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Should Indonesia adopt digital services tax?
Despite the opportunities for sellers and buyers, digitalization also brings about challenges to the tax system. The digital platform and internet technology have enabled businesses to operate and generate huge revenues in a particular country without having to establish a significant physical presence.
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Illustration of digital business (Shutterstock.com/fatmawati achmad zaenuri)
T
echnological advances have brought more cross-border transactions than ever. With digital technology, it is easier and cheaper for sellers to reach the global market. At the same time, it also brings more convenience to buyers as they may access a greater variety of products at lower prices.
Despite the opportunities for sellers and buyers, digitalization also brings about challenges to the tax system. The digital platform and internet technology have enabled businesses to operate and generate huge revenues in a particular country without having to establish a significant physical presence.
This has created a growing global tax concern because it may erode the tax base and reduce tax revenues. For example, the presence of foreign digital business operations in a market jurisdiction may reduce the market share and profit of traditional businesses that previously comprised the tax base in the country. Furthermore, the ability of foreign digital businesses to pay less tax undermines the level playing field between digital multinational companies and local traditional businesses.
In responding to this concern, leaders of major economies have agreed to establish a coordinated approach in dealing with tax challenges raised by digital businesses. The approach particularly aims to provide more tax rights for the market countries where the revenues are generated.
While waiting for the long-term solution, some countries — including the United Kingdom, France, Spain, Italy, India and Malaysia — recently enacted or announced plans to impose a digital services tax (DST). Foreign digital businesses would be levied at a flat rate (ranging from 2 to 6 percent) on gross annual revenue generated from users in the country. Furthermore, a DST generally applies to certain business models such as digital advertising, social media platforms and online marketplaces.
This new type of tax seems tempting to Indonesia as a market country with a large consumer base. Like other countries, Indonesia is having difficulties in taxing foreign digital businesses operating in the country with a tax system that was designed for traditional business models.
For example, Indonesian income tax law requires a certain level of physical presence or a permanent establishment for nonresident corporations to be taxed. The limitation of the current laws in defining the permanent establishment of digital corporation with primarily digital transactions creates difficulties for the Indonesian tax authority in enforcing taxes on businesses without a physical presence in its jurisdiction.
