any countries are now facing a major issue concerning digital economies: they cannot impose taxes (either direct or indirect) on digital companies selling digital and non-digital goods or services through websites or online platforms. This issue arises because current international tax rules are no longer compatible with digital business models.
For direct taxes, especially income tax, a source country cannot tax digital companies because there is no nexus or relationship between an income and the country where the income is generated. Due to international tax rules, a source country has the right to tax business profits derived by foreign residents only if there is a fixed place of business called a permanent establishment (PE) in the country.
Unfortunately, in many tax treaties, including those of Indonesia, the word “fixed place” mainly refers to a physical presence in the source country. In this emerging digital world, the definition of PE should be redefined as a foreign resident company that can easily run a business and sell goods or services without having a physical presence in the source country. So, no PE, no tax. That is why many digital companies, including giant techs such as Google, Facebook and Amazon, remain nontaxable due to existing treaties.
Many tax authorities also face big challenges in imposing indirect taxes — which are not as complicated as direct taxes — from digital companies, especially value-added tax (VAT). Under a destination principle rule in VAT, a country can tax goods or services that are consumed in the country regardless of the origin of the sellers (either residents or nonresidents). However, the application of destination principle and VAT collection from nonresident sellers is not easy, considering the fact that they can run their business and sell goods or services without having a physical presence.
The issue now is how to create a level playing field for digital and traditional business. So, what’s the solution?
The Organization for Economic Cooperation and Development (OECD) — through the Inclusive Framework, of which Indonesia is a member — issued a policy note in January. The note highlights its view that a source country should have more taxing rights in cross-border transactions involving digital companies. There are three concepts for expanding the taxing rights of the source country, namely User Participant, Significant Economic Presence (SEP) and Marketing Intangibles. A global consensus on which concept will be agreed among the members of the Inclusive Framework is expected to be achieved by 2021.
While waiting for the consensus, the Indonesian government has taken a bold step in its endeavor to tax the digital economy by proposing a draft bill, namely Taxation Provisions and Facilities for Strengthening the Economy, to the House of Representatives a couple of weeks ago.
Share your experiences, suggestions, and any issues you've encountered on The Jakarta Post. We're here to listen.
Thank you for sharing your thoughts. We appreciate your feedback.