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Internet commercials are starting to take over the advertisement business from print and electronic media, especially television. Wide accessibility and ease of use are the internet’s main points of attraction. However, this poses new problems, as online advertisers are not bound by physical presence.
Google’s business in Indonesia is a case in point, highlighting problems that accompany the advance of the digital economy, where the concept of space itself is being distorted. People can conduct business in places without having any physical presence there. The law of the land is failing to catch up to this new trend, with tax rules being one prominent example.
Google’s business model allows such phenomena to arise. Payments for advertisements from Indonesia are sent to Google Asia Pacific Pte. Ltd. (GAP), a Singaporean company.
Because of the tax treaty between Indonesia and Singapore, Indonesia must refrain from taxing the company’s income. Unless GAP has a permanent establishment (BUT) in Indonesia, such income cannot be taxed.
The Directorate General of Taxation (DJP) claims that GAP’s business activities constitute a dependent agent BUT through the presence of PT Google Indonesia (GI). This view is contested by GI, which says GAP has no BUT in Indonesia. Moreover it refuses to cooperate with the DJP and resists investigation.
The existence of a BUT as claimed by the DJP is doubtful. A dependent agent BUT exists when the agent (i.e. GI) basically conducts the non-resident taxpayer’s (GAP’s) business activities. The fact that there is an associated company in Indonesia and income sourced from Indonesia is not enough for the DJP to claim there is a BUT as a tax subject. The DJP needs to study the relationship between GAP and GI carefully. Is GI doing its own business or is it doing GAP’s business?
Furthermore, even if the DJP makes the case that Google has a BUT in Indonesia, that does not mean that all of Google’s income can be attributed to that BUT. The next question is the functions performed by such a BUT. Are significant functions performed in order to generate all of the income?
Profits attributed to the BUT are based on those significant functions performed there or the contributions of the BUT performed in GAP’s business. The DJP cannot tax profits that cannot be attributed to the BUT if functions related to those profits are not performed there.
This approach is more or less the same as if the DJP accepted GI’s claim. If the DJP accepts the claim, then GI’s transactions with other members of the Google group will be treated as transactions between independent entities.
Therefore, such transactions need to be priced properly by transfer pricing analysis. Such analysis will delineate GI’s role and responsibilities in the whole Google business model. From there, its contribution to the profits will be described, and on that basis we can calculate how much profit is attributable to GI.
At the end of the day, both approaches look at the activities performed in Indonesia by GI. To be more precise, it depends on the company profiles and their roles and responsibilities in the whole business model of Google.
Those factors determine the share/contribution in creating the value of the products of the group and thus the profit allocation. Creating a new BUT concept alone is not enough, because it does not solve the problem of attributing profits to the BUT.
If the DJP really wants to capture the income, it should pay more attention to linking GI’s activities to Google’s income and maybe pursue GI through an audit, rather than trying to establish a BUT and attributing the profits later.
