Works at the Directorate Taxation Regulation I of Directorate General of Taxes
By definition, value added taxes (VAT) is a tax on consumption of goods and services within Indonesia’s customs jurisdiction which is applied at every stage along the production and distribution line. This statement carries two important general principles, the destination principle, whereby the place of taxation is the place of consumption, and the neutrality principle, whereby VAT is implemented through a staged collection process whatever the nature of the supply, or technical means used.
Due to the extremely rapid advancement in digital technology, this principle is facing tough challenges with regards to VAT collection from supplies of services and intangibles goods from non-resident or cross border supplies. The use of reverse charging mechanism for this type of transaction is ineffective, compliance is predictably low since there is no incentive to the final private consumers to declare and pay the VAT due, worsened by absence of penalties. Thus the cost of chasing unpaid small amount of VAT from millions of private consumers may outweigh the total revenue collected.
The OECD International VAT/GST Guidelines proposes to require such non-resident suppliers to register and account for the VAT in the jurisdiction of taxation. What potentially works with this OECD approach is that, first, big foreign suppliers, on the basis of good governance, trust, image, and expected ethical conduct, might follow through the registration process requirement and collect VAT from their consumers on the behalf of the government unaffiliated with such consumers. Therefore, the stream of VAT revenue is expected to significantly increase in comparison to the only reliance of reverse charging by the consumers.
Secondly, it offers more effective and efficient mechanism than custom-assisted for imported goods and reverse charging for business to consumers. It’s effective because VAT is truly collected and it’s efficient because VAT is collected with the least hassle as tax administration only deals with a handful of registered foreign suppliers in contrast to having to enforce compliance to every single private consumer. The incremental impact to the tax revenue is expected to be positive.
Last but not least, this approach nurtures compliance in general because the tax administration could be seen imposing the similar level of taxation to similar transactions according to the intended regulation whether they are done conventionally or unconventionally or whether they are purchased locally or internationally. When compliance is nurtured, more consistent stream of tax revenue is expected to follow.
However, we also have to think about what potentially doesn’t work.
First, this system will not function if the targeted registrants do not follow the registration process. As foreign suppliers have no legal entity present in Indonesia to be held responsible to meet the required registration process, tax administration will have difficulty imposing the rule. Without proper incentives and accompanying applicable and immediate meaningful sanctions, this new mechanism is potentially failing from the start.
Secondly, when businesses see no incentives are given to foreign suppliers who have already registered voluntarily and no penalties applied to those who have not complied, nurturing compliance is a huge task especially when business competition gets more intense.
Then there is this issue of accountability in off-shoring tax collection to foreign suppliers. Without legal or formal affiliation to Indonesia, any enforcement action of any misconduct by foreign suppliers could be a very challenging task. When issuing the regulation stating that the VAT is going to be collected by a foreign supplier, policy makers must have proper safeguards installed to know how much VAT has collected by each foreign suppliers, to make sure that all those VAT collected from all tax payers in Indonesia are truly remitted to the state coffers in whole by the foreign suppliers, and what to do when they are not.
Unless such safeguards have been clear since the get-go, it is going to be very difficult to answer the question concerning the accountability of following the OECD approach.
However, a proper and accountable policy response must be undertaken as soon as possible with the risk of lost tax revenues looming larger. The policy response should rest on the foundation that it is still vital for tax collection assistance to be done by an Indonesian legal entity since it still falls within the boundary of the Indonesian legal system.
Therefore what we can sensibly do right now is to engage very actively as soon as possible with all parties, Indonesian legal entities and relevant Indonesian authorities, who are involved in the business process of digital transactions, to come up with a consensus on how to collect the VAT for digital transactions and which Indonesian legal entity or entities should bear the responsibility in helping the government to collect such tax in the most effective and efficient way, and of course with high accountability.
The government, in this case, the tax administration, should facilitate the course of the discussions. I believe that when we give trust and let the businesses decide for themselves what is best on this matter, participatory compliance can be developed. And I also believe that businesses also want to have a successful tax administration that can collect VAT in the most fair and equitable manner when a level playing field for all businesses, local or foreign, is achieved. After all, we all know that VAT is a tax on consumption of the final consumer, not a tax on the business itself.
The writer currently works at the Directorate Taxation Regulation I of Directorate General of Taxes at the Finance Ministry. He has a Master degree in public finance from the National Graduate Institute for Policy Studies in Tokyo. This is a personal view.
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