It is also one of the sectors targeted by the tax authority for revenue. However, it raises concerns on how the Taxation Directorate General formulates and implements proper strategies to optimize revenue from the digital economy.

It is acknowledged that collecting tax from this sector is not easy considering that the digital economy has specific features that distinguish it with traditional business models. It is marked with the native of transactions that occur globally and the high use of intangible assets in favor of physical assets.

While there are dozens of domestic companies in the sector, some foreign companies also engage in digital business activities in Indonesia. Google and Facebook have been long known to provide advertising services to businesses in Indonesia. On the other hand, local companies playing in the digital sector also emerged rapidly recently. Marketplace platform and ride-hailing start-up companies, for instance, are now popular.

Despite the popularity of digital economic activities, it creates complexity for the tax authority to collect tax revenue, especially for foreign companies with no legal presence in Indonesia.

Based on the concept of international taxation, income derived from business activities by foreign companies can be taxed only if it has a permanent establishment (PE) in Indonesia. PE is a form of business used by foreign entities to conduct business in Indonesia. The presence of PE is vital as it becomes the requirement for Indonesia to levy tax on foreign companies.

The government recently released the latest regulation regarding PE with the issuance Finance Ministerial Regulation No. 35/2019. While the term PE has been mentioned explicitly in the income tax law, the latter regulation elaborates the definition and provides a more detailed arrangement of PE.

However, there are no substantially new rules governed. Conceptually, the term of PE which is defined in this regulation still refers to the concept of PE introduced by the Organization for Economic Cooperation and Development (OECD) in the Tax Convention Model Guide on Income and on Capital.

One of the fundamental traits from those concepts is the requirement of foreign companies to have a permanent places of business for a company to be categorized as PE. The term of a fixed place of business constitutes a wide meaning. Not only including an office, but also including a management, branches, workshops and even ownership of computer tools owned or rented.

Using that PE concept, companies such as Google and Facebook in Indonesia are still in the grey area, and perhaps do not meet the requirement to be categorized as PE. Both companies do not have a fixed place of business in Indonesia.

Although some foreign companies do have a legal and physical presence in Indonesia, they were set up as a representative office that does not run contracts with consumers.

The presence of this representative office cannot be considered as PE because they do not conduct the main business but rather do auxiliary activities, such as conducting market surveys and promoting their consumers in Indonesia. These kind of activities are excluded from the PE definition under the OECD model.

The problem arising from the digital company is also an international issue that is not only faced by Indonesia. Specifically, it is part of key issues in the tax evasion practice of so-called Base Erosion and Profit Shifting that are now under discussion with the OECD.

There are many countries or jurisdictions that have disputes with digital companies related to taxing rights.

Most countries considered that the tax contributions paid by foreign digital companies do not represent the value of transactions that they made in the country. There is a mismatch between countries where revenue recognition is where business activities are executed.

The Taxation Directorate General as a tax collection authority faces the same problem with regard to taxing rights from digital companies. There is still no global consensus on how to tax the digital economy. Therefore, the new rule regarding PE will still be difficult to use as a legal base to collect tax revenue from foreign digital companies that do not own PE in Indonesia.

On the other hand, imposing taxes on local digital companies is considered easier. There is no issue in taxing rights as it arises in the case of foreign companies. The focus is on how to identify companies that are engaged in digital transactions but not yet registered as taxpayers.

Furthermore, it is must be ensured that all income derived from those activities are reported to the tax office.

In the end, the attempt to maximize tax revenue from the digital economy seems not easy for the tax authority because of the lack of support from existing rules and the absence of global consensus. Therefore, other creative strategies should be considered to be able to collect taxes from the sector.

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The writer finished his postgraduate degree at the University of Western Australia and works at the Taxation Directorate General. The views expressed are his own.

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