Fashion
Southeast Asia is experiencing rapid growth in digital technology, social media, mobile activity and internet usage. Like every other emerging market that is witnessing rapid smartphone adoption, Indonesia is seeing mobile phones increasingly chosen as the platform for digital content consumption. According to US research firm eMarketer, spending on digital advertisement is growing very fast in Indonesia.
The world consists of hundreds of different nations and legal jurisdictions, each with their own set of tax regulations. In cross-border transactions, the interaction of domestic tax systems can leave gaps that result in income not being taxed anywhere.
Google is the poster boy of companies successfully practicing “tax optimization”. In the last couple of years, there have been intense discussions on how foreign-based online businesses have apparently failed to pay their “fair share” of tax.
Multinational internet corporations with the help of their financial advisers used the tax treaty network and international structuring regime to minimize their tax burden through various mechanisms. In the digital era, taxing multinational companies becomes a lot more complicated.
First, under international tax rules, local corporate tax will usually be levied on a business in its home country. The target country has the right to tax under traditional international tax concepts, if a non-resident business has a permanent establishment.
Permanent establishment typically requires a relatively strong physical presence or a relatively high number of activities before a state has source-based jurisdiction over income.
Most online businesses do not need these to do business; their online presence and payment systems are sufficient. It is very easy for businesses to claim that they have no taxable presence in a country. It becomes more difficult to apply traditional concepts to link an item of income with a certain location.
Second, having a taxable presence is only the beginning of the story; countries then have to determine how much profit is attributable to that entity.
There is a lack of definite legislation for guidance on this. Tax authorities have often left it to the companies to bargain with them.
However, while negotiating, both parties will also be looking over their shoulders at their home country.
Especially companies from the US, such as Google and Facebook, would prefer any tax they pay in other countries to be deductible as a credit against taxes to be paid in the US.
Another question is how the government could tax a large business that has not yet been monetized, meaning it does not really earn any money, like WhatsApp? It is pretty much playing on the valuation, and taxes are applicable only when the business is sold.
Third, governments are often slow to adapt their tax laws to technology. Many countries are now struggling with how streaming video services like Netflix fit into their tax structure.
Historically, the problem with the taxation of digital goods is that the sales tax was designed to be imposed on the sale of tangible personal property.
The tax base has been expanded over time to include several specific services, but many digital products are a mix of an intangible product and a service. Most transactions do not systematically fit into existing tax laws.
Indonesia’s government has tried to address some of these problems. The Communications and Information Ministry has issued Decree No. 3/2016, which stipulates that internet companies providing services in the country must establish a permanent establishment.
