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How can we tax the digital economy?
Taxation of the digital economy is a widely discussed topic following a report published by the Organization for Economic Cooperation and Development (OECD) in 2013 with a mandate from the Group of 20 countries. Now, what can Indonesia do? Indonesia is a large market for the digital economy.
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The first measure proposed is “to address the tax challenges of the digital economy”. The key challenge to digital economy taxation is that a business can be run in a jurisdiction without being physically present in that jurisdiction. (The Jakarta Post/Seto Wardhana)
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axation of the digital economy is a widely discussed topic following a report published by the Organization for Economic Cooperation and Development (OECD) in 2013 with a mandate from the Group of 20 countries. In the report titled Action Plan on Base Erosion and Profit Shifting, the OECD lists 15 measures to combat cross-border tax avoidance by multinational corporations. The project has since become known as the OECD/G20 Base Erosion and Profit Shifting Project (BEPS project).
The first measure proposed is “to address the tax challenges of the digital economy”. The key challenge to digital economy taxation is that a business can be run in a jurisdiction without being physically present in that jurisdiction.
Yet, the existing tax rules govern that a jurisdiction has the right to tax income derived by the business only if the business is physically present.
The BEPS project made significant progress after the Inclusive Framework (IF) was formed in July 2016. The IF’s main task is to develop a long-term solution to the tax challenges arising from the digitalization of the economy and is expected to reach a global consensus on the solution in 2020. As of August, 134 jurisdictions have become IF members, including Indonesia.
In January, the IF issued a policy note containing three proposals intended to replace the existing business profit taxation concept. While the proposals differ in terms of approach, they share the same view that the source-of-income countries should be given the right to tax business profit even though the business is not physically present in that jurisdiction. But the challenges do not stop here.
There are differences of opinion — particularly between European Union and the United States — as to which proposal would serve as the global consensus. The EU leans toward a proposal that targets highly digitalized businesses (HDBs).
As we know, most HDBs, such as Google, Amazon, Facebook and Apple, are US companies. Therefore, on the contrary, the US is more likely to choose a proposal that targets not just HDBs.
