Insights | Taxation of Daigo activities

The ABC recently published a feature article on the “Daigo” phenomenon.

For those who aren’t familiar with that expression and too time poor to read the entire ABC article, “Daigo” refers generally to private shoppers, relevantly based in Australia, who traditionally purchase high demand items such as baby formula powder or vitamins or supplements for consumption in China.

This article does not delve into the politics of Daigo activities and is limited to a consideration of international taxation issues arising in the context of Daigo activities.

Australian-based Daigo participants taxable in Australia

We are concerned the journalism conducted by the reporters in the above article may be giving rise to uncertainty as to the proper taxation of Daigo activities, as it includes this passage:

Angela pays GST just like any other Australian consumer, and told the ABC that her income is deposited into a Chinese bank account and taxed by Beijing, which she can prove — however, it’s a grey area whether or not some daigou activities should be classified as taxable income here in Australia.

As Daigo participants are based in Australia, there is no uncertainty as to whether or not the income from locally based Daigo participants are taxable here; such participants will typically be resident of Australia for income tax purposes by residing here for greater than 183 days in a year, and as such, section 6-5 of the Income Tax Assessment Act 1997 makes it clear one’s assessable income includes ordinary income derived from all sources, whether in or out of Australia.

Whether Australia or China (or both) may exert taxing rights over the Daigo participant’s income

The ABC indicates the anonymous Daigo participant, Angela, is assessed in China on her earnings from Daigo activities notwithstanding the individual is resident of Australia.  We do not have enough facts before us to form a proper view on the correctness of this outcome, but where the peril arises for those in Angela’s shoes is the correct application of the Agreement between the Government of  Australia and the Government of the People’s Republic of China for the Avoidance of Double Taxation and  the Prevention of Fiscal Evasion with Respect to Taxes on Income, colloquially referred to as the Australia-China Double Taxation Agreement or DTA.  Care must be taken or otherwise the taxpayer may be caught in the middle of a dispute between revenue authorities as to which country has primary taxing rights over the Daigo participant’s income and the country which must allow relief from double taxation.  It is beyond the scope of this article to resolve this issue and advice should be sought on this issue if required.

Two further situations where potential uncertainties arise as to the taxation of Daigo activities are:

  • the local Daigo participant is fulfilling the orders of a large Chinese entity on a systematic basis
  • the local Daigo participant is a large commercial enterprise with local networks deployed in China to procure the private buyers in China

Depending on how the commercial activities are conducted and structured, very different international tax profiles arise having regard to the domestic laws of Australia and China and the allocation of taxing rights under the the Australia-China DTA.

Conclusion

Cross-border commerce gives rise to complex international tax analyses where it becomes impossible to provide general advice which conclusively covers all arrangements.  However, care should be taken to be properly informed as to the applicable taxation obligations as substantial penalties can arise where failure to exercise reasonable care is found on the part of the taxpayer or their registered tax agent.

Our view is that, given the estimated size of the Daigo industry and the revenue risks associated with incorrect taxation reporting, there are compelling grounds for intervention by the Australian Taxation in the formulation of a public taxation ruling to provide guidance to Daigo participants.  This is desirable as proper reliance on public taxation rulings provide a “safe harbour” for taxpayers covered by the public taxation ruling.

Disclaimer

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.


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