Digital Service Tax Plan

KOMPAS/PRIYOMBODO

Finance Minister Sri Mulyani Indrawati delivers a statement on the state budget’s performance on 21 June 2019 at the Finance Ministry, Central Jakarta. Her portrait is superimposed with images of monitors displaying data for the June 2019 APBN KiTa (state budget performance and facts) in this multiple exposure photograph.

One of the international taxation agendas discussed at the G-20 Summit in Japan last June was tax collection plans for multinational companies that use or operate digital services in running their businesses.

Contextually, the G-20 countries have given a mandate to the Organization for Economic Cooperation and Development (OECD) to formulate various international tax policies, including issues on cooperation under the framework of the automatic exchange of information (AEOI) and base erosion and profit shifting (BEPS Action Plan).

Also, with the issue of digital service tax, the substance of the discussion of which was based on or guided by the OECD Secretary-General Report to G-20 Finance Ministers and Central Bank Governors, June 2019.

In line with the target to produce comprehensive digital service tax formulation by the end of 2020, the OECD Report sharpens its analysis on two pillars, namely reallocation of taxation rights (hereinafter we call the First Pillar) and the imposition of minimum tax rates (Second Pillar). The two pillars were previously published last February at the Public Consultation Document: Addressing the Tax Challenges of Digitalization of the Economy and have received 2,000 pages of written inputs from 200 commentators (OECD Report: 31).

The First Pillar calls for a new (nexus) link between digital economic activities and taxation rights arising from these activities (OECD Report: 31). Rules of Agreement on the existing Double Tax Avoidance (P3B) provides taxation rights on operating profits to the country where the foreign person or entity is domiciled, unless the foreign person or entity has a permanent business unit (BUT) in the country where the income is generated.

In line with its name, BUT must be in a physical form, for example, an office building or factory. There is also another form of BUT known in P3B, such as an agency. However, the existing concept of BUT does not cover the non-physical form of digital service companies, so it needs to be expanded. As an alternative, the OECD and the G-20 need to draw up a new concept for dividing taxation rights over operating profits (OECD Report: 41-42).

Kompas

These three file photos show from top: the Google logo displayed on a screen and reflected on a tablet in Paris, France, April 29, 2018; Twitter logos on a computer screen in Beijing, China, March 23, 2018; and the logo of social the network Facebook displayed on a screen and reflected on a tablet in Paris, France, April 28, 2018.

Meanwhile, the Second Pillar does not specifically target digital service companies, but is part of an action plan to mitigate the practice of shifting business profits to countries with low tax rates (OECD Reports: 47), with or without digital platforms. The mitigation is carried out by initially determining the minimum tax rate that will be imposed on the multinational companies. Furthermore, with certain methods, a country with the P3B will be granted taxation rights on operating profits if the partner country in the P3B collects taxes lower than the minimum tax rate (OECD Report: 47 et seq).

When compared to the First Pillar, the Second Pillar has a wider scope and is relatively more difficult to implement. Moreover, the implementation of the Second Pillar disrupts the balance of taxation rights among countries that has been created through the provisions contained in the P3B.

However, solutions obtained from the Second Pillar can avoid discrimination due to the imposition of special taxes on digital service companies originating from the US (for example: Google).

Support from G-20 countries for the OECD Report is explicitly conveyed in the G20 Osaka Leaders\' Declaration (29 June 2019) and the Communiqué of G-20 Finance Ministers and Central Bank Governors Meeting (8-9 June 2019).

Not in line

As a member of the G-20, Indonesia is morally bound to a commitment to develop work programs that are compiled based on the First Pillar and the Second Pillar. However, the domestic tax policy plan is not in line with that commitment. First, Finance Minister Sri Mulyani Indrawati firmly said that the government would collect the digital tax on digital service companies that earn income in Indonesia, with or without BUT (Kompas, 13/6/2019).

The unilateral digital service tax collection plan resonates with the digital service tax collection plan in the United Kingdom (see: HMRC Digital Services Tax: Consultation, November 2018) and France [search: Google Apple Facebook Amazon (GAFA) tax]. This unilateral policy plan clearly contradicts the consensus-based solution being pursued by the G-20. Its existence disrupts the relevance and sustainability of the international taxation framework and leads to impacts on investment and global growth (OECD Report: 31).

Second, instead of formulating the upstream tax policy on digital services, the government focuses on its downstream policy. On 1 April 2019, the government issued Finance Minister Regulation Number 35/PMK.03/2019 concerning Permanent Business Establishment (PMK BUT). Article 2 juncto Article 3 of the PMK BUT regulates the obligation of foreign persons or entities to register themselves as taxpayers and be confirmed as taxable businessmen.

In the OECD Report, this registration-based collection mechanism is part of the implementation of the First Pillar (OECD Report: 44), which is discussed after the rules on business profit allocation and the nexus are formulated.

Third, to attract foreign investment, Indonesia still applies various tax incentive policies, which include but are not limited to tax holidays, tax incentives in the property sector, and which are being widely promoted, super tax deduction (Kompas.com, 13/6/2019). These policies contradict the Second Pillar, which actually wants to eliminate the distortion of investment due to the application of tax incentives (OECD Report: 47).

The OECD is of the opinion that state revenues, which lose due to tax incentives will reduce the country\'s fiscal capacity in building infrastructure and providing public services (OECD Report: 47).

Fourth, still in the framework to attract foreign investment, the government plans to reduce the tax rate, especially the corporate income tax (PPh) rate (Kompas.com, 21 June 2019). This plan is contrary to the Second Pillar, which precisely targets the minimum tax rates for multinational companies.

Depending on the difference between the tariffs formulated in the Second Pillar and the corporate income tax rate that will be applied in Indonesia, Indonesia may fall into a harmful tax competition, which is counterproductive to the implementation of the BEPS Action Plan.

Burdening the ”unicorn ”

Fifth, despite the above problems, Indonesia\'s participation in the cooperation in the formulation of digital service tax can be compared with domestic fiscal and non-fiscal policies that support the formation of new unicorns. On the one hand, unicorns in Indonesia currently hold digital services for consumers in Indonesia and are expected to expand to reach consumers abroad. On the other hand, the digital tax architecture is built on the desire to give taxation rights to the country where the consumers live.

It means that the digital service tax being formulated based on the First Pillar and the Second Pillar will in time put the Indonesian unicorns as the parties burdened with the tax payment. Furthermore, fiscal incentives (for example, tax exemptions) provided by the government to the unicorns are meaningless because the country where consumers are located will collect taxes according to the minimum tariff formulated in the Second Pillar.

From the government side, the exclusive taxation rights on Indonesian unicorns which are now owned due to the absence of BUT in the country where consumers are located, will in time become not exclusive, because the unicorns will also be taxed in countries where consumers exist, based on the concept of sharing tax rights on new business profits formulated on the First Pillar.

These two factors immediately encourage a country, especially the developing country, to participate regardless of the systematic impact on other national policies.

Finally, all international tax cooperation propagates tax avoidance and evasion as a cause of declining state revenues. The cooperation is also always inserted with the lure of increasing efficiency and transparency in tax collection. These two factors immediately encourage a country, especially the developing country, to participate regardless of the systematic impact on other national policies.

It has to be noted that international tax cooperation always prioritizes the interests of developed countries, so the benefits for developing countries need to be carefully taken into consideration.

Adrianto Dwi Nugroho, Tax Law Lecturer at the School of Law of Gadjah Mada University; Doctoral Student at University of Helsinki, Finland