The Gaidar Forum – 2019: Natalia Kornienko Held an Expert Discussion: “Taxation of Cross-Border Trade: Problems and Solutions”

On January 1, within the framework of the Gaidar Forum—2019 Natalia Kornienko, Head of the Tax System Department, the Gaidar Institute held an expert discussion on regulation and taxation of cross-border trade.

Opening the discussion, the moderator specified that e-commerce was currently the most dynamically developing line of the global economy. At the same time the volume of funds earned by the industry cannot be describes as an “initial” one. Any country, including Russia is concerned about incomes received by foreign residents engaging in cross-border trade.

Leading speaker Basalisco, Managing Economist of the Copenhagen Economics Institute told about the findings of the research into the European e-commerce market carried out for the European Commission.  The expert said that amid large-scale debates on digitization it was necessary to pay particular attention to taxation, though this issue was of less interest than digitization. 

In the period of active development of the e-commerce, it is important to discuss not only taxation, but customs regulation and VAT. It is to be remembered that competition plays an important role in the e-commerce market.  According to the finding of the research, small- and mid-sized business account for nearly 52% of the European e-commerce. Utilization of e-commerce components helps reduce trade barriers. The buyer and the seller can meet on this market, while in other conditions they could not.

The research has established that modification of the threshold of the VAT value largely affects costs which are incurred by all e-commerce participants fr om delivery and the seller to the buyer.   Electronic VAT collection modes may become a solution for reduction of costs. In January 2018, Sweden staged an experiment and increased the VAT threshold which dramatically affected its sales turnover and reduced it a great deal. Millions of deliveries got stuck at the customs. The volume of incoming parcels dropped by 60%–70%. Consumers decided that they were not going to pay additional logistics costs. Those who bought goods online knew well that this mode of commerce was quick and simple and when problems arose they started to give up this mode of purchasing.   This example is an illustration of how the level of tax collection may affect the entire situation.

According to the expert, taxation is an applied line and all the theories need to be tested in practice. In this context, It is particularly important to review the situation with postal services. Postal services do their best to be in step with the time, expand the scope of their capabilities and establish hubs, but it is to be remembered that this system needs to maintain a certain level of loading. To be most effective, the e-commerce should harmonize all the processes to avoid failures.

Analyzing the e-commerce market, Alexei Petrovsky, Chief Analyst of Rambler&Co touched upon the existing situation in Russia. In 2017, the ratio between the retail and online trade volumes was as follows: 97.75% (retail trade) to 2.7% (online trade). In the previous three years, retail online trade growth was equal to 15.4%. According to the expert, estimates of development of this market are both of optimistic and conservative nature. The well-balanced scenario of calculation of the market volume can be presented by the following formula: number of buyers ? frequency of purchases ? average bill = market volume.
Artem Sokolov, President of the Association of Online Trade Companies commented on the presented statistical results. Artem Sokolov explained that though the value of 97.75% was received in accordance with generally-recognized criteria, it did not include such goods as petroleum, cars, food products and other goods which people did not buy online.  In this regard, the most advanced country was China (22%). 

At present, there is globally a certain pool of large online sites wh ere one can buy almost everything. These online sites deliver goods to any part of the world within short timelimits.  To receive the status of a legal entity  carry out trade operations, it is necessary to prepare a package of documents, secure relevant certificates and documents translated into Russian, install a cash-register, prepare reporting, comply with the legislation and pay taxes and duties. As a counter to it, there is a legal mode of bringing goods to the country without paying any costs, duties and taxes.

In 2010, the volume of the domestic online trade on the Russian Market amounted to 92%. By 2018, the volume of foreign online trade increased from 8% to 38%. According to Artem Sokolov, in the past few years the most successful and large businesses were formed on the basis of the model of cross-border trade. If Russia does not introduce any regulatory measures, the entire e-commerce market will be taken over by foreign companies in the short-term prospect. A lack of comprehensive regulation may result in income reduction, job cuts, reduced investments in development of commercial infrastructure and exit of the business from Russia.

Andrei Pavlov, President of the ZENDEN Group, supported the idea of introducing limitations on cross-border trade. According to the expert, on one side, a lack of regulation will lead to reduction of growth rates of the Russian business, while, on the other side, it slows down growth rates of development of the light industry because online trade infiltrates at a higher rate into this sector’s markets.

Armen Manukyan, Head of the Project for Development of Digital Services at the Russian Export Center offered his expert comments on the need of a tough barrier regulation. The expert explained that the Russian market accounted for less than 1% of the total online trade volume on global markets. Russia is interested in export volume growth and the evidence of it is introduction of the entire range of tax privileges for businesses which deal with exports of Russian products abroad.  In terms of cooperation and export potential, introduction of barriers on cross-border trade may create additional problems to development growth rates.

Summing up the results of the discussion, moderator Natalia Kornienko thanked participants for lively debates and different opinions.  The issue of cross-border regulation concerns multiple components of the global and Russian economy and has an ever growing influence on it with every passing day. This issue needs further elaboration as decision-making is to be weighted and responsible.