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De Minimis Tax Thresholds and Cross-Border Ecommerce

Approaches to De Minimis tax thresholds is a growing subject of interest within cross-border ecommerce. When an item purchased online passes through a customs barrier its value is compared against the De Minimis level (Latin for ‘from the smallest’) set by the destination country’s government; usually in the form of a monetary figure. If an item’s value is below this level no duties or taxes are applied. However, above it, it is liable for additional charges. The rapid growth of ecommerce has exposed the outdated nature of many De Minimis regimes around the world with several major markets applying methods to adapt their taxation strategies.

Team workMost De Minimis levels were historically set for traditional trade methods, with several existing designs inadvertently affecting ecommerce activities. Altering De Minimis values can be a difficult and controversial decision for national governments as they try to balance what is of advantage to local manufacturers (and jobs) against the commercial needs of citizens. Changes to De Minimis levels will inevitably disturb one of these sectors. It is the role of a government to determine if benefits of such changes outweigh potential domestic political or financial fallout. For online retailers, added costs due to duties and taxes can result in higher levels of shopping cart abandonment at checkout. These costs can in-turn reduce the attractiveness of a site to customers from certain countries or force those customers to utilise grey-market or daigou agent (‘on behalf of’) options to avoid greater charges.

A person working on a tabletGEODIS commissioned a study in 2017 to review various approaches to De Minimis levels at an international level, particularly concerning lower-value online goods, and how governments are adapting their taxation laws. Seventeen major ecommerce markets on five continents were examined and compared during the course of this study. Summarised here, it was found that international approaches to De Minimis levels can be divided at a macro level into three broad groups – protectionist, competitive or stationary.

Protectionist

Ecommerce has the potential to pose a threat to traditional domestic markets, particularly where certain products are difficult to obtain or are highly taxed locally. Cheaper international prices, multiple delivery options and greater variety of goods can result in significant expenditure directed towards foreign retailers, putting pressure on governments to defend domestic businesses and jobs.

View on Toronto, CanadaOne of the few effective tools available for governments is to make cross-border online purchases less attractive through higher taxation or lowering De Minimis levels. This is the case in Canada where the De Minimis threshold was set in the 1980s at only CAN$20, primarily to defend local industry. Though Canada’s De Minimis regime is popular with resident manufacturers, it has recently proven to be a major impasse within the NAFTA trading block and is deeply unpopular with Canadian online shoppers. A recently poll suggesting that 76% of Canadians would like to see the limit raised to at least CAN$200, still well below the USD$800 level in the neighbouring United States.

Sydney, AustraliaThe potential of added revenue from heavier taxation of overseas online goods can be a primary argument for a protectionist De Minimis approach. In Q2 2017 Australia planned to reduce their De Minimis value from AU$1000 to AU$0 as a method of generating taxation from international ecommerce. Implementation however was deferred until July 2018 by the Australian Senate due to difficulties in determining how the extra taxation was to be collected and is still an open point for discussion. In theory, a zero limit may seem attractive to governments. However, a counterpoint to this argument is the cost of processing low value items can exceed the revenue gained, thus negating any benefit to a government’s exchequer.

ChinaOf all protectionist approaches China’s, though complex, is perhaps the most adaptable to international ecommerce. Introduced in 2016, the law reduced the De Minimis level to CNY50 (USD$7) utilising a stratified import tax system that applies a yearly and per transaction De Minimis limit per user, ensuring that occasional online shoppers are not taxed as heavily as those making frequent, expensive or large volume online purchases.

Competitive

USA flagGovernments who hold a competitive approach to De Minimis levels seek to open both domestic and cross-border lanes to consumers by maintaining threshold levels. For some, like Hong Kong, high or non-existent De Minimis rates have been in place for many decades and are imbedded in the national commercial psyche; part of a wider economic approach to attract international trade. Others, such as Indonesia or the United States have only recently increased their De Minimis levels, hoping that greater international trade will also stimulate domestic markets.

Stationary

Stationary De Minimis tax regimes are by far the most frequently encountered and can be subdivided into two primary groups:

  • Mature ecommerce/tax relationship.

JapanCountries such as Japan, with a mature ecommerce/tax relationship, often recognise the impact cross-border online trade has on their populace. Though many countries within this category maintain low De Minimis levels they have aided international imports through simplified customs procedures or low duty rates above De Minimis. Others, like South Korea or the United Arab Emirates, assist cross-border ecommerce through expanding existing trade deals with significant ecommerce origin markets or regional/trade-block neighbours.

  • Immature ecommerce/tax relationship

European Union flagImmature ecommerce/tax relationships stem from the unprecedented growth of online retail and the inability of governments to adapt their import tax systems accordingly. The European Union openly admits that their existing €22 De Minimis threshold is outdated as it was established prior to the emergence of online shopping as a major economic force. Those countries that have yet to adjust their tax arrangements to modern cross-border ecommerce trends may also simply be observing how recently implements protectionist or open market policies perform prior to implementing an appropriate tax structure.

Conclusions

Over the coming years the issue of De Minimis limits for cross-border ecommerce will become a more prevalent discussion point for national governments, logistics providers and online retailers. Changes in existing De Minimis levels, both in emerging and maturing ecommerce markets, can be expected and should be reviewed at regular intervals as part of basic policy by logistics providers.

World map: changes to De Minimis taxation in study countries

 

 

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