The Jakarta Post
The imposition of 10 percent value-added tax (VAT) on digital products provided by tech companies overseas to customers in Indonesia through the electronic trading system as stipulated by Law No. 2/2020 will come into force on July 1. Though Indonesia is taking part in international negotiations under the Organization for Economic Cooperation and Development (OECD) to rewrite global tax rules in response to the rising prominence of tech firms, the government will not wait for a final agreement on the matter, expected later this year.
Faced with a steep decline in tax receipts due to the pandemic-induced economic recession, the government decided to join six other countries in Asia and Europe that have collected such taxes despite the threat of retaliation from the United States Trade Representative.
The argument behind the law quite strong. It is imperative to create a level playing field because currently only domestic providers of digital products are obliged to collect the 10 percent VAT in accordance with the 2009 VAT Law.
Furthermore, Indonesia has seen a fast-growing digital economy with potentials estimated by analysts to reach US$135 billion in 2025. The pandemic and associated social and physical restrictions have caused commerce to shift online, as consumer purchases have increasingly been made through digital channels and streaming networks for games, music and movies and online conferencing services.
Our big concern, though, is the institutional capacity of the Taxation Directorate General to administer and manage the VAT.
Administratively, collecting taxes on digital products from overseas is complex because such products are intangible and therefore difficult to monitor. Monitoring is important for obtaining information on subscriber numbers and transaction values, which are needed to calculate the VAT.
Providers that are based entirely overseas operate outside of Indonesia’s tax authority. Therefore, cooperation among tax authorities in administering digital tax is one of the issues being negotiated within the OECD.
Unlike physical goods, it is also extremely difficult to determine the collection point of intangible products. Depending on foreign providers to calculate, collect and withhold the VAT for monthly transfers to the Taxation Directorate General could be ineffective. Imposing legal penalties on providers that defy the regulation may not work due to jurisdictional difficulties.
Hence, the effectiveness of the tax policy will depend on how the tax office sets up a regulatory framework that requires overseas providers of digital products to use the internet and electronic payment infrastructure in Indonesia to serve their customers in the country. Under such regulatory arrangements, the tax office would be able to appoint the domestic providers of such infrastructure, from telco firms and banks to fintech and credit card issuers, the collectors of the VAT under separate agreements.
At the end of the day, the VAT collection system should conform to international best practices; otherwise, Indonesia’s attractiveness as a destination for foreign investment could be affected as all multinational companies use data, computers and internet connectivity for their products and services.