The Lost Promise of International E-commerce in Australia – LogiSYM August/September 2018
Starting 1st 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 are listed on Amazon.au. The local site of the e-commerce multinational corporation.
Amidst an 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. a removal of its De Minimis threshold (DMT) for consumption tax. Now 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 1st July 2018.
The move attempts to maximise tax revenue for 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.
The removal of DMT in Australia, 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 new situation for technology giants (like Amazon) who are striving for liberalisation stand at crossroads with governments looking to capitalise on the digital economy.
So why might a DMT removal be detrimental in the long run?
Costs outweigh potential revenue
Supporters for removing DMT have commonly cited lost tax revenue from e-commerce as an issue. 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 exponentially every year.
We should however note, that there is no certainty that revenue will outweigh expenditure required for policy implementation. There is no border processing or enforcement required under the Australian legislation. But it seems inevitable that the government will need to address these shortcomings in the model over time. This will require 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 costs. This is 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.
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. Its implementation should reduce cross-border complications at customs. This would allow authorities to concentrate resources on illegal goods trafficking and fraudulent transactions.
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. The move attempts to equalize domestic and foreign retailers. But 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 currently benefit from DMTs; regardless of their size, customs exemptions on low-value goods would reduce overall costs for firms. Furthermore, 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, will incur 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.
Furthermore, 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.
With Australia removing DMTs, countries that import Australian products could retaliate by removing their respective DMTs or specifically removing DMT on Australian imported goods.
Tit-for-tat moves are petty. But bad precedence is being set and could be copied in the global stage vis-à-vis the U.S- China trade war.
Consumers lose out in the end
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 costs, eases import processing, encouraging more e-commerce retailers and suppliers to expand their businesses offshore and diversify their range of products and quality of service. A “no-questions asked” returns policy is something many e-commerce platforms tout.
The removal of DMT will complicate the returns process. Tax rebates on products imported, would also raise any likelihood of getting a tax refund 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.
Even for larger firms, administration of an e-commerce tax is not favourable for fear of losing customers. For instance, luxury retailers like, Matches Fashion, Gucci and Prada, have 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. But how long can this be sustained for?
However other retail giants like Marks & Spencer from the U.K, and US fashion retailer J.Crew, are examples of companies who have chosen not to add 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 may appear to be a good idea. But the reality is fraught with complications that extend beyond unhappy suppliers and consumers.
For many 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.