Chasing on OTT Company Taxes

The bright spot for digital taxes, G20 members to decide on the framework

Prayogo Ryza - 18 June 2019

The taxes of OTT companies, such as Google, Facebook, and Amazon has been the talk around many countries including Indonesia back then. The potential tax might help with some country's income. Now, the tax issues have come to an end. The Financial Minister, Sri Mulyani said that in the G20 summit last week, all members decided to set a new framework.

Sri Mulyani explained, as two things have decided, about base erosion and profit shifting (BEPS) or the tendency for companies to find places with low tax and about economy digital. England and France are examples with successful with tech company taxes.

"England and France, in particular, forming unilateral to impose digital economic taxes. It's not only for the digital economy in terms of VAT, as the simplest one, but also for income tax where the economic presence becomes a tax source as an approach. It's not the residential place, the business might take place in Ireland with low tax, but when the activities are mostly in England, the tax will follow England's rate. It was what happened in England and France," Sri Mulyani said.

Currently, Indonesia has around 260 million population with 100 million internet users, but the tax revenue is yet to be reflected in it. The challenge is having no office building in Indonesia. Moreover, the redefined permanent establishment is still a priority.

"The digital activity has a different business model with the non-digital because it doesn't require BUT (permanent establishment) in a country or jurisdiction to operate cross-countries," the Financial Minister said as quoted by Liputan6.

She added further, "What makes it difficult is the tax based on a physical presence. However, digital companies can make it without opening branches or permanent establishment. It's not only in Indonesia, so the physical presence can no longer count as a reference."

Quoted from Kontan, DDTC Tax Observer, Bawono Kristiaji said if the effort to implement tax for OTT companies like Google, Amazon, Facebook, and Apple success, Indonesia will take the advantage.

He said, there are two main issues that freed those companies of taxes, first is a permanent establishment and the profit allocation. Even though it's a permanent establishment, profits that can be taxed in a jurisdiction should reflect the contribution of the state entity towards value creation in a multinational group.

"Unfortunately, the current international tax system does not regulate these two, the status of the permanent establishment has not been based on a significant economic presence and profit allocation has not reflected fair value creation," he added.

Digital tax pursuits for OTT companies are indeed profitable for countries with large consumers such as Indonesia. However, with the complex digital economy, another challenge risen for government in pursuing OTT corporate tax is policy, especially in quantitative calculations related to the significant presence, and to define low or no tax jurisdiction. Including the formula and the basis of the calculation.

Original article is in Indonesian, translated by Kristin Siagian

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