Works for the Directorate General of Taxation of Indonesia
Over the last couple of years we have watched tax authorities around the world escalating investigations into technology-based multinationals such as Google, Facebook and Yahoo that allegedly shift profits offshore to reduce their tax burdens.
However, taxing those tech giants is easier said than done. This is mainly because the current tax laws have not caught up with the nature of the businesses run by the multinationals.
More precisely, tax laws fail to make tech-based multinationals set up the so-called permanent establishments (PE) in countries where they undoubtedly receive income (income-source countries).
The existence of a PE in an income-source country is the key for the tax authority to tax income received by a business run by a nonresident taxpayer. A PE can take various forms, such as a branch, a representative office or computer devices.
On the other hand, tech-based multinationals like Google can run their businesses without a PE as defined by the law. As a result, they can receive income from countries without paying income tax in those countries by diverting the income to a lower tax jurisdiction.
Subsequently, some countries impose a new tax rule that has come to be known as the “Google tax”. It is a measure that is expected to force multinationals to pay tax on the income diverted out of income-source country.
It started in April 2015 when the United Kingdom introduced a novel anti-avoidance provision called a diverted profits tax (DPT). The DPT applies a new tax of 25 percent plus interest on profits diverted out of the UK by large multinationals through either one of these two channels: exploiting PE rules, or using transactions with entities that lack economic substances.
When Her Majesty’s Revenue and Customs (the UK tax authority) reached a £130 million (US$162.35 million) tax settlement with Google in January 2016, its chancellor told the media that Google had exploited the UK PE rules and claimed the tax settlement thanks to the UK DPT. Since then, “Google tax” rather than DPT has become a more acceptable term to represent anti-avoidance provisions for tech-giant multinationals.
Recently, some other countries have also introduced or considered introducing a “Google tax”. In a much simpler yet straightforward scheme, India has imposed a “Google tax” by applying a 6 percent levy on payments made by Indian merchants to foreign websites such as Google, Facebook and Yahoo from June 1, this year. Russia has drafted a “Google tax” that will impose an 18 percent value added tax on companies selling online services to Russian customers from Jan. 1, 2017. While Russian domestic businesses will also be affected, the largest online retailers in the country, i.e. Google, Apple, Microsoft, eBay and Yahoo, will be hit more substantially. Australia says that a “Google tax” will be in effect in or after July 2017 by imposing rates as high as 40 percent on profits diverted offshore by large multinationals.
Does Indonesia need a “Google tax”? We need to assess the key question of this article from at least two perspectives: general and special. From a general perspective we need to evaluate whether there is a strong signal that multinationals avoid Indonesian income tax. I use the performance of tax revenue collection from corporations as the proxy. From special perspective, we need to examine whether tech-giant multinationals do exploit loopholes in the tax law to avoid Indonesian taxes. The current tax settlement with Google is a perfect example to better understand this matter.
Tax literature posits that developing countries rely heavily on corporate income tax revenues. Yet Indonesia seems to be an exception. While income tax collected from corporations has steadily increased, its contribution to the total tax revenues collected is considered low and has consistently decreased from 22 percent in 2009 to 16.7 percent in 2013 (compared to Malaysia where it was 19 percent in 2009 and increased to 27.3 percent in 2013).
These figures are even lower than those of Australia, a developed country that relies on individual income taxes, where it was 22.6 percent for 2012 and 2013.
Meanwhile, studies conducted by the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) show that developing countries are no less vulnerable to diverted profit activities by multinationals than developed ones.
Indonesian tax officials told the media that Google and Facebook collected 70 percent of Indonesia’s total digital advertising revenues of $830 million in 2015, of which the majority falls into Google’s pockets. However, as Reuters reports, Google Indonesia allegedly paid less than 0.1 percent taxes by reporting most of the revenue at Google’s Asia Pacific headquarters in Singapore, a country that imposes the lowest corporate tax rate in Asia. Google Singapore says that it does not have a PE in Indonesia and under the law, therefore, Indonesia does not have rights to tax the income.
The Directorate General of Taxation then pursued Google for five years of back taxes and estimated that the company owes at least $400 million. Recently, however, the media reported that after so much effort Indonesia nearly closed the Google tax case for $73 million, less than 20 percent of the estimation.
This low figure, to a large extent, was likely the result of the absence of a “Google tax”. Furthermore, the fact that Indonesia does not have a “Google tax” has exacerbated the circumstances that are full of uncertainties during the course of settlement. As reported by the media, Google previously refused to be audited by the tax office and claimed that the company has fulfilled its obligations.
With 250 million people, most of whom are young, Indonesia is perceived as one of the largest users of social media, suggesting a high potential for e-commerce in the country. Therefore, after Google the government plans to pursue other tech giants such as Facebook and Twitter. Yet, without a “Google tax”, lessons learned from the tax settlement with Google are: Uncertainty and increased effort ends up with relatively little tax collected. This suggests, from a special perspective, that while it may not be a panacea, a “Google tax” will certainly be advantageous.
However, prior studies advocate that the existing Indonesian tax system is already awfully complicated. Thus, the government should introduce a simple “Google tax” as applied by India, for example. Besides, President Joko “Jokowi” Widodo is craving to promote growth in the e-commerce industry. Simple and straightforward regulations will certainly help to achieve the growth and certainty.
The writer works for the Directorate General of Taxation of Indonesia. He is a PhD candidate at the College of Business and Economics at the Australian National University in Canberra, Australia. The views expressed are his own.
We are looking for information, opinions, and in-depth analysis from experts or scholars in a variety of fields. We choose articles based on facts or opinions about general news, as well as quality analysis and commentary about Indonesia or international events. Send your piece to [email protected] For more information click here.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.