Indonesian government plans to collect value-added tax from foreign digital companies such as Google, Facebook, Amazon, Twitter, and Netflix, which lack a physical presence in the country but gain revenue from domestic consumers - Photo by TheInsiderStories

JAKARTA (TheInsiderStories) – Indonesian government plans to collect value-added tax from foreign digital companies such as Google, Facebook, Amazon, Twitter, and Netflix, which lack a physical presence in the country but gain revenue from domestic consumers. The rule will included in the omnibus law for taxation will provide a stronger legal basis for the government to tax digital-based companies.

“In the new law, with the phenomenon known as a cross-border digital economy, the definition of a permanent establishment would no longer be based on physical presence. So, even if the companies do not open any offices in Indonesia, they still have a tax obligation because they have what is called a significant economic presence,” finance minister Sri Mulyani Indrawati told reporters after a limited meeting at the president office in Jakarta, on Friday (11/22).

Moreover, the digital-based companies would be declared a foreign tax subject, which will mandate them to collect value-added tax from economic activities conducted in Indonesia and deposit taxes with the tax authority.

The country’ current tax code, last revised in 2000, has a loophole that has meant only companies domiciled in Indonesia have to pay taxes. This lets over-the-top media services to stream their movies to local customers without collecting value-added taxes like their local counterparts.

With the revised tax code, Indonesia is following in the footsteps of Singapore and Australia, countries that have implemented the so-called Netflix law. Governments around the world are banding together to try to find a way to collect tax from over-the-top media streaming services and other companies of their ilk.

The government will also modify how expatriates in Indonesia and the Indonesian diaspora pay their tax. Indonesians who have been living abroad for more than 183 days, or six months, will not have to pay income tax on their earnings from their new country of residence.

“Anyone who receives dividends from abroad will not have to pay tax on them, as long as they invest the dividends here. They will become the tax subject of the foreign country,” said Indrawati by adding these taxpayers still need to meet several other criteria before they can get the tax break.

Expatriates who live in Indonesia for more than six months will only need to pay income tax on earnings that they generate in the country, the minister said.

The government also seeks to lower corporate income tax from the current 25 to 22 percent in 2021 and 20 percent in 2023, which would avoid a drastic decrease in tax revenue, she adds. The bill, which is still being discussed within the government to be deliberated further with lawmakers, would amend parts of the existing income tax law, value-added tax, and general taxation law to make Indonesia’s taxation regime more competitive for investors.

On top of the new rate, companies that go public for the first time in 2021 and the years after will get a further discount of three percent for five years on their income tax. Corporate or individual shareholders will no longer be required to pay tax on dividends they receive from local companies. Today, the tax office takes a 10 percent cut for the state on any dividend.

The minister also said the government will lower income tax on interests, currently at 20 percent, to an undisclosed amount. It will be determined later by government regulation, she said, referring to a lower-tier regulation that can be issued without consultation with the House of Representatives.

Indrawati said the government will also adjust how the tax office imposes tax deduction and tax fines to benefit businesses. Today, companies can deduct the value-added taxes they pay when purchasing raw materials or other input services and materials.

But if they purchase from suppliers that, by law, are not required to collect and report value-added taxes – such as small and medium enterprises – they miss the chance at the deduction. Under the new tax policy, the government will let local companies that make purchases from small businesses to claim the deduction, up to 80 percent of the full-claim amount.

The government will also adjust tax fines, from a 2 percent flat rate per month to equal to the prevailing benchmark rate. Indrawati said the government hopes the new scheme is less of a burden for tax offenders and will encourage them to pay up. Conversely, compensation for taxpayers – which applies when, for example, the tax office is late to disburse restitution – will also be based on the benchmark rate, the minister concluded.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com