Employee of the taxation training center at the Finance Ministry
This July, there are two important things relating to taxation: the tax amnesty and Pokémon Go. In this article, I would like to discuss the latter. It is certainly not about how to play the game, but rather about how to tax it. Pokémon Go is a game based on the augmented reality concept, enabling digital objects to be placed on top of the real world. Hence reality is augmented or supplemented.
In this case, the technology puts Pokémon monsters, and items such as gyms and “PokeStops”, on top of places in the real world.
While playing Pokémon Go, players are offered the chance to purchase “PokeCoins” to buy items in the game. Wired reported that Niantic, the game developer, was earning US$1 million in a day from selling PokeCoins, and it is only the beginning. They have already set up a plan to put their PokeStops and gyms in places near certain business locations for a fee to increase businesses’ foot traffic.
MacDonald’s has allegedly entered into such an agreement in Japan. Now, imagine this situation. Some teenagers in Jakarta decide to swipe their dad’s credit card to buy PokeCoins. The mother of one of the players sends a text message asking her son to buy her some groceries. By looking at his screen, the son sees a supermarket next to a PokeStop and shops there.
Here, we can see a scenario where a foreign company does business in Indonesia in an amazing way. In the olden days, a foreign company could do business through a few options: selling its products directly to a local company, establishing a subsidiary, setting up a branch or contracting an agent to represent it. Under a typical double tax agreement, in the first two cases, Indonesia has no taxing right over the income the foreign company earns.
Hence, although income flows from Indonesia, the Indonesian tax office has no right to tax it. The rationale for this is that the foreign company does not use any public goods in Indonesia. As a result, Indonesia cannot tax its income.
On the contrary, in the last two cases, that company has a permanent establishment and as such, is liable to pay taxes on income it earns. The rationale is that the branch or the agent undoubtedly uses public goods in Indonesia (roads, security, etc.) and is, as such, liable to pay taxes.
What about Pokémon Go? It is clear that Niantic does business in Indonesia and earns money as a result. The question is, can Indonesia tax it? The answer is complicated. Niantic clearly uses servers, located in an unknown location, to do business and the game players access those servers to play and pay.
Legally, Indonesia can only tax Niantic’s income if it has a permanent establishment. Unfortunately, a permanent establishment, as the name suggests, requires a certain degree of permanence to exist. In the olden days, this could be established simply by looking at a company’s office, warehouse or factory.
Niantic, however, does not have an office or anything like that and therefore, no permanent establishment. This means it does not use security or other public goods. Right? Not that simple. It is true that Niantic has no office in Indonesia, but it relies on network connection and electricity through which its users access its servers. It also uses landmarks such as the National Monument (Monas) to place its monsters. So, Niantic in this sense uses public facilities in Indonesia to do business. As a result, it is right that it should pay taxes here.
Does it, though? Unlikely, because it has no permanent establishment. By definition, a permanent establishment requires a degree of permanence. In an online business, the only thing that can indicate this is the location of a server. It is unlikely that Niantic has servers in Indonesia, and therefore, no permanent establishment. Hence, Indonesia cannot tax Niantic’s income although it is clear that it uses Indonesian infrastructure to do business.
To alleviate this issue, there are two alternatives, both requiring fundamental legislative changes. Firstly, it is possible to withhold tax on a gross basis on payments made to Niantic. At the moment, the financial industry is ready to see data exchange on credit card usage with the Directorate General of Taxation, so it would be simple to separate such payments and withhold the tax. This industry has been withholding taxes for sometime, for instance on income tax levied on its employees and on interest payments. Thus, technically it is possible.
At the end of the financial year, Niantic can elect to be taxed on a net basis, as opposed to a gross amount in the withholding regime, and lodge tax returns for that purpose. The benefits of this model are twofold: additional tax revenue and an increased tax base. This would also enable the Indonesian tax office to efficiently levy tax on other companies practicing similar business models, such as Google or Apple.
Second, it is possible to extend the definition of permanent establishment to include the so-called virtual permanent establishment. In essence, this alternative removes the permanence requirement imposed in the conventional definition for online businesses. This, however, may be more difficult to implement, as all treaties would have to be renegotiated.
All in all, it is the view of this article that online businesses are a potential source of tax revenue. Unfortunately, the current legislative framework is unable to cope with this business model effectively and thus needs fundamental changes. With tax laws planned to be amended in the near future, Pokémon Go may provide an indication that today could be a good time to start thinking about this issue.
The author, an employee of the taxation training center at the Finance Ministry, is a PhD candidate at Curtin University, Australia. This is a personal view.
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