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Jakarta Post

Concerns over unfair practices, law enforcement cloud digital tax implementation

  • Farida Susanty

    The Jakarta Post

Jakarta   /   Wed, April 8, 2020   /   05:12 pm
Concerns over unfair practices, law enforcement cloud digital tax implementation Government Regulation in lieu of law (Perppu) No. 1/2020 issued last week serves as the legal basis for the government to tax foreign companies with a “significant economic presence” that provide digital services and intangible goods from outside the country. (Shutterstock/Creativa Images)

The government’s move to roll out the legal basis for imposing taxes on digital companies operating in Indonesia might just be the beginning of its struggle going forward, with concerns surfacing over perceived unfair practices and the enforcement of the regulation.

Government Regulation in lieu of law (Perppu) No. 1/2020 issued last week serves as the legal basis for the government to tax foreign companies with a “significant economic presence” that provide digital services and intangible goods from outside the country.

The significant economic presence will be determined through the companies’ gross circulated product, sales and/or active users in Indonesia, the regulation reads.

Read also: Indonesia taxes tech companies through new regulation

Tax office spokesperson Hestu Yoga Saksama said the Finance Ministry was now drafting a regulation to implement the Perppu’s provisions. The regulation will allow the government to instruct the digital companies, such as streaming giant Netflix and Swedish music streaming platform Spotify, to collect, pay and report charged value added tax (VAT).

“We have started communicating with some of their [digital companies’] representatives in Indonesia. We hope that it [tax collection] will start taking effect in several months,” he told The Jakarta Post recently, citing the examples of similar practices conducted in Singapore, Malaysia and Australia.

In Singapore, starting from Jan. 1, customers subscribing to overseas digital services have to pay a 7 percent goods and services tax after the Goods and Services Tax Act was passed in November 2018.

Indonesia has yet to gain significant state revenue from mushrooming digital companies offering and selling services in the country to date. One of the main reasons is that many of the digital companies operate from abroad, with no legal entity in Indonesia.

The home screen for the Netflix Inc. original movie Two Popes pictured in this undated photo.The home screen for the Netflix Inc. original movie Two Popes pictured in this undated photo. (Bloomberg/Gabby Jones)

Under the Perppu, the government is able to declare digital companies with a significant economic presence as permanent establishments, obliging them to comply with domestic tax regulations.

Yoga confirmed the high state earning potential from the digital tax, which is expected to increase in the future. He, however, declined to give specific details with regard to potential income.

Finance Minister Sri Mulyani Indrawati said recently that the government decided to tax the digital companies because their sales soared during the pandemic.

“They will be the government’s tax base, especially such as today when we use Zoom or Netflix. The companies are not present in Indonesia so they can’t be taxed. But their economic activities are huge,” Sri Mulyani told a teleconferenced briefing.

Netflix recorded US$20 billion of revenue globally in 2019, up by 31 percent from the previous year, of which more than $1 billion came from the Asia Pacific region. Meanwhile, Spotify clocked up $1.85 billion in 2019 globally, up by 24 percent from the previous year.

Data website Statista has estimated Indonesian Netflix subscribers to number around 481,000 in 2019, a figure that has not been confirmed by Netflix. Statista also estimates the number of music streaming users in Indonesia to be 26.7 million, a 3.3 percent increase from the previous year.

“Ultimately, it’s for governments to decide the rules on tax - and in every country in which we operate, Netflix respects those rules,” Netflix has said previously. “Taxation is an important and much-debated issue in Indonesia - and we've had conversations over the last few months with the tax authorities.”

Read also: Indonesia accelerates tax reforms, cuts corporate income tax in COVID-19 playbook

However, the upcoming digital tax has been met with caution by both digital service users and experts. Institute for Development of Economics and Finance (Indef) expert Andry Satrio Nugroho voiced concerns about a level playing field in the digital business landscape after the tax was imposed.

“The government needs to establish a similar level playing field and convince business players that the government as a regulator will not use a regulation to hinder specific parties from competing,” he said, citing state-owned telecommunications company PT Telekomunikasi Indonesia’s (Telkom) decision to block Netflix services on its internet network.

Telkom has contended that Netflix does not yet fully comply with Indonesian regulations regarding media content.

“If the government plans to impose the tax on OTT [over the top companies], the government needs to also grow trust in the digital sector that discriminatory practices will not be not used by the regulator or state enterprises,” he stressed.

Meanwhile, Indonesia ICT Institute executive director Heru Sutadi highlighted the concern over sanctions in the case of noncompliance by OTT companies in the future. “It’s not very easy to enforce the rules if the OTT headquarters are elsewhere,” he said.

Read also: State revenue to contract 10% as businesses suffer, tax incentives take effect: Sri Mulyani

Based on the Perppu, the sanction for tax regulation noncompliance could be a block on access to the digital service, after a warning. The Finance Ministry has pledged to work with the Communications and Information Ministry and Statistics Indonesia (BPS) in supervising the data exchange and employing sanctions.

Heru also questioned the government’s coordination among ministries on enforcing the digital tax sanction, especially with the recent $1 million partnership between Netflix and the Education and Culture Ministry.

“The strategy of foreign OTTs in Indonesia is always like that. If there is an institution that presses them, they will go to another institution to collaborate,” he said.