Can Thailand’s customs rules strike the right balance for the digital economy? : Part 1

The growth of the digital economy has broken down traditional commercial and geographical boundaries.  Goods and services are being delivered and consumed across borders in ways that were unforeseen and at a pace that was unprecedented just decades ago.  In a prior article, we discussed how the rules of global trade, written over 50 years ago, struggled to remain relevant.[1]  In this article, we explore some of the challenges for customs rules in the e-commerce landscape.

Alibaba's founder and CEO Jack Ma recently visited Thailand, urging the Thai government to amend its customs rules.  In particular, Mr. Ma wanted to see Thailand raise its 1,500 Baht import duty exemption threshold for express consignment goods.[2] Establishing a higher tariff exemption threshold, it was argued, would lower logistics costs for e-commerce consumers and reduce the Customs Department’s workload.

For readers who may not be familiar with the customs rules for express consignment goods and the import duty exemption threshold, a brief explanation is warranted.  Express consignment refers to goods that are transported via air freight – readers will be familiar with express consignment operators such as DHL, Kerry, UPS, and FedEx, to name a few.  Under the current customs regulations, goods imported to Thailand by air are divided into 5 categories and given the following treatments:

* The applicable duties vary in accordance with the nature of the goods as prescribed by Thailand’s tariff schedules.

Goods priced at 1,500 Baht or less may be imported into Thailand with minimal procedural fuss.  Such goods do not require submission of formal import declaration entries with the Customs Department and do not require payment of import duty or import VAT.  In the commercial context, this category provides an ideal customs environment “sweet spot” for e-commerce transactions.  Unfortunately, this “sweet spot” is relatively small.  As soon as the price of goods being transacted exceeds 1,500 Baht (approximately 45 USD), the e-commerce operator or consumer will have to file customs declarations for the good, a process that could be inconvenient, costly and time consuming.

By way of demonstration, the author will share an experience he had with purchasing a watch from an on-line retailer based in the United States.  The watch took eight days from “click purchase” to arrive at my front door.  Two days were spent en-route from California to Bangkok and six days (two days attributed to the weekend hiatus) to be finally cleared from the airport customs bureau.  That process involved preparing the necessary documents to appoint a customs agent to declare the goods on my behalf, explaining to the customs agent the nature of the item, consenting to customs inspection of the goods, submitting further documents such as printouts of screen-capture of the on-line retailer’s website and product photos, the on-line published price, and on-line payment records to verify the price, remitting money to pay for duties and VAT. 

Thus we can see the significance of this duty exemption threshold and why e-commerce operators – not just Alibaba – would like to see Thailand raise its value beyond 1,500 Baht.

The logical next question is: if not 1,500 Baht, then how much should the threshold value be?

There is no simple answer. 

From an economic policy perspective, the rules must create a level playing field for competing businesses while ensuring that consumer welfare is optimised.  We must create rules that are fair to domestic brick-and-mortar retailers, domestic manufacturers, as well as foreign and domestic e-commerce operators.  For instance, the rules must address the following tough questions:

• Why are potentially competing goods being given different treatments?  A pair of sunglasses from Malaysia priced at 1,400 Baht is being given import duty exemption whilst another pair of sunglasses from South Korea priced at 1,700 Baht has to pay duty and VAT.  From the consumer’s perspective, these prices are close enough to be competing products.
• Why are domestic retailers being placed at a disadvantage for selling “small ticket” items?  A shop in downtown Bangkok that imports sneakers in bulk must pay import duty and import VAT on the goods, reselling each pair at 1,000 Baht with VAT.  An e-commerce operator selling the same sneakers may import them one pair at a time without import duty and import VAT, and sell at the price of 1,000 Baht exclusive of VAT. 
• Why are the exact same goods given different duty treatment if imported in different quantities?  A consumer purchasing two shirts from an on-line retailer, each priced at 500 Baht, may import both shirts free of duty and import VAT, whilst another consumer purchasing four of the same shirts from the same on-line retailer must pay import duty and import VAT on all four shirts. 

The rules seem arbitrary.  But if we revoke the duty exemption threshold by requiring all goods to be dutiable and subject to customs declaration, the Customs Department will be unable to deal with the substantial influx of workload.  The entire system of express consignment may very well collapse.  Goods will take weeks to be cleared from customs even though they are meant to be shipped express.  On the other hand, if we waive all express consignment goods from customs duty and customs declaration, domestic Thai manufacturers and domestic on-line export retailers will be ruined, as other countries would benefit from duty-free exports to Thailand, essentially ensuring that only domestic producers would pay tax. 

This author believes that the answer is not with raising the threshold for duty exemption. Such measures would simply pass the problem further up the price ladder.  The same perceived unfairness would remain, this time for goods priced at a different tier and affecting different industries.  Rather, the Thai government should look to a combination of simplifying the customs declaration process for express consignment goods, enhancing the ease of custom declaration via digital solutions, and setting a default blanket duty rate for express consignment goods.  Examples could include:

1. Creating a value range where express consignment goods would be subject to a flat duty rate irrespective of the nature of the goods (for instance for goods value exceeding 45 USD but not 250 USD or exceeding 1,500 Baht but not exceeding 8,000 Baht).  The applicable duty rate could be derived from an average of a basket of common consumer goods based on historic import volume.  This would achieve a degree of fair treatment for domestic manufacturers and retailers, while sparing e-commerce operators from the undue administrative burden of having to determine the applicable duty rates for each item being imported;
2. Allowing consumers or e-commerce operators to declare express consignment imports via simple declaration forms for goods priced up to 250 USD.  This will help facilitate the ease of transaction for e-commerce operators and consumers;
3. Creating an on-line system for which consumers may file simple declaration forms directly with the Customs Department for express consignment, and pay duty and import VAT at the flat rate for goods not exceeding 250 USD in price.  This would help alleviate the workload that the Customs Department would face as well as the transaction time for consumers when purchasing goods on-line.  

Such a detail-oriented approach toward customs process optimisation may at first seem like a minor adjustment, but if done correctly it could have a massive impact on the future of domestic production and sales, keeping it in balance with the fast-growing e-commerce industry.

In Part 2, we will take a closer look at how Thailand could pursue bi-lateral or multi-lateral trade agreements to enhance the competitiveness of the country’s digital economy.

[1] See Grant Thornton’s publication Is Time Running Out for Unregulated International Software Sales?, 7 May 2018, available at: https://www.grantthornton.co.th/insights/articles/is-time-running-out-for-unregulated-international-software-sales/

[2] Bangkok Post 23 April 2018.