The government of Indonesia has now drafted Government Regulation in Lieu of Law No. 1 of 2020 concerning State Financial Policies and Financial System Stability for Handling COVID-19 Pandemic and in the Context of Facing Threats that Harm National Economy and Financial System Stability.
In the contents of the Government Regulation in Lieu of Law No 1 of 2020, Indonesia introduced a new type of tax policy to support the financing of COVID-19 handling in Indonesia as well as to minimize the deficit. These tax policies include adjustments to domestic income tax rates for domestic taxpayers and permanent establishments (PE), the tax treatment in trading activities through the electronic system, exemption or reduction of import duties, and an extension of the fulfillment of tax obligations.
Rapid and contractive responses have been taken by the government of Indonesia through the establishment of Government Regulations on Electronic Transaction Taxes on Income from Trading Activities Through Electronic Systems by Foreign Tax Subjects that Fulfill Significant Economic Presence Conditions.
In line with what is being developed by The Organisation for Economic Co-operation and Development (OECD), the Unified Approach Proposal, which allows market countries to impose income tax on digital economic income, by implementing a new nexus without basing on physical presence as a basis for taxing income from the digital economy and offering new allocation profit rules to allocate profits against the new nexus.
This approach is applied by creating a new nexus based on the concept of a significant economic presence that does not require physical presence. Then, the taxation rights will be allocated to the country where the significant economic presence is located Indonesia moves quickly by implementing the regulation into its new tax type to gain state revenue and reduce wider deficits.
Based on the OECD Commentary, the presence of digital transactions carried out by digital multinational enterprises (MNEs) in market jurisdictions is sufficient to be considered to have a physical presence. At present, physical presence is an essential requirement for the emergence of PE as a source country for taxation.
The problem occurs with the current consensus that is still based on physical presence, if physical presence is not located in the source country, which allows taxpayers to be considered to have no physical presence. This resulted in market countries losing the nexus to bring up PE. In this context, there is no taxation if there is no PE.
The character of the complex MNEs Digital business model, must encourage the renewal of the concept of determining the nexus for taxation purposes. The OECD in the BEPS Action 1 report on “Addressing the Tax Challenges of the Digital Economy” states that there are three main categories of tax policy challenges related to the digital economy, one of which is related to the nexus. Nexus concept, which still makes physical presence as a condition in determining an entity to conduct an activity or business, is seen to be not relevant enough amidst the rapid disruption of digital technology.
The concept of nexus is currently very much in favor of Digital MNEs, which can get substantial benefits from transactions from a jurisdiction without having a physical presence or a dependent agent that is a condition for determining the status of PE.
The expansion of the nexus concept in domestic tax regulations can add to the tax authority’s options in preventing artificial PE avoidance from the digital industry. The gap, both from the tax treaty rules and domestic regulations, can be narrowed through a more aggressive tax policy escalation for Digital MNEs.
This also makes it possible to reduce taxable presence avoidance efforts from non-tax treaty jurisdictions. So that by stipulating the use of the new nexus in Government Regulation in Lieu of Law No. 1 of 2020, it is hoped that it can effectively reduce the scouring of the taxation base by Digital MNEs in Indonesia. So that the Government of Indonesia should be appreciated for considering policies to expand the concept of PE based on significant economic presence, primarily related to the business of digital products and services.
By its nature, the new nexus uses a significant economic presence approach to a breakthrough for market countries to protect their taxation rights. It is a good thing if Indonesia no longer waits for a digital economy consensus in 2020 and will soon embed a nexus significant economic presence in domestic regulations to be regulated through implementing regulations from the Government Regulation in Lieu of Law No 1 of 2020.
With the new nexus in the form of a Significant Economic Presence, Indonesia has the right to get revenue from taxes paid by digital businesses, which so far have always been transferred to other countries. With such a sizeable Indonesian market, it would be wise for the government to incorporate the concept being developed by the OECD and all jurisdictions included in it so that it can provide state revenues from new tax types, reduce potential losses and can cover the deficit from decreasing other types of tax revenues due to COVID-19.
