E-commerce Tax Meets Industry 4.0

The government recently issued a new regulation on the tax treatment of e-commerce transactions in Finance Minister Regulation No. 210/PMK.010/ 2018.

Finance Minister Sri Mulyani Indrawati has explained on a number of occasions that the regulation was not intended to impose a new and different tax on e-commerce transactions, as opposed to conventional transactions.

The tax remains the same as stipulated in general tax provisions. The new Finance Minister Regulation concerns only on the administration and mechanism for collecting the tax. It carries additional obligation (administration) for online marketplaces (merchant), but it does not carry any additional obligation (administration or tax) for traders or service providers utilizing an online marketplace.

One of the additional administrative obligations is for marketplace entrepreneurs to register as Taxable Entrepreneurs (PKP), regardless of their turnover. In contrast, other entrepreneurs are generally free to determine whether to register as PKP or not, once they have reached the minimum turnover for small entrepreneurs (currently Rp 4.8 billion a year). The consequence is that e-commerce business owners must collect Value Added Tax (VAT) for each delivery of services (and goods), regardless of their turnover.

The second is the obligation for traders to provide their tax number (NPWP) or citizenship identity number (NIK) to the online marketplace. In practice, this is actually the marketplace’s responsibility to obtain their traders’ NPWP or NIK.

The marketplace is then required to report a summary of each trader’s transaction to the taxation directorate general (DJP) – of course, with the NPWP or NIK. It can do this by attaching the summary to its VAT annual tax return (SPT). It seems that this is why all marketplaces are deemed taxable, regardless of their turnover.

From here, it is clear that there are no new tax obligations for online marketplaces or traders. Their income tax (PPh) and VAT still follow the prevailing general provisions. If annual turnover does not exceed Rp 4.8 billion, taxpayers are subject to a final income tax of only 0.5 percent as stipulated in Government Regulation No. 23/2018.

Whereas if their turnover reaches Rp 4.8 billion and above, they are subject to a PPh with the general mechanisms and rates under Article 17 of the Income Tax Law. Likewise, the VAT tax treatment holds nothing new, except the obligation for each marketplace.

If annual turnover does not exceed Rp 4.8 billion, traders can choose not to register as PKP, so they have no VAT obligation at all. Whereas if their annual turnover reaches Rp 4.8 billion and above, the trader must register as a PKP and is obliged to collect, deposit, and report VAT and luxury sales tax (PPnBM), if any, on the transactions they complete.

As regards the tax treatment of imported goods, the regulation appears to be trying to encourage the marketplace to use the DDP (delivery duty paid) mechanism. This mechanism requires the marketplace to be responsible for the duties and taxes of imported goods (PDRI).

However, if the customs duty is more than FOB US$1,500 or does not follow the DDP scheme, then the treatment follows the provisions for imports and shipments as stipulated in Finance Minister Regulation No. 112/PMK.04/2018. In addition, the marketplace is obliged to deliver e-invoices and e-catalogs to the customs and excise directorate general.

Traders’ concerns

According to the Finance Ministry, traders are not required to have an NPWP when joining an online marketplace. If they don\'t have an NPWP, they must simply provide their NIK to the marketplace. Under the tax provisions, it is true that traders have no obligation to possess an NPWP to join a marketplace. They become taxpayers once they have completed their first sales transaction (based on PP No. 23/2018). However, because Finance Minister Regulation No. 210/PMK.010/2018 does not regulate tax obligations (material and administrative) for traders, this means that general tax provisions will apply.

The DJP will follow up on the marketplace’s transaction report through research, extensification and intensification. We can only imagine the additional administrative burden for the DJP in carrying out this task, especially if this data is processed manually using conventional data processing methods.

On the other hand, the concerns of the Indonesian E-commerce Association (IDEA) make sense. Finance Minister Regulation No. 210/PMK.010/2018 is clearly intended as a new tool for the taxation directorate general to increase their supervision of traders.

Based on the data and information that marketplaces are obliged to provide, the tax office can easily determine those traders that are not paying the correct tax. Meanwhile, e-commerce supervision outside online marketplaces (such as social media) remains the same. Of course, this will encourage e-commerce businesses to move from online marketplaces to social media.

Article 9 of Finance Minister Regulation No. 210/PMK.010/2018 merely states that marketplaces may provide only data and information on e-commerce transactions outside the marketplace to the tax office. It is worth questioning to what extent do marketplaces retain this data and the efforts they make in reporting it.

This is contradictory to the tax office’s statement that it wants to encourage e-commerce businesses – which are mostly micro, small and medium enterprises (MSMEs) to move to online platforms. This is intended to increase tax compliance. However, without the appropriate incentives, it would certainly be difficult to encourage these businesses to move voluntarily to marketplaces. This could instead encourage traders that are already on marketplaces to abandon them for fear of taxation.

Meanwhile, the tax office currently has limited ability to oversee transactions outside online marketplaces. Instead of improving this, Finance Minister Regulation No. 210 could actually lead to lower tax compliance. For example, the tax rate for MSMEs was reduced from 1 percent (PP No. 46/2013) to 0.5 percent (PP No. 23/2018) in a bid to improve taxpayer compliance. However, we have not seen any statistical reports that show the truth of this argument. It turns out that the compliance of MSME taxpayers has not increased significantly despite the reduced tax rate. Of course, there are other reasons that have maintained low compliance among MSMEs.

What, then, is an effective way to increase tax compliance of e-commerce businesses? The 1998 OECD Conference on e-commerce taxation in Ottawa agreed that taxation principles of conventional trade must be applied equally to e-commerce trade. These principles are: neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and flexibility.

From the perspective of taxpayers (especially online traders), the first and third principles are very important. Traders demand neutrality or a level playing field on and outside online marketplaces, and expect simplicity, convenience and certainty in meeting their tax obligations.

‘Tax Revolution 4.0’

The government can actually fulfill the simplicity and certainty principle in working with online marketplaces, such as by appointing the marketplace as an income tax collector based on Government Regulation No. 23/2018. The marketplace must collect their merchants’ income taxes from every transaction made on the marketplace. The marketplace will then deposit the collected taxes and file a report with the tax office.

Supported by the marketplace’s information technology infrastructure, this additional obligation will increase the burden of compliance (compliance cost). Marketplaces can simply add a plug-in to their platforms that will automatically calculate the tax owed and add it to the amount the buyers must pay. Interest from the amount of tax collected before depositing to the state treasury (floating interest) could be an incentive for marketplaces.

Traders are not required to have an NPWP when joining a marketplace. This is to avoid entry barriers (obstacles to the entry of new traders), which IDEA feared. Traders are not even required to register their NIK. However, if necessary, traders that do not have an NPWP must be taxed higher than traders that already have an NPWP – 20 percent or 100 percent higher for example – so this would be an incentive for traders to obtain an NPWP. Because the income tax collection is final, traders no longer have the obligation to pay, deposit or report their taxes. The marketplace has taken care of everything. This is also an incentive for traders, as it will significantly reduce their compliance costs.

If desired, rules can be issued for traders that exceed the MSME threshold, so the income tax the marketplace collects can be credited (no longer a final income tax). The marketplace is required to provide an electronic receipt for any trader that requests it. Traders that exceed the MSME threshold can use the tax receipt as tax credit in their annual tax returns.

Thus, there are at least two advantages for marketplace traders as opposed to traders outside the marketplace, namely simplicity and certainty. Besides the simplicity of calculating tax, the marketplace also offers certainty in the amount of taxes due.

Because the tax is final, traders do not need to worry about being pursued by the tax office. This is different from e-commerce outside online marketplaces. Because the mechanism is one of self-reporting, the taxpayers are responsible for calculating, depositing and reporting their unpaid taxes. If at any time the tax office detects a difference in the tax receipts and calculations, the tax payments can be corrected up in addition to a fine, of course.

The tax office’s cooperation with online marketplaces could mark the beginning of “Tax Revolution 4.0” in Indonesia. Taxpayer compliance increases on the back of fulfilling the principles of simplicity and certainty. Using information technology in the process reduces compliance costs for taxpayers. The tax office can collect more taxes with more certainty, effectiveness and efficiency. This can be achieved simply by using the taxpayers’ business model that is developing alongside Industry 4.0. (Suhut Tumpal Sinaga, Taxation Lecturer at PKN STAN - National College of Accounting)