The rise of digital taxes during a pandemic

Latest DataReportal reports show that as of January, internet penetration in Indonesia stood at 64 percent of the population or 175.4 million users, up 17 percent or 25 million people from 2019.

Social media penetration was at 59 percent or totaling 160 million users, representing an increase of 8 percent or 12 million people from April 2019. These data shows good prospects for the digital economy and digital taxes.

However, the Organization for Economic Cooperation and Development (OECD) Inclusive Framework, which consists of 129 countries, has yet to conclude an international agreement on digital taxation. Developing countries need to maintain pressure on the inclusive framework committee so that their interests can to be accommodated in future digital taxation practices.

But even before an international consensus is achieved, countries may have to resort to unilateral measures to deal with digital taxation. They need to improve their tax administration and tax policy, especially regarding business models and value created.

Prevailing international taxation rules that were designed in the 20th century for brick and mortar businesses cannot apply to the new business models of the digital economy. But it is urgent for countries to regulate digital taxes to protect both revenues and the domestic industry.

The Indonesian government, for example, has stipulated rules and directives on the taxation of digital transactions in Regulation in Lieu of Law (Perppu) No. 1/2020 on state finances and financial system stability, which was recently enacted into law by the House of Representatives.

Provisions in the new law have become a legal umbrella for governing taxation matters related to cross-border digital economic activities. This is in line with the earlier Government Regulation No. 80/2019 on trade through electronic systems, which also stipulates digital taxation arrangements.

The approach chosen by the government is based on the significant economic presence (SEP) of the subject. Income tax is imposed on electronic commercial transactions carried out by foreign tax subjects who meet the classification or provisions for SEP.

Perppu No. 1/2020, which has now become law, stipulates that the classification of SEP is based on several criteria, such as the gross circulation of consolidated business groups in Indonesia, sales in Indonesia and active users of digital media in Indonesia. This also complements the same provisions in Government Regulation No. 80/2019, which states that the imposition of a significant presence is realized by criteria such as the number of transactions, transaction value, number of package shipments and/or the amount of traffic or access.

The SEP approach has been applied in several countries and regions, including Turkey (2016), the Slovak Republic (2017) India (2018) and the European Union (2018). The SEP approach adopted by Indonesia will conflict with the provisions of Indonesia's tax treaties with partner countries. The contravention tax treaty only regulates the physical presence requirements, not the significance of economic presence.

To overcome this, Indonesia introduced the electronic transaction tax provision in Perppu No. 1/2020. Electronic transaction tax is levied on sales of goods and/or services from outside Indonesia through electronic trading to buyers or users in Indonesia conducted by foreign tax subjects, both directly and through the organizers of foreign trade through electronic systems.

However, the electronic tax rate has yet to be determined by the Finance Ministry. This step is considered appropriate because in the middle of this pandemic, foreign companies are also making significant profit as the use of their services/products increases.

In Indonesia, the most visited websites by average monthly traffic according to SimilarWeb are Google, YouTube and Facebook. Meanwhile, the most common types of activities are the video-streaming, watching vlogs, music-streaming, listening to online radio stations and listening to podcasts.

This measure could also become a new source of state revenue during the enormous tax relaxation given by the government to business sectors affected by the COVID-19 pandemic. But this measure will be more effective if it is supported by other steps.

First, as there has yet to be a standard or international consensus on digital economy taxation, Indonesia needs to keep good consultations and cooperation with the companies that provide e-commerce platforms such as Google, YouTube, Facebook, Amazon, Netflix and Zoom. Indonesia also needs to coordinate with other countries, both in the region and around the world.

Second, Indonesia needs to develop its domestic tax policy according to international standards and best practices. Multidimensional business models involving users pose several challenges.

Third, the designing of a tax policy on the digital economy should be based on neutrality, efficiency, certainty and simplicity. Taxation should seek to be neutral and avoid double taxation or unintentional non-taxation. The cost of compliance for both businesses and tax administration should be minimized and efficient. And also, tax rules should be clear and simple to understand.

It is undeniable: the digital economy is a popular issue among countries during the COVID-19 pandemic. Taxing the digital economy is not an easy matter. How the tax is calculated and withheld and many other technical issues are still big questions to all of us.

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Analyst at the Center for Government Revenue Policy, Fiscal Policy Agency, Ministry of Finance. The views expressed are his own.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

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