The rapid advent of information and communications technology (ICT) has seen changes to the way business is conducted and made certain traditional practices and methods employed in levying and collecting taxes obsolete.

For direct taxes, as identified by the Organization for Economic Cooperation and Development (OECD), three key issues arising from the characteristics of the digital economy include digital presence versus traditional taxable presence, data/value creation, and the characterization of income derived from the digital economy. 

With Vietnam’s tax authorities considering determining ways to levy taxes on social media platform-based businesses, such as Facebook, it is necessary to review global experience and study the current status of such activities in Vietnam, whose economy is heading towards the fourth industrial revolution (Industry 4.0), as announced recently by the government. 

Status of social media platform-based sales 

Recent years have witnessed strong growth in sales via social media platforms in Vietnam. Average per capita online spending was estimated at about $160 in the Vietnam E-commerce Report 2015 issued by the Ministry of Industry and Trade (MoIT). B2C e-commerce revenue reached $4.07 billion, up 37 per cent compared to 2014 and accounting for around 2.8 per cent of total retail sales.  

Furthermore, foreign online travel agents (OTAs) in Vietnam, especially those from the US, are dominating the market due to their advantages in technology, funds, and tax-free status, according to the Vietnam E-business Index Report 2017 from MoIT’s E-commerce Department. 

Not only the percentage of total retail sales made online is unquestionably growing but also the majority of consumer purchases made at online shops. 

Consumers say they prefer shopping online because of time flexibility, cost savings, avoiding any negative experiences associated with going out to shop, and gaining access to products not available in local shops. 

As consumers continue to shift more towards shopping online, there will be more retailers better positioned to create sales channels that meet these evolving needs and preferences. 

The increased use of the internet and online shopping, along with the rising level of expenditure, account for this development in e-commerce revenue. 

This upwards trend is expected to continue in the future, with the penetration of foreign retail brands who want to diversify their distribution channels by leveraging the boom time for online businesses in Vietnam. 

Some 32 million Vietnamese people use social media networks frequently, accounting for approximately 36 per cent of the country’s population, according to eMarketer figures released in November 2015. 

E-commerce revenues in 2015, including sales through social media platforms, totaled $4.1 billion, a five-fold rise since 2012, and are expected to reach $10 billion by 2020 and account for 5 per cent of all retail sales.

Will you continue online shopping?

Source: Vietnam E-commerce Report, 2015

As indicated in the accompanying chart, the response to the question “Will you continue online shopping?” was 95 per cent “Yes” and only 5 per cent “No”, despite concerns about prices, vendor reputation, and the brand of products and services. 

This confirms that e-commerce is playing a significant role in Vietnam’s retail sector, so collecting taxes on sales via social media platforms may be worth undertaking. 

However, due to the variety of online businesses, a certain threshold on revenue or profit must be established. 

Though the Hanoi Department of Taxation has made instructions available on its website about tax registration and declarations for those who conduct online business activities, given the current context in Vietnam, taxing such sales will be rather challenging. 

Earlier this year, the Ho Chi Minh City Department of Taxation sent notices to 13,469 vendors on social media platforms regarding paying taxes, but many have refused, saying sales were poor. Tax officers have been told to collect information on owners by checking with delivery companies and post offices and looking at bank payments. 

Tax collections must be based on cash flows, which are difficult to track in case of social media sales, as most online businesses in Vietnam only advertise their goods or services on online platforms, whereas real transactions are conducted directly at an outlet on a cash basis. 

This situation undoubtedly poses major difficulties for tax authorities in calculating exact revenues and quantifying the volume of goods sold by online businesses based on what is displayed publicly on the social media site. 

Other concerns include many retailers using anonymous accounts for transactions, while others may be one-time or small-time vendors with insignificant revenues, making it hard for tax authorities to regulate activities. 

The accompanying chart shows that cash on delivery and bank transfers were popular payment methods among online shoppers, with 91 per cent and 48 per cent of respondents using these methods in 2015, respectively.  

Meanwhile, Vietnam is trying to reinforce its existing foreign contractor tax (FCT) regime to protect its taxing rights on Vietnam-sourced income derived by foreign vendors from certain e-commerce businesses. 

Notably, the Ministry of Finance (MoF) issued official guidance on January 18, 2017, in the form of Official Letter No.848 (OL848), clarifying FCT declaration and payment obligations with respect to the commission income earned by foreign digital companies conducting business in online hotel room booking services in Vietnam. 

OL848 stipulates that regardless of where Vietnamese accommodation establishments receive the room rate, whether directly from guests and then use part of that amount to make commission payments to foreign digital companies, or whether the foreign digital company collects the room rate directly from guests and then transfers the remaining amount (i.e. the room rate collected from the guest less the foreign digital companies’ commission) to the Vietnamese accommodation establishment, the latter is required to declare and pay FCT on behalf of the former.

Major payment methods in online shopping

Source: Vietnam E-commerce Report, 2015

Perfecting the legal system 

Though online traders are obliged to pay taxes under Vietnamese law, collecting taxes from online businesses remains a challenge for tax authorities as it is difficult to oversee revenues.

The preference in Vietnam for cash transactions makes it impossible to exactly determine the revenues earned by online shops. For instance, many transactions are conducted by private message, email, or phone calls. 

There are also many ways to deliver goods, not just through post offices. In some transactions, when both purchasers and vendors don’t want others to know the value of their goods, they may use another way of quoting prices. 

Tax authorities also have difficulty taxing individuals doing business on social media platforms, whose numbers are growing rapidly in Vietnam. 

Without cooperation and assistance from social media platform owners, tax administrators cannot access such information. 

Under Decree No.52/2013 dated May 16, 2013 on e-commerce, and Circular No.47/2014 dated December 5, 2014, on regulations on the management of e-commerce websites, social media networks that allow members to open online booths or sub-websites to display goods or services or open sections allowing their members to publish commercial information, must register as e-trading floors with MoIT. 

Traders and organizations establishing these social media networks must fulfill the responsibilities of e-trading floor service providers, as required by law. 

But existing law fails to govern foreign social networks involved in e-business activities, which are established under international domain names with servers located overseas, owned and operated by foreign traders without representatives in Vietnam. 

Though addressing foreign social media networks providing information across borders for Vietnamese users, Decree No.72/2013 dated July 15, 2013, on the management, provision, and use of internet services and online information, and Circular No.38/2016 dated December 26, 2016 specifying cross-border provision of public information, do not touch on vendors on these social media networks. 

Neither of these documents require social media network owners cooperate with and assist State authorities in providing information about these vendors. 

This reveals legal loopholes in the management of foreign social media networks as well as challenges for enforcing the obligations of their owners to the State in general and tax authorities in particular. 

VN Economic Times