One of the great promises of the digital age is the ability of any company of any size to become a “micro-multinational.” From the garage or living room sofa, anyone with a good product can now ship to global customers.
But this brave future is steadily being undermined by regulatory policies that restrict and hamper the ability of firms to compete. The most recent example can be found in Australia where a new taxation law took effect on July 1.
One of the first consequences has been that e-commerce giant Amazon stopped shipping directly to Australian addresses from its American and other international sites. Instead, a reduced selection of goods retailed by Amazon on its US site are listed on Amazon.au, the local site of the e-commerce multinational corporation.
This change does not just affect Amazon and online shoppers in Australia, but also thousands of large and small firms that depend on the platform for handling their products.
The online giant's move was in response to a decision by the Australian government to both impose a 10 percent tax on all imported goods into Australia and lower the de minimus threshold (DMT) for entry into the country from AU$1000 all the way to $0.
The DMT is a government-imposed limit under which imports are exempted from taxes, import charges and most customs duties, and have a limited clearance processes and data requirements. A higher de minimus, in particular, can make it much easier for smaller firms to ship goods globally since most are not sending 40 foot containers anywhere, but small size packages.
Under the new law, businesses located anywhere in the world that experience an Australian annual turnover of AU$75,000 or more are now required to register with the Australian Taxation Office.
The combination of the removal of the DMT and the imposition of tax is very problematic. It creates a triple burden for firms shipping smaller value packages into the country: they must now deal with duties or tariffs, they must handle often complex customs forms and paperwork; and they must be prepared to pay tax in Australia whether or not they are based in Australia.
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 AU$390 million annually since 2013-14, and grows every year.
One of the reasons why smaller size shipments have, until now, remained exempt from many customs procedures is the cost of managing such parcels. Under the Australian model, the customs costs need to be factored in along with new tax collection procedure charges.
When the European Commission announced plans to tax low-value imports in December 2016, studies noted that instead of improving growth, the removal of the VAT exemption on low-value imports in Europe would actually impede the growth of e-commerce. The EU has new tax rules coming in January 2019.
Customs, e-sellers and delivery personnel would also face the burden of additional screening, compliance and delivery time for a high volume of small-value imports, with additional processing costs 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 countries’ administrative procedures.
Instead of lamenting over e-commerce earnings not yielded, de minimus thresholds and taxation issues might be better approached by thinking through how to reduce cross-border complications at customs, and allow 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 reductions in domestic consumption and profit margins. While the move attempts to equalize 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 DMTs; 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 (SMEs) 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. Small traders selling through tax-compliant marketplaces will have GST applied from the first dollar of their sales, whereas their competitors selling directly to Australian customers will not. This will further distort the market, as small traders looking to harness the tools and capabilities of marketplaces will be placed at a price disadvantage compared to non-compliant competitors.
For small e-commerce business owners who regularly import, a lack of sales tax can make the difference between surviving and not; high compliance costs can kill small companies.
This particular tax and de minimus policy currently exists in Australia, but is likely to spread elsewhere, forcing Australian companies that export to contend with the same complications as they seek to expand their own businesses abroad.
Consumers lose out in the end
Consumers are the biggest losers with increased costs, reduced varieties or even the withdrawal of goods shipped in from abroad.
New tax and de minimus policy changes make it harder for firms to promise returns on e-commerce purchases. The tax has been paid, and the likelihood of getting a tax refund is low due to cumbersome processes. For small business owners, efficient delivery and returns often creates part of the distinguishable brand and ensures customer loyalty.
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 opted to absorb Australia’s online sales tax for consumers.
Other retail giants, like Marks & Spencer from the U.K. and US fashion retailer J.Crew, are also not adding 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. These policies may be difficult to sustain
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 may wreck of the promise of many dreams for digital trade.
***This Talking Trade was written by Dr. Raymon Krishnan, Director of Corporate Advisory, and Renette Lee, Research Intern, Asian Trade Centre, Singapore***