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Indonesia must tread carefully in considering new digital tax
Together with improvements on ease of doing business and cutting bureaucratic red tape, a harmonized tax regime will amply serve President Jokowi in achieving his vision to boost job creation and attract new foreign investment.
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Indonesia has the world’s fifth-highest number of internet users. Indonesian internet users increased from 132.7 million to 150 million last year. (Shutterstock/Creativa Images)
T
he coronavirus crisis already has had far-reaching and devastating impacts on the global economy and international business. Corporate profits have nosedived, and most experts predict it will be at least a year before the situation stabilizes sufficiently to resume normal business activity. Even then, company investments will take longer to recover, and CEOs will be looking to capitalize on only the very best opportunities.
Indonesia’s digital economy, which was already on an upward trajectory before the crisis, is likely to play a pivotal role in Indonesia’s own recovery from the virus. As Southeast Asia’s fastest growing and largest digital economy with the potential to reach US$133 billion in value by 2025, the Indonesian digital economy will be a key driver of jobs and economic growth. In charting a path toward economic recovery, Indonesia has sought to improve its investment climate by benchmarking its tax and other policies with those of its competitors.
Like many countries in the Asia Pacific, Indonesia is involved in negotiations at the Organization for Economic Cooperation and Development (OECD) to achieve international consensus on tax challenges arising from the digitalization of the economy, so that corporate income taxes are rebalanced toward countries where products and services are consumed. The OECD hopes to reach a consensus by the end of 2020.
By harmonizing its national approach with the global consensus, Indonesia can ensure that its tax regime follows international best practices, while collecting additional tax revenues. This will strengthen Indonesia’s attractiveness as a destination for foreign investment across industries, given that almost all multinational companies use data, computers and internet connectivity to power their products and services.
Together with improvements on ease of doing business and cutting bureaucratic red tape, a harmonized tax regime will amply serve President Jokowi in achieving his vision to boost job creation and attract new foreign investment. Such reform efforts are even more urgent in the post-coronavirus climate, where countries will be locked in fierce competition for a more limited pool of foreign direct investments. Ensuring that its tax regime is aligned with international best practices will be critical to helping Indonesia attract these investment dollars.
Since many of the multinational companies in this space are based in the US, an international tax regime that adheres to international standards will also boost US-Indonesian ties. Before the COVID-19 crisis, we saw welcome momentum in our relations. President Donald Trump had been ready to welcome President Joko “Jokowi” Widodo for a bilateral visit to Washington, and the CEO of the new US Development Finance Corporation (DFC), Adam Boehler, had signaled the DFC’s commitment to invest up to $5 billion to support new US projects in Indonesia. Indonesia’s energy and infrastructure sectors appear poised to be early beneficiaries of this cooperation.
America’s technology companies likewise are optimistic about long-term prospects in Indonesia. Google, Facebook, Amazon and Microsoft are expanding their investment in Indonesia, both through infrastructure and digital skilling initiatives, a strong signal of their confidence in future market opportunities in Indonesia.
A new tax targeted only toward the digital sector could undermine such investment plans and potentially risk US retaliation. Many would recall the US’ move to impose tariffs on French products in response to France’s discriminatory digital services tax which was targeted at US tech firms. Moving ahead of the OECD international consensus by imposing unilateral tax rules which would disproportionately impact US tech firms would likely invite similar retaliatory action. This would be counterproductive to Indonesia’s
economic recovery efforts and would hurt Indonesian businesses and SMEs seeking to access the US market.
The way forward, then, is to keep Indonesia’s tax reforms in line with the emerging OECD consensus so Indonesia will be able to sustain its position as the fastest growing digital economy in Asia, maintain good momentum in its relations with the US, compete successfully with its ASEAN and other competitors to attract new investment once the COVID-19 crisis subsides, and leverage that investment to create new digital economy and other jobs to sustain Indonesia’s recovery.
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United States ambassador to Indonesia from 2013 to 2016, now senior director at McLarty Associates, a global consultancy
