The digital economy is predicted to be one of the powerhouses of economic growth. The rapid penetration of internet connection, as well as the widespread use of smartphones, drive the rise in the value of transactions.
he digital economy is predicted to be one of the powerhouses of economic growth. The rapid penetration of internet connection, as well as the widespread use of smartphones, drive the rise in the value of transactions. This sector is projected to contribute approximately 10 percent of Indonesia’s gross domestic product (GDP) in 2025.
It is also one of the sectors targeted by the tax authority for revenue. However, it raises concerns on how the Taxation Directorate General formulates and implements proper strategies to optimize revenue from the digital economy.
It is acknowledged that collecting tax from this sector is not easy considering that the digital economy has specific features that distinguish it with traditional business models. It is marked with the native of transactions that occur globally and the high use of intangible assets in favor of physical assets.
While there are dozens of domestic companies in the sector, some foreign companies also engage in digital business activities in Indonesia. Google and Facebook have been long known to provide advertising services to businesses in Indonesia. On the other hand, local companies playing in the digital sector also emerged rapidly recently. Marketplace platform and ride-hailing start-up companies, for instance, are now popular.
Despite the popularity of digital economic activities, it creates complexity for the tax authority to collect tax revenue, especially for foreign companies with no legal presence in Indonesia.
Based on the concept of international taxation, income derived from business activities by foreign companies can be taxed only if it has a permanent establishment (PE) in Indonesia. PE is a form of business used by foreign entities to conduct business in Indonesia. The presence of PE is vital as it becomes the requirement for Indonesia to levy tax on foreign companies.
The government recently released the latest regulation regarding PE with the issuance Finance Ministerial Regulation No. 35/2019. While the term PE has been mentioned explicitly in the income tax law, the latter regulation elaborates the definition and provides a more detailed arrangement of PE.
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