Advances in Social Science, Education and Humanities Research, volume 167 First International Conference on Administrative Science, Policy and Governance Studies (1st ICAS-PGS 2017) Second International Conference on Business Administration and Policy (2nd ICBAP 2017)
IMPLEMENTATION OF TAX REGULATIONS ON INTERNET-BASED BUSINESS ACTIVITY CASE STUDY: GOOGLE’S TAX AVOIDANCE IN INDONESIA
Indah Susanti Laode Arahman Nasir Faculty of Economic and Business Faculty of Economic and Business Universitas Indonesia Universitas Indonesia Jakarta Jakarta [email protected] [email protected]
Vera Partiana Sukardianti Faculty of Economic and Business Universitas Indonesia Jakarta [email protected]
Abstract internet based business model. This cause the tax liability paid in Indonesia is To align with global and digital economic inconsistent with revenue derived by growth, businesses must be able to change Google from Indonesia. It is required competitive strategies and business models significant changes on tax regulations that to keep them relevant to on-going can be applied in internet-based business developments. This also requires changes model. However, this application presents in government regulations, especially tax several obstacles, so the Indonesian regulations in order to support business government can learn from countries, development. Google as a company including Britain, India and Australia in providing Internet-based services and applying this tax regulation. products, located in Singapore as regional office, conducts its business in Indonesia Keywords: Tax Regulation, Internet-based by utilizing tax treaty between Indonesia Business, Tax Avoidance and Singapore in its tax planning scheme aimed at avoiding taxation. In Indonesia, BACKGROUND Google only has a representative office The phenomenon of internet-based that does not record revenues and profits business is undeniably a trend that derived from activities in the country. This characterizes business activities in both study aims to first find out why Google is developed and developing countries. New not willing to pay the income or profits concepts have evolved as the advancement derived from business activities in of information technology and new Indonesia, Second knowing what should business paradigms is regarded as the key be done by the government of Indonesia to to success of companies in the information Google to pay tax to the government of age and the future. Advances in Indonesia. The research method used is technology, computers and normative juridical. Based on the results of telecommunications support the the study, the existing tax regulation development of Internet technology. cannot support new business model that is
Copyright © 2017, the Authors. Published by Atlantis Press. This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/). 387 Advances in Social Science, Education and Humanities Research, volume 167
The use of the internet in business is implement technology and information changing from functionality as a tool for into the company. electronic information exchange into a tool for business strategy applications, such as: The increasing number of internet users marketing, sales, and customer service. impact on the increasing turnover of Internet marketing has penetrated electronic commerce will cause some obstacles, national boundaries, and without problems in the field of finance, one of standard rules. While conventional which is tax. The existence of e-commerce marketing, goods flow in large parties, with no geographical boundaries of course through seaports, containers, distributors, also raises the question of how the tax law guarantee institutions, importers, and bank is anticipating the income from internet- institutions. Conventional marketing is based transaction. Without proper taxation more involved than marketing over the regulation of internet-based transactions, internet. Marketing on the internet is the the potential for tax revenue on internet- same as direct marketing, where the based transactions can be lost. consumer deals directly with the seller, even though the seller is abroad. Tax is one of the largest sources of state revenues. The country's largest revenue The use of the internet has experienced should continue to be optimally upgraded tremendous growth in the business field so that the country's growth rate and especially in large-scale enterprises. Since development implementation can work the discovery of internet technology in the well. Thus, it is expected taxpayer 1990s its use is widespread because it is compliance in carrying out its tax seen to provide enormous benefits for the obligations voluntarily in accordance with smooth process of business activities. applicable tax laws. Non-compliance with Seeing the fact, the application of internet- taxpayers may potentially avoid tax based technology is one important factor evasion. to support the success of a product of a company. To accelerate and increase sales Tax avoidance strategy is one way quickly then by looking at the permitted by law even though it is very development of information technology is unfavorable to the State because it does rapidly, we can utilize an on-line service in not provide income for APBN. So, in the form of e-commerce. practice tax avoidance is used as exploiting limitation in tax law without Under offline world, the sales system of violating existing tax laws. Because the tax customers used by the company is only is a burden for the company so the greater written and manual, which often tend to the tax burden paid by the company then it mislead. With the services of internet- can reduce revenue received by the based business that can be quickly enjoyed company. In order for revenue received by by customers and companies themselves the company is not reduced then the then all the services desired by customers company uses tax avoidance as a can be immediately followed up with as necessary strategy. The most common tax soon as possible, so that the company will avoidance strategy is done by companies be able to provide the best service and the involving two countries, especially in fastest for the customers. Therefore, with companies engaged in internet-based the utilization and use of internet business model. technology is expected to provide great benefits to the competitive business world. Tax avoidance strategies stipulated in Companies that are able to compete in the taxation laws aim to avoid double taxation. competition is a company that is able to Here is one method of avoidance of double
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taxation for example Bilateral Taxation According to Bernard P. Heber in Method. The Bilateral Taxation Method in Nurmantu (2005: 151), the definition of its tax calculation should consider the tax avoidance is a taxpayer's effort in treaty of the two countries (tax treaty). exploiting the opportunities (loopholes) Indonesia cannot easily establish the that exist in the tax laws, so as to pay amount of tax owed by foreign residents or lower taxes. In addition, under international bodies of the two countries international taxation, tax avoidance can that have entered into an agreement. be considered legal practice, but this is considered to provide harm to the Google, as a internet-based company, government because it will reduce state conducts its business activities in revenues. In addition, Suandy (2001) Indonesia as a representative office but is argues that tax avoidance is a "tax affairs" domiciled in Singapore. Based on tax engineering that remains within the treaty Indonesia and Singapore, Google framework of taxation provisions. The enjoys withholding tax rate 0% on its understanding of tax avoidance is legal revenue derived from Indonesia and books practice but if it is not in accordance with its revenue under its Singapore entity as the provisions of the tax law, it will be stated in its billing. While the Indonesian utilized by certain parties to pay lower government suspects that Google diverts taxes. as its existing income in Indonesia to Singapore to reduce the tax burden. As Companies can avoid taxes by channeling widely known, Singapore is one of a tax the results of their business to the tax haven country. The Indonesia tax office heaven. This can be done with three alleges Google Indonesia paid less than 0.1 media, namely: holding company, percent of the total income and value- intermediary and subsidiary company. A added taxes it owed last year holding company is an entity that holds great control in a company.
LITERATURE REVIEW The second means of tax avoidance is the Tax Evasion intermediary establishment. Intermediary Based on empirically stand point, tax is a establishment consists of 3 schemes. First, burden that can reduce the purchasing foreign investment (PMA) to Indonesia by power of society, especially companies. utilizing tax heaven country. The scheme So, tax can be seen as unprofitable. is done by opening the first, intermediary Unprofitable things will trigger a person to company in the state tax heaven then avoid tax evasion or resistance. Sri create a subsidiary in Indonesia. Second, Mulyani (2013) argues that tax evasion the scheme occurs when a company in can be grouped into two, namely as Indonesia, wants to expand its business follows: and open a branch in Indonesia itself but - Passive Resistance want to take advantage of tax heaven. Passive tax resistance is caused by the Third, investment from Indonesia to obstacles that complicate the tax collector. abroad by utilizing intermediary company. This resistance is not done actively let Subsidiary company or subsidiary is an alone aggressively by the taxpayers. entity that can be fully controlled by a - Active Resistance parent company due to share ownership of Active resistance includes the scope of all most or more of the company. efforts and actions directly directed against the tax authorities in order to avoid Utilization of media used as tax avoidance taxation. facility to tax heaven country can use the following method: (1) transfer pricing, (2)
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treaty shopping, (3) thin capitalization, (4) Singapore tax treaty is taxable only controlled foreign company. Transfer from the country in which the pricing can occur either between two immovable property is situated even companies in the same group though the owner of the immovable (intercompany pricing) or even between object is not a national of that State. two divisions of a company within the • The operating profit earned by a same company. As a benchmark of business entity in a country under this fairness and business practice is the price agreement may only be imposed by the given by a company to another company country of which the enterprise is that does not have a special relationship. domiciled, but if the enterprise carries The pricing is not in accordance with the on business in the form of a permanent fair transaction price is used multinational establishment in the other Contracting companies to gain profit from the State, it may be taxed by the State difference in fair price with the price of the concerned. special party transactions in the country • Aircraft and shipping, for aircraft Low tax rates or no taxes at all. By using business and shipping taxation is the transaction price with a related party, different. The aircraft is taxable only to the Tax Base of the transaction will be the country where the aircraft is from, much less than the Tax Base to the other while for the vessel during the voyage party so that the tax paid is much lower. in the sea of the other country then the other country imposes a tax by Treaty shopping is done by a company to deducting 50% which thereafter benefit from a tax treaty between two becomes the object of tax of the ship's countries by creating an affiliated originating state. company in one of the countries where tax • Companies which have privileges, in avoidance is practiced. The tax treaty rate the case of privileged companies applied by each country to another country because the function of this enterprise would be the trigger for a treaty shopping. is to participate in the management, Countries with very low withholding taxes supervision and capital participation of compared to their partner countries are the enterprise of the other State may be Singapore, the Netherlands and Hong liable for any additional profits. Kong. • Dividend, the taxation of dividends of a company which is domiciled in one Tax Treaty country in the agreement if such A tax treaty is an agreement between two dividends are granted to a national of or more countries by dividing the right to one party, shall be taxable according to impose a tax on income derived from a the tax law of that citizen. As for state sourced by a resident or resident of dividends whose shareholders are another country. The purpose of this tax companies then the country where the treaty is to avoid the imposition of double place of domicile of the company may taxation and various tax evasion efforts impose tax with the following arising from transactions between the two provisions: countries. ➢ 10% of the gross amount of the One of the tax treaties that will be dividends, if the company has a discussed is the Indonesian tax treaty with 25% interest in the company. Singapore which was signed on May 8, ➢ 15% of gross amount in any other 1990. The avoidance of double taxation on case. the tax object is as follows: • Immovable property, income from The exception to this agreement is that as immovable property under Indonesian- long as the Singapore government does not
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regulate the additional dividend tax, the the funds for such activities come from dividend earned by an Indonesian business the government. entity from a Singapore enterprise is not • Pensioners, for pension funds obtained taxable. from work of a Contracting State in the • Interest, for interest paid by a company treaty shall be taxable on the basis of domiciled in one of the countries in the the origin of the enterprise. treaty to not one of the nationals. The • Government officials, in the case of Agreement is subject to the tax of that remuneration other than government citizen. For the collection of such taxes pension funds will be taxed according by being limited to (a) bonds, bonds, to the law of the officer who issued the and other bonds; And (b) Loans, tax. warranties or guarantees. State where a • Teachers and researchers, teachers and business entity is domiciled may researchers who stay for no more than impose a maximum of 10% tax. Other 2 years to teach and research will be exceptions of interest are not taxable in exempt from tax. This provision shall respect of Indonesian or Singapore not apply if the activities are government affairs. performed for the benefit of certain • Royalties, paid from one country to a persons or persons. citizen of the other country are taxed • Student and other participant ie from a citizen / entity of another Student, an employer or technician, an country, but the country of origin of apprentice, a person receiving the royalty may levy a maximum tax of assistance or allowances for the 15% of the gross amount of the purpose of study shall not be taxed on royalties. the payment of his life, all grants, • Independent employment, defined as allowances, rewards, and payments not professional services and other more than 2,200 US dollars per year. services. The tax imposed on such Considering that all of the above are independent employment is derived, related to teaching and learning, except within 90 days in the 12 months research, and training activities. that such independent employment • Unregulated earnings, the laws opens up services in the other country applicable in each Contracting State then the State may collect taxes. shall still apply to the tax on the • Employment in the employment taxation of income of the Contracting relationship, in the form of salaries, State in the Contracting State except as wages or remuneration derived from otherwise provided in this Agreement. one of the countries shall be taxed from the country in which the citizen is However, tax treaty is not applicable for originated, unless the national has companies that act as virtual presence, one settled in the country for 183 days. example is Google. So, the shortcomings • The remuneration of directors, who of these rules are used by Google to work for a company not originating structure its tax management by not setting from the director's nationality against up a permanent establishment in Indonesia the benefits, is taxed as the enterprise and not paying the tax in accordance with is derived. In that case is the country revenue that is derived from Indonesia. referred to in this agreement. • Public figures and athletes, public DISCUSSION figure activities or athletes conducted Google is a US company-based that is in a country under this agreement are known as a search engine with its mission subject to tax based on the place of is to organize the world’s information and such activity but the tax is not levied if make it universally accessible and useful.
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It was founded by Larry Page and Sergey Graphic 1 Google Searches per Year Brin on 1998. For this over the past two decades, Google has grown tremendously from a search engine becoming the giant technology company and touching lives of millions of users around the world. With over 70 offices in more in 50 countries, Google offers a wide range of services and products and its innovation subsequently becomes a part of daily life Source: including Android phones, Google Maps, http://www.internetlivestats.com/google- Google Earth, as well as in business with search-statistics/ its mail, mobile devices and analytics solutions. Based on this, Google enables Google, under its parent company marketers target the online users with its Alphabet Inc, now has a market value of advertising products. Google generates $680 billion, listed as a 2nd the biggest revenue mainly by selling online internet companies worldwide, exceeding advertising over its sites and its network Amazon, Facebook and Alibaba. Its member sites. Google Network is the market value increasing significantly from network of third parties that use Google $498 billion in 2016. Google offer its advertising programs to deliver relevant products for free to the online users such ads over their sites. Google generates a as web search, email, content creation, small percentage of revenue from its content storage, content publishing and enterprise products. sharing, commerce, and hardware. Here are some of the Google products that are Google offers following products to the popular among the online users: advertisers: • Google Web Search. • Google AdWords. It is an auction- • Gmail. based advertising program that delivers • Google Docs. ads based on user search queries.. • Chrome browser. • Google AdSense. It helps content • Android operating system for owners monetize their content. smartphones. • DoubleClick Ad Exchange. It is a • Google Play. real-time auction marketplace for the • Youtube. trading of display ad space. • Blogger. • Google Wallet. . Below statistic shows Google's revenue • Consumer hardware products. worldwide from 2002 to 2016. In 2016,
Google's revenue amounted to 89.5 billion Google processes over 40,000 search US dollars. Google's revenue is largely queries every second on average, which made up by advertising revenue, which translates to over 3.5 billion searches per amounted to 67.39 billion US dollars in day and 1.2 trillion searches per 2015. year worldwide. The chart below shows the number of searches per year throughout Google's history:
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Graphic 2 Annual Revenue of Google Graphic 4 Number of Internet Users in from 2002 to 2016 Indonesia from 2015 to 2022
Source: https://www.statista.com Source: https://www.statista.com Below displays Google's advertising or ad This huge market-size has attracted many revenue since 2001. In 2016, Google's ad investors, both local and foreign, to make revenue amounted to almost 79.4 billion investment in e-commerce businesses. For US dollars or contributed 89% from total over the past of 7 years, e-commerce revenue. That year, advertising accounted businesses have been grown tremendously for the majority percent of the online in Indonesia. E-Commerce companies company's total revenues. such as Tokopedia, Bukalapak, OLX, etc
have been using Google to advertise their Graphic 3 Advertising Revenue of product and service and at the same time Google from 2001 to 2016 to monetize their content as one of revenue channel, that is advertising revenue. These business activities contribute substantial advertising revenue to Google.
Google runs its business in Indonesia from its regional office in Singapore, Google Pte Ltd. Google has office and also legal entity in Indonesia but there is no business operation, only representative office. This structure makes Google not liable to pay Source: https://www.statista.com any taxes on revenue derived from Indonesia. In 2015, Google Pte Ltd book In Indonesia, number of internet users has advertising total revenues of been growing significantly year-over-year. approximately US$109.2 million from With over 104 million internet users, clients in Indonesia. There are 10 major Indonesia is one of the biggest online Indonesian clients contribute markets worldwide. It is estimated by 2022 approximately US$60million or about number of internet user will grow to 55% of Google Asia Pacific revenue. 139,54 million. Google’s tax management structure is using a loop-hole on tax treaty between countries, the practice of this tax avoidance is called a treaty shopping.
Many countries in worldwide including Indonesia has already taking a stand to fight Google to pay its tax obligation.
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Indonesia should immediately start used by many multinational enterprises introducing tax regulations to regulate the to transfer profits from UK’s internet-based business model that can jurisdiction by way of business provide legal certainty both from the structures that prevent the company side and tax officials. characterization of a permanent establishment (PE) within UK, either According to Indonesia Directorate by the use of artificial transactions or General Taxes, Google has not paid its tax of entities without economic substance. obligation for the past five years. Google's This rule applies to over the top (OTT) tax debt in 2015 alone is estimated at Rp 5 companies, like Google, which keeps a trillion. This year, Indonesia government is permanent company in another country managed to get Google to pay taxes in whose income tax rate is below 80 Indonesia for 2016 revenue, the amount is percent of UK corporate tax rate. With undisclosed, while the remaining past 5 the UK corporate tax rate of 20 years are still in process to complete. percent, the OTT company that establishes a fixed-income company in In general, the current tax treaty has a country with an income tax rate limitation on regulating companies that below 16 percent (80 percent of UK running its business through digital corporate tax) will be subject to a 25 presence. With a business model like this, percent real diverted profit tax. There the approach taken must be fragmented are pros and cons on this approach because the business is expanding rapidly because it is seen against tax treaty so that the rules should be made in such a although it can be justified. Some of way as to support the development of the the cons, the levying of the DPT business itself. should be restricted to cases where UK can clearly demonstrate the artificiality There are some challenges on of the legal structure used by a implementing tax rule impose to internet- taxpayer, furthermore the state partner based company, those are, a high level of may challenge the breach of the tax difficulty to identify the transactions, treaty by UK arising as a result of the taxpayers are numerous and the number introduction of the DPT. fluctuates because of the ease of entry or exit from this sector, cross border 2. Multinational Anti Avoidance Rule transactions, and all transactions recorded Australia implemented this tax online that are not visible die so that avoidance rule where if certain requires expertise in the field of company structures are essentially only information technology to open or get the made for tax evasion then they cannot data. benefit the tax treaty. This is the Australian equivalent of the UK’s Here are several approaches that can be diverted profits tax (DPT) and whilst referred that have been implemented in the mechanics are very different, the United Kingdom, India and Australia: Australian version shares the ‘carrot and stick’ approach of the DPT. The Australian approach is to add a new 1. Diverted profits tax provision to Part IVA, Australia’s In April 2015, The United Kingdom general anti-avoidance rule (UK) introduce the diverted profits tax (GAAR). By this form of amendment, (DPT) into its domectic tax law. The there is no doubt Australia can DPT has the declared objective of override its existing double tax treaty countering aggressive tax planning as commitments, at least at law, if not
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‘politically’. The new provision equalization levy of 6% of the amount (section 177DA) targets global groups of consideration for specified services that avoid an Australian taxable received or receivable by a nonresident presence by undertaking significant not having a permanent establishment activities in Australia with a direct (PE) in India, from a resident in India connection to Australian sales, but who carries out business or profession, where the sales revenue is booked or from a nonresident having a PE in overseas; and do so with a principal India. Specified service is defined as purpose of avoiding tax in Australia, or follows: avoiding Australian tax and reducing a a) Online advertisement foreign tax liability. b) Any provision for digital The new section 177DA will apply advertising space or any where: facility/service for the purpose of • There is a BEPS scheme online advertisement a) a foreign entity makes a c) Any other service which may be supply to an Australian notified later by the central customer of the foreign entity government b) activities are undertaken in The equalization levy is aimed at Australia directly in taxing business-to-business (B2B) e- connection with the supply commerce transactions. Therefore, the c) some or all of those Australian scope of the levy may be expanded to activities are undertaken by an cover a wider range of digital goods Australian entity or Australian and services as time progresses. The permanent establishment (PE), levy would not be applicable to either of which are associated nonresident service providers having a with or commercially PE in India, as they will be subject to dependent upon the foreign regular PE-basis taxation. The levy is entity currently applicable only on B2B d) the foreign entity derives transactions, if the aggregate value of income from the supply consideration in a year exceeds e) some or all of that income is approximately US$1,500. not attributable to an To avoid double taxation of income Australian PE of the foreign which has been subject to an entity. equalization levy, such income will be • The principal purpose test is exempt in the hands of the nonresident satisfied under the Income Tax Act, 1961. • The foreign entity is a significant However, one would need to evaluate global entity the possibility of claiming a tax credit for such levy in the home country of These measures will apply only to the nonresident service provider. This taxpayer groups with global revenues is the first significant step taken by exceeding $1bn. India to tax digital economy transactions. 3. Equalization Levy The Indian government on February Refer to above approaches, Equalization 29, 2016 introduced an equalization levy is the prominent approach to be levy on online advertising revenue by implemented in Indonesia to tax non-resident e-commerce companies multinational internet-based companies earned in India, which became who derive revenue from Indonesia and do effective on June 1, 2016. An not have permanent establishment in
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Indonesia. Equalization levy has similar approach with the witholding tax in From tax administration stand point, it is Indonesia. There are several approaches simpler and more pragmatic to apply that must be done to implement because Equalization levy is similar with equalization levy: withholding tax that have been applied • Due to complexity, there should be refer to Indonesia Income tax law. cooperation in terms of providing Indonesia has to move fast on introducing and sharing information among new tax regulations for internet-based government institution in Indonesia companies for transparency, fairness, and that consists of the Ministry of clarity. finance, Ministry of Communication & Information, Reference Ministry of Trade and Bank of Anggoro, Stefanus Tri. (2015). Analisis Indonesia so that there is Pengaruh Perilaku Penghindaran transparency as it has been Pajak Terhadap Nilai Perusahaan described in the KUP article 35 Dengan Transparansi Sebagai that is when in the implementation Variabel Moderating. Universitas of the provisions of the tax laws Diponegoro. Semarang. and regulations required Chairysa, Ferin. (2012). Perbandingan Tax information or evidence of banks, Treaty Indonesia – Singapura Dan public accountants, notaries, tax Indonesia – Malaysia. Universitas consultants, administrative offices, Indonesia. Depok. and / or other third parties, who Desiana.(2012). Analisis Sistem have a taxpayer relationship with Perpajakan Dan Hukum Di Negara tax audits, tax collection, or Tax Haven Serta Kaitannya Dalam investigation of criminal acts in the Praktik Penghindaran Pajak. Bina field of taxation, upon written Nusantara University. Jakarta. request from the tax director- the Dewi, Kristiana Nyoman Ni., & Jati, I party is obliged to provide Ketut .(2014). Pengaruh Karakter information or evidence received Eksekutif, Karakteristik Perusahaan, but this should not only relate to Dan Dimensi Tata Kelola when the examination or error Perusahaan Yang Baik Pada Tax occurred so that the investigation Avoidance Di Bursa Efek Indonesia. due to criminal action . Jurnal Akuntansi Universitas • Income tax law no 36/2008 of Udayana. 249 – 260. article 2 and No SE – 04/PJ/2017 EY. (2016, March 2). EY calls for India (4) regarding Foreign tax subject Propose Equalization Levy On definition. It is necessary to amend Digital E-commerce Transaction In in terms of the definition to include 2016 Budget. for foreign tax subject which Form Garage To The Googleplex. < derives income from Indonesia, https://www.google.com/intl/en/abou this is to encounter cross-border t/our-story/>. transaction business model. “How Google Makes Money?” < • Income tax law no 36/2008 of https://revenuesandprofits.com/how- article 26 to amend minimum google-makes-money/>. income earned amounting to USD Internet Live Stats. < 1,500 and subject to a tariff of 20% http://www.internetlivestats.com/goo based on tariffs on Income Tax gle-search-statistics/>. article 26 so that it can be applied for the following Google cases.
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