Indonesia Chases Down "Digital Tax"

KOMPAS/PRIYOMBODO

multiple exposure photo of Finance Minister Sri Mulyani Indrawati giving a statement in the June 2019 performance of the APBN KiTa (Performance and Facts) at the Finance Ministry, Central Jakarta, Friday (21/6/2019).

JAKARTA, KOMPAS — Concerns over the low tax payments made by technology companies were raised during a meeting of G20 finance ministers on Saturday (June 8, 2019) in Fukuoka, Japan.

The majority of G20 countries agreed to establish common rules to enable technology companies to pay their taxes (digital tax) more proportionally. "{Revenue] Growth [for technology companies] continues to multiply, but we are not be able to benefit from it, either in gross domestic product (GDP) or tax revenues," Finance Minister Sri Mulyani Indrawati said at the meeting. (Kompas, 9/6/2019)

Some companies have allegedly tried to avoid taxes for years. They operate in several countries, but shift their profits to tax haven countries so that they make a big profit.

The Indonesian government has attempted to force digital companies to establish a legal entity in the country through Finance Ministerial Regulation No. 35/PMK.03/2019 on the requirement to establish a permanent, local business entity.

The regulation requires all foreign businesses operating in Indonesia to obtain a tax identification number (NPWP), which affirms a company’s legal status and that it is subject to local taxes.

However, the regulation has been considered ineffectual because it refers to conventional taxation rules, whereas digital companies operate across countries and do not adhere to any geographical jurisdiction.

In addition, the current standards in the international tax system still define “permanent business entity” as a physical structure.

Poltak Maruli John Liberty Hutagaol, the international taxation director at the Finance Ministry’s Directorate General of Taxation, said in Jakarta on Friday that it was difficult to tax multinationals that operated in sectors of the digital economy.

No global agreement has been made on tax standards to impose income taxes on digital transactions.

According to Poltak, a special team of tax experts from 129 countries was still discussing the draft rule on digital tax. "The issues regarding the digital economy are very broad and there are concerns regarding the overlap of taxation between countries and the fair taxation principle," he said.

However, each country was allowed to impose Value Added Tax (PPN) while awaiting the global consensus on digital tax. The VAT was deemed easier to impose than Income Tax (PPh), because it referred to the destination principle.

VAT is collected in the country where the digital services are provided. According to Poltak, the VAT scheme was suitable for Indonesia because the country would not need to change the law. Several countries like Australia, Japan and Singapore imposed VAT on the activities of digital companies.

Indonesia is preparing a mechanism so it could be implemented soon.

AFP/CHARLY TRIBALLEAU

A woman takes a picture of a G20 Osaka design set up outside the venue for the G20 Osaka Summit in Osaka on 26 June 2019, ahead of the start of the summit last week.

Big market

Member countries of the Organization for Economic Cooperation and Development (OECD) have developed two policy pillars in response to the challenge of digital tax in its public consultation document, "Addressing the Tax Challenges of the Digitalization of the Economy" (February 2019).

First, the countries where the digital goods and services are sold should be given a greater tax allocation, even if the digital companies do not have physical presence. The second pillar relates to applying instruments to prevent the tax base from eroding through a minimum tax payment system.

The executive director of the Center for Indonesia Taxation Analysis (CITA,) Justin Prastowo, said drafting the new rules would take time and required a long process of political lobbying. The government should therefore impose VAT scheme based on consumption as the initial stage.

This scheme would not require revising the law, and the government only needed to issue a ministerial regulation. The VAT scheme targeted large-value business-to-business (B2B) transactions, and could be collected from paid digital services or consumers’ subscription fees.

However, the VAT scheme had a weakness in that it could not be applied to business-to-customer (B2C) transactions, such as those made through Google and Facebook. No global consensus has been reached on taxing multinational digital service providers. However, the global consensus was expected next year.

With its large population and large number of internet users, Indonesia is a major market for internet content and software providers. According to the Google-Temasek report, "e-Conomy SEA 2018", Indonesia\'s internet economy based on gross merchandise value (GMV) was worth US$27 billion in 2018. This figure had grown 49 percent compared to that in 2015 – the highest recorded growth in the region. The GMV of Indonesia\'s internet economy is projected to reach $100 billion by 2025.

AFP/PAU BARRENA

In this file photo taken on 26 February 2018, the Google sign is pictured at the Mobile World Congress (MWC), the world\'s biggest mobile fair in Barcelona.

The number of internet users in the country is also growing rapidly, with data from the Indonesian Internet Service Providers Association (APJII) showing that 171 million Indonesians used the internet last year, an increase of about 28 million from 143.26 million the previous year. Meanwhile, Internet penetration reached 64.8 percent in 2018, up 10.12 percent from 54.68 percent in 2017.

Earlier, Heru Sutadi, the executive director of the Indonesian Information and Communication Technology Institute, said he believed that the economy would develop rapidly, driven by digital transactions. Therefore, Indonesia must have an appropriate strategy to benefit from the digital economy and not remain as simply a market destination. (KRN/MED/JUD)