with governments looking to capitalise on the digital economy.
So, why may a DMT removal be detrimental in the long run?
Costs outweigh potential revenue
Supporters of a DMT removal have commonly cited lost tax revenue from e-commerce as an issue. For example, according to the Australian government, this exclusion on taxing low-value imports has cost Australia roughly AUD 390 million annually since 2013-14, and grows exponentially every year.
What we should note, however, is that there is no certainty that revenue will outweigh expenditure required for policy implementation. While there is no border processing or enforcement required under the Australian legislation, it seems inevitable that the government will need to address these shortcomings in the model over time, requiring investments in systems, staff and infrastructure to ensure overseas vendors comply with the law.
The European Commission announced plans to tax low-value imports in December 2016, intending to improve cross-border VAT rules in light of the burgeoning e-commerce market. However, studies evaluated that instead of improving growth, a removal of the VAT exemption on low-value imports in Europe would actually impede the growth of e-commerce.
Customs, e-sellers and delivery personnel would face the burden of additional screening, compliance and delivery time for a high volume of small-value imports, with additional processing cost estimated to amount to a hefty €1 billion. In addition, paperwork completion adds to the tedious process, due to a lack in consistency for each country’s administrative procedures.
From an operational point of view, a tax exemption on low-value goods complicates processes. As costs of collecting tax for low-value items may outweigh potential maximum revenue collected through tax, the removal of the tax exemption directly runs counter to basic taxation principles.
Instead of lamenting over e-commerce earnings not yielded, a DMT should be approached in a practical perspective – in that its implementation reduces cross-border complications at customs, and also allows authorities to concentrate resources on more pertinent issues such as sieving out illegal goods and fraudulent items.
Unequal playing field for smaller firms
Supporters of e-commerce tax often cite the entrance of global e-commerce giants resulting in drastic reductions in domestic consumption and profit margins. While the move attempts to equalise domestic and foreign retailers, the greater issue at stake is the widening chasm between small and large firms, with small businesses ultimately placed at a severe disadvantage.
Small and large businesses alike benefit from DMT. Regardless of their size, customs exemptions on low-value goods would reduce overall costs for firms. Furthermore, certain small businesses particularly rely on tax exemptions to have a competitive volume of sales against large businesses.
The removal of a DMT will mean a smaller firm being subjected to the same taxes and compliance costs as large companies. Unlike bigger firms that have advantages of economies of scale yielded from bulk purchases, small firms are unable to capitalise on cost savings. The creation of artificial barriers for small e-sellers to compete is detrimental, especially when small- and medium-sized enterprises (SME) account for over 95% of economic activity in many countries.
The qualifying AUD$75,000 for registration with the Australian Taxation Office continues further distortion between small and large businesses. Cautious traders in smaller firms who believe they are at risk will register to pay taxes, incurring additional costs. Small traders who choose not to register, but have an unexpected upsurge in sales, will be burdened with unbudgeted tax liability, and possibly be fined for failure to comply with taxation rules. This places smaller firms at a competitive disadvantage, where tax could be greater than their profit margin on already sold goods. Further, small traders selling through tax-compliant marketplaces will have GST applied from the first dollar of their sales, whereas their competitors selling direct to Australian customers will not. This will distort the market, as small traders looking to harness the tools and capabilities of marketplaces will be placed at a price disadvantage to non-compliant competitors.
For small e-commerce business owners who regularly import, a lack of sales tax can make the distinction between cessation and continuity; adhering to compliance costs equates to unnecessary revenue loss that small businesses can hardly afford.
Perhaps many legislators are looking at the issue on DMT from an erroneous perspective. Instead of looking at how much tax revenue is forsaken under a DMT when goods are imported into a country, a perspective to adopt is looking at how domestic firms – especially SME and home-grown firms – have much more to lose when exporting into a country without a DMT.
As an example, many smaller Australian firms export globally. With Australia removing DMT, countries that import Australian products could retaliate by removing their DMT as well, or worse, target Australia’s actions by specifically removing DMT on Australian products.
Tit-for-tat moves may sound petty, but what may unfold is merely borrowing from a precedence set in the global stage vis-à-vis the US-China trade war.
Consumers lose out in the end
However, consumers would be the biggest losers with increased costs, reduced varieties or even the withdrawal of goods shipped in from abroad, as seen from the Amazon example.
A high DMT decreases administrative and processing costs, encouraging more e-commerce retailers and suppliers to expand their businesses offshore and diversify their range of products.
In addition, a high DMT also eases entry of imports, enabling better quality of service, such as faster delivery and returns. A no-questions asked returns policy is something many e-commerce platforms tout. The removal of DMT will complicate the returns process; tax would already have been paid on products being imported, and the likelihood of getting a tax refund is low due to cumbersome processes. For many a small business owner or e-commerce practitioner, efficient delivery and returns creates a distinguishable brand for them to ensure customer loyalty.
“A deferral to remove the DMT is worthy of further consideration until a balanced approach is found.”
Even for larger firms, administration of an e-commerce tax is not favourable for fear of losing customers. For instance, Matches Fashion, a luxury retailer for goods like Gucci and Prada, has absorbed Australia’s online sales tax for consumers as an advertising tactic: customers are informed of the company’s full subsidy upon checkout of purchases.
Other retail giants, like Marks & Spencer from the UK and US fashion retailer J.Crew, are examples of companies that chose not to add the Australian sales tax to final prices of their goods, choosing to conceal their tax obligations at the expense of keeping customers satisfied with low prices. It remains to be seen how the Australian Tax Office can successfully enforce taxation laws on imports in the long run.
No easy solution
For the legislator, the intent to capitalise on untapped e-commerce revenue appears to be a good idea. The reality, however, is fraught with complications that extend beyond unhappy suppliers and consumers.
For plenty of government and trade officials worldwide, a deferral to remove the DMT is worthy of further consideration until a balanced approach is found.
For Australia, this marks the misplacement of dreams for digital trade.
Dr Raymon Krishnan is the president of the Logistics & Supply Chain Management Society and Secretary-General of the Asia Business Trade Association. He is also a Director at The Asian Trade Centre.
Ms Renette Lee is a final-year sociology student from the University at Buffalo, who concluded an internship with the Asian Trade Centre. She takes a keen interest in the understanding of social relations through public and trade policies.