Despite the opportunities for sellers and buyers, digitalization also brings about challenges to the tax system. The digital platform and internet technology have enabled businesses to operate and generate huge revenues in a particular country without having to establish a significant physical presence.

This has created a growing global tax concern because it may erode the tax base and reduce tax revenues. For example, the presence of foreign digital business operations in a market jurisdiction may reduce the market share and profit of traditional businesses that previously comprised the tax base in the country. Furthermore, the ability of foreign digital businesses to pay less tax undermines the level playing field between digital multinational companies and local traditional businesses.

In responding to this concern, leaders of major economies have agreed to establish a coordinated approach in dealing with tax challenges raised by digital businesses. The approach particularly aims to provide more tax rights for the market countries where the revenues are generated.

While waiting for the long-term solution, some countries — including the United Kingdom, France, Spain, Italy, India and Malaysia — recently enacted or announced plans to impose a digital services tax (DST). Foreign digital businesses would be levied at a flat rate (ranging from 2 to 6 percent) on gross annual revenue generated from users in the country. Furthermore, a DST generally applies to certain business models such as digital advertising, social media platforms and online marketplaces.

This new type of tax seems tempting to Indonesia as a market country with a large consumer base. Like other countries, Indonesia is having difficulties in taxing foreign digital businesses operating in the country with a tax system that was designed for traditional business models.

For example, Indonesian income tax law requires a certain level of physical presence or a permanent establishment for nonresident corporations to be taxed. The limitation of the current laws in defining the permanent establishment of digital corporation with primarily digital transactions creates difficulties for the Indonesian tax authority in enforcing taxes on businesses without a physical presence in its jurisdiction.

With a DST, Indonesia could impose taxes on the transactions that take place in the country, regardless of the physical presence of the digital business.

Despite its growing popularity among developed and developing countries, a DST may not be appropriate for Indonesia as the country is planning to harness the digital economy for future economic growth. Indonesia is developing a supportive ecosystem for the digital economy, and a DST may hamper this effort.

Unlike the existing corporate tax that is imposed on profit, a DST is applied on gross turnover. This type of tax is perceived as unfair for businesses with a low profit margin.

This unfairness perception may send a signal that the Indonesian tax system is discriminatory against digital businesses and, thus, may influence the foreign investment that supports the digital economy ecosystem.

Furthermore, a DST is imposed only on certain revenue types rather than on the overall revenue derived from a country. This imposition will be problematic for businesses that have more than one business segment. For example, a large foreign digital business is generating revenues, not only from advertising but also from cloud services. However, whether a DST also applies to these cloud services is still unclear. The problem gets worse as the variety of revenues keeps expanding due to digitalization. Therefore, efforts to tax the digital economy based on its revenue model is like hitting a moving target and raise issues of uncertainty in taxation.

Also, as a DST is applied to gross revenue instead of profit, the tax revenue generated by applying the DST will depend on the profit margin of the businesses. Based on a simplified calculation, if the profit margin of the gross revenue is above 12 percent, then the tax revenue generated from imposing the current corporate tax rate of 25 percent on profit will be higher than imposing a 3 percent DST on revenue.

However, acquiring information regarding the profit margin of digital businesses is even more challenging. Hence, the benefit of a DST to increasing tax revenue is still unclear.

But, does that mean we should leave digital businesses untaxed properly? I believe there is no contention that digital businesses should pay their fair share of tax. But the debate is about how to tax them and I support the idea of taxing them properly with good tax policy that holds fairness and certainty principles.

The approach of Indonesia’s tax authority that opts for a multilateral effort within the framework of the G20 and the Organization of Economic Cooperation and Development (OECD) appears consistent with the principles. The framework recommends several more fundamental actions, including redefining the international taxation rules to adapt with the digital economy and facilitating international tax administration cooperation in enhancing enforcement in transfer pricing.

Furthermore, it is essential for the tax authority to provide adequate resources to effectively implement the OECD/G20 final recommendations that are expected to be established by 2020. Among others it is important to develop infrastructure that improves enforcement capability in dealing with digital businesses.

Today’s tax administration reform that emphasizes strengthening the business process and information technology is expected to accommodate the needs in addressing the tax challenges from the digital economy.

Overall, it is commonly agreed that digital businesses should pay their fair share of tax. However, a key part of fairness would be to ensure that digital businesses are taxed with a sound and sustainable tax policy that complements and encourages the development of a digital economy ecosystem.

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The writer is a PhD candidate from the University of Queensland, Australia and an Australia Award Scholarship awardee. The views expressed are his own.

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