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Taxation bill allows government to ‘cut’ tech firms’ access

The government will be able to cut the internet access of foreign technology companies such as Netflix and Spotify, which are considered as having “significant presence and transactions”, if they do not pay local taxes, according to the omnibus bill on taxation

Adrian Wail Akhlas (The Jakarta Post)
Jakarta
Mon, February 24, 2020

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Taxation bill allows government to ‘cut’ tech firms’ access

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span>The government will be able to cut the internet access of foreign technology companies such as Netflix and Spotify, which are considered as having “significant presence and transactions”, if they do not pay local taxes, according to the omnibus bill on taxation.

The sweeping bill will consider foreign e-commerce and digital companies with significant economic presence in the country, regardless of where they are based, as permanent establishments, and thus subject to local income and value-added tax (VAT).

The “significant presence” will be determined by gross circulated product, sales and/or active users in Indonesia.

The concept of significant economic presence falls under the first of two pillars in the OECD/G20 Inclusive Framework on BEPS (base erosion and profit shifting), which was developed by a working group that brings together more than 125 countries under the Organization for Economic Cooperation and Development (OECD) to tackle global tax avoidance.

Furthermore, the bill stipulates that in the event such a company cannot be declared a permanent establishment due to Indonesia’s tax treaty with a certain country, the tax office will charge it an electronic transaction tax instead. Further details on the significant presence and tax payment procedures, among other things, will be regulated in a finance ministerial regulation.

The bill also stipulates that the communications and information minister can cut the companies’ access if they fail to fulfill the tax obligations based on the Finance Ministry’s Taxation Directorate General’s request.

The current Electronic Information and Transactions Law states that the government has the authority to cut internet access and/or ask digital companies to shut down access to electronic information/documents violating the law.

Taxation Director General Suryo Utomo said the prevailing regulation only obliged companies with a physical presence in Indonesia to pay taxes. If passed into law, the bill will give a legal basis for the government to tax digital companies abroad even if they do not have a local presence.

“The bill will expand the base for not only companies that have a physical presence but also those with significant economic presence,” Suryo said last Wednesday.

The tax authority has been struggling to tax digital companies, which have a growing presence in the country, amid sluggish revenue collection and advanced countries’ similar efforts to tax tech giants.

The country’s digital economy is expected to reach a value of US$130 billion by 2025, almost five times the $27 billion last year, according to the annual e-Conomy SEA 2019 report by technology giant Google, Singaporean holding company Temasek and management consulting firm Bain & Company.

Meanwhile, tax collection fell short of the government’s target last year with Rp 1.33 quadrillion ($96.66 billion) in tax revenue collected, 84.4 percent of the full-year target. Such a situation caused a shortfall of Rp 245.5 trillion, the biggest shortfall in at least the last five years.

The government submitted the omnibus bill on taxation earlier this month to overhaul the taxation system and relax some regulations in a bid to attract more investment. The bill will effectively lower corporate income tax from the current 25 percent to 20 percent by 2023, lower tax penalties and ease income tax regulations for expatriates.

According to the bill’s draft, digital companies will be subject to VAT and could appoint representatives in Indonesia to collect, pay and report the taxes on their behalf. Further details on the VAT will be regulated in a finance ministerial regulation.

Center for Indonesia Taxation Analysis executive director Yustinus Prastowo said the government’s plan to tax the tech giants was problematic due to the country’s involvement in the OECD’s effort to unify tax treatment for digital companies.

The inclusive framework has yet to reach a consensus on how to tax digital companies. It allows its members to pursue their own initiatives before a global consensus is reached but the initiatives should be revoked by the members if they contradict the measures agreed to later by the framework.

“This could curtail the trust of other OECD members toward Indonesia,” Yustinus told The Jakarta Post in a phone interview, adding that the government’s decision to tax digital companies through the bill was an unilateral decision.

He also warned of dispute risks with advanced countries, such as the United States, in which most of the companies were established.

The US has threatened tariff retaliation for France’s attempt to tax digital giants. The digital service tax that French President Emmanuel Macron signed on July 24 last year applies a 3 percent tax on gross revenue earned by digital companies in France.

The two countries then declared a truce in January, which resulted in France postponing the tax implementation and the US not slapping tariffs on the European country until the end of this year to give chance for the OECD to rewrite the rules on international taxation.

A Netflix spokesperson told the Post that the company had met with tax authorities in Indonesia over the last few months and stressed that the streaming giant supported the introduction of VAT in Indonesia and the OECD’s proposed global tax reforms.

“Ultimately, it is for governments to decide the rules on tax and in every country in which we operate. Netflix respects those rules,” the spokesperson said in a statement.

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