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Jakarta Post

E-commerce and cross-border tax avoidance

In Indonesia, there is an enormous potential for growth in the e-commerce sector

Hendri (The Jakarta Post)
Jakarta
Mon, February 4, 2019

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E-commerce and cross-border tax avoidance

I

n Indonesia, there is an enormous potential for growth in the e-commerce sector. According to the Indonesian Internet Service Providers Association (APJII), the number of internet users in 2017 totaled 143.26 million, about a half of which (49.52 percent) were in the productive age (19 to 34 years old).

Global management consulting firm Bain & Company has reported a similar finding, revealing a 74 percent increase in digital consumers between 2016 and 2017. In its report, the company stated that Indonesia had 83 million digital consumers, making it the highest number of digital consumers among all Southeast Asian countries.

The findings certainly encourage market players to develop the e-commerce sector, despite that in 2016 e-commerce only contributed 0.71 percent to Indonesia’s gross domestic product.

A survey conducted by Google and Temasek, for instance, predicted that in 2025 the value of Indonesia’s market would be US$46 billion, approximately 52 percent of Southeast Asia’s e-commerce sector, which is worth $87.8 billion.

Therefore, this indicates how Indonesia would potentially dominate ASEAN’s e-commerce.

However, there are also myriad challenges. One example of the immediate and often overlooked challenges is cross-border taxation and corporate tax evasion, particularly that committed by product-based and service-based companies.

E-commerce allows us to find particular products or services with minimum effort. We can easily purchase electronic books (e-books), for instance, on foreign e-commerce websites that offer a large number of
available products at competitive prices. In regard to entertainment services, subscriptions on over-the-top applications provide us purchase services for premium accounts without bothersome advertisements.

E-commerce also enables us to buy products from foreign websites. However, from the perspective of taxation, such transactions pose a problem.

The main question is: How can products and services be taxed if they are purchased from foreign e-commerce websites?

The Directorate General of Taxation applies the understanding of “permanent establishment” (PE), which is regulated by Law No. 36/2008 on income tax.

According to the regulation, every business entity in Indonesia must have infrastructure or a physical business location, in which business is conducted. In other words, PE emerges alongside a business entity’s physical location.

Then, how about business entities located abroad that do not have physical infrastructure in Indonesia? In this case, online music streaming platforms, for instance, may pick their representatives in Indonesia as tax
intermediaries.

Foreign companies with no physical infrastructure can cooperate with local operators to sell their products and services by charging value-added tax (VAT) in their final invoices.

Regardless, VAT is not applicable if consumers choose to conduct transactions using credit cards as the payments would be made directly to the foreign companies, making it possible for the companies to evade taxes.

In regard to purchasing e-books, if the selling company does not have any physical business location or representatives in Indonesia, none of the transactions between the company and buyers would be subject to VAT.

This demonstrates how tax avoidance clearly takes place when electronic documents can be successfully sold and distributed to buyers without being taxed.

In a large transaction, allowing such tax avoidance would disadvantage Indonesia in the future. Lenience toward tax avoidance occurs not only because of companies’ incompliance, but also because of the absence of effective and continuous regulations.

Taking into account Indonesia’s considerable potential in the e-commerce sector, alternative measures to manage tax avoidance should be proposed.

Furthermore, the Income Tax Law needs amending so as to allow the tax office to introduce new innovations such as redefining the concept of PE, in which the new concept can accommodate technological
developments.

By redefining existing concepts, the government can renegotiate past intergovernmental agreements on taxes and implement new agreements that are in line with technological developments.

For instance, Indonesia can push for the realization and legalization of virtual PE as an alternative in managing tax evasion. The essence of virtual PE is to reconsider companies’ permanent establishments in regard to their virtual establishments. With virtual PE, an application for mobile phones, for instance, can be considered as having a virtual establishment.

Of course, it would take a long time to realize the goal considering the hundreds of intergovernmental tax agreements Indonesia has signed.

A strong international campaign is needed to streamline countries’ perceptions of tax regulation. Bilateral and multilateral negotiations must be intensified as well to find the middle ground.

Therefore, we would be ready to face the uncertainties surrounding information and technological developments in the future.
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The writer is pursuing a PhD at the University of Indonesia, with a thesis on cross-border e-commerce taxation.

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