TheJakartaPost
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Taxing cross-border transactions
Indonesia’s Directorate General of Taxation has accused Google of having tax arrears of almost Rp 5 trillion. Google has not established a permanent establishment in the country.
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This Wednesday, April 26, 2017, photo shows the Google mobile phone icon, in Philadelphia. Alphabet Inc., parent company of Google, reports financial results, Thursday, April 27, 2017. (AP/Matt Rourke)
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onducting transactions digitally has become a method of tax avoidance, especially in developing countries such as Indonesia. By this way, providers can provide goods or services to customers in other countries without establishing a fixed office, because they can carry out transactions through the internet.
As a result, the tax base in the country where the income is generated will be reduced. This is caused by a condition whereby a taxpayer in one country claims expenses on a payment upon benefit received from a service provider in another country. Meanwhile, the income received by the service provider is taxed in the country in which they reside, which is commonly a country with a low tax rate. This condition is commonly called “base erosion.”
Based on international tax norms, a country has a primary right to tax income that has its source in that country. The model introduced by the Organization for Economic Cooperation and Development (OECD) is a reference used by many countries to design a tax treaty.
Regarding to the right to tax business income, Article 7 of the OECD model states that the profit of an enterprise of a country shall be taxable only in that country unless the enterprise conducts business in another country through a permanent establishment situated therein. Accordingly, having a permanent establishment is a requirement to tax business income received by a non-resident company in the source country.
