Income Taxes for Trading Activities Made Through Electronic System in Indonesia as an Unilateral Measure

Income Taxes for Trading Activities Made Through Electronic System in Indonesia as an Unilateral Measure

Amelia Cahyadini

Assistant Professor at Faculty of Law, Universitas Padjadjaran

DOI: https://doi.org/10.51244/IJRSI.2025.12010038

Received: 05 January 2025; Accepted: 09 January 2025; Published: 08 February 2025

ABSTRACT

Indonesia has the fastest development of digital economy amongst other countries in Southeast Asia. As a country with a large population and internet users, Indonesian Government is trying to effectuate the imposition of the Income Taxes towards the foreign business actors in the trading activities by using Electronic System. This intention is amplified by the existence of Covid-19 pandemic. Since the social and physical distancing have fertilized the trend to conduct trading activities through the electronic system, and to provide a level playing field, then the policies for income tax in the trading activities utilising electronic systems was issued in the Law Number 2 of 2020. The application of this regulation is assessed based on the Tax Law in Indonesia by focusing on several aspects such as legal certainty and tax jurisdiction. Based on the tax philosophy in Indonesia, Law Number 2 of 2020 is considered as lacking in providing legal certainty and policies regarding the income tax for the trading activities utilising electronic system, it is considered as a unilateral measure.

Keywords: Taxation in Indonesia, Income Tax, Digital Economy, Trade Activities by using Electronic System, Over the Top Services.

INTRODUCTION

Convergent technology development provides changes in the way people consume and use multimedia technology utilities. One of the bridges prominently connect physical and digital application activated by the 4.0 industrial revolution is the internet of things (IoT), occasionally known as the internet of all everything. In its simplest form, IoT may be described as a relationship between certain matters (products, services, places, etc.) with the people, it is made possible by the network built through the accessible technology across various platforms  in smart phones (digital platforms/online platforms) (Klaus Schwab, 2016). Other alternative that may be used in providing services through broadband internet connection is through the Over the Top service (hereinafter referred to as the OTT) (OECD, 2020). Over the top (OTT) is an application accessed and delivered over the public Internet that may be a direct technical/functional substitute for traditional international telecommunication services. NOTE – the definition of OTT is a matter of national sovereignty and may vary amongst Member States (International Telecommunication Union, 2019).

Several examples of the OTT services which provide an operation of real-time communication services in Indonesia are including Whatsapp, Apple’s Facetime, Skype, and Facebook Messenger. Whilst the OTT services which provide an entertainment video services are including Netflix and Youtube. Up to 2019, Youtube has controlled around 24% of the internet traffic in the world, and it is predicted to continue to increase (We Are Social dan Hootsuite, 2019a). On the other hand, in 2019 Netflix has already have 137 million subscribers who streamed HD and 4K content (We Are Social dan Hootsuite, 2019a). In the retail business sector, there are Amazon, Shopee, Bukalapak, and Tokopedia. In the accommodation sector, there are AirBnB, Traveloka, and Agoda, whilst the transportation sector is known with Gojek and Grab (Directorate General of Tax, Ministry of Finance, 2020).

Based on Google and Temasek’s report on the 2019 SEA e-Conomy, Indonesia’s digital economy is estimated to reach US $ 130 billion in 2025, it has indeed reached US$ 40 billion in 2019 with an average growth of 49% per year (Google, Temasek, Bain & Company, 2020). The growth of digital economy in Indonesia is faster than six other countries in the Southeast Asia. One of the supporting factors is due to Indonesia’s vast geographical conditions and large population.

This is backed up with the survey from Hootsuite (We Are Social) which illustrates the continuing growth of internet users in Indonesia, where in February 2019 it has reached 150 million people, this is an increase of 13% from 2018, where it was only 268.2 million people, the growth is predicted to rise continuously (We Are Social dan Hootsuite, 2019a). In addition, Indonesia ranked third in the world in contributing audience for Facebook advertisements and fourth in the world in contributing audience for Instagram advertisements. For the same cause, Indonesia ranked eleventh for Twitter and eighth for Linkedin (We Are Social dan Hootsuite, 2019b).

Such elaboration shows that the development of technology and internet has created accesses, functions, scales, and new scope which previously can only be accessed by large-scale businesses. With the support from data, the OTT business model is taking various role starting from mobilizing to controlling the content, the compatibility, and the price in the market. During 2019, the OTT services have generated a global revenue of US$ 129.4 billion, 90% of which were come from subscriptions and advertisements, and it is predicted to increase rapidly beyond US$ 200 billion by the end of 2023 (Daniel Frankel, 2020).

The scale and extent of the ongoing technology revolution will bring economic, social and cultural changes in such a phenomenal proportion to the extent that it can hardly be imagined, (Klaus Schwab, 2016) including to the state administration process. One of the biggest impacts, amongst others, is the change on how the government can regulate the current relation between itself with the business actors and the society; or how such great technological power can build relationship with developing countries, including Indonesia, in this regard, to impose income tax to the OTT business actors domiciled abroad yet keep on obtaining market share inside Indonesia’s territory, and thus may obtain income therefrom.

Up to this date, only PT Google Indonesia that has registered itself as a taxable company as of 1st of October 2019 (Klaus Schwab, 2016). Google is a multinational technology company based in the United States, it provides many internet-related products and services. Some of its specialized products and services are including cloud, search engine, hardware, software and online advertising technology. Its subsidiaries are including YouTube, Google.org, Google Nest, Google AdMob, Waymo, Google Japan, and Double Click (Sharon Omondi, 2019).

This supposed to also be happening to Netflix, as of operating in Indonesia in 2016 until now, yet in fact, Netflix has never paid taxes to Indonesia (Wahyunanda Kusuma Pertiwi, 2016). The Directorate of Counselling, Services, and Public Relations of the Directorate General of Taxes recognize this fact in January 2020, that basically, Indonesia’s current regulation is not capable yet in collecting taxes from Netflix activities in Indonesia (Wahyunanda Kusuma Pertiwi, 2016). It is estimated that Indonesia has lost some great potential of taxable services by refraining from imposing income tax against Facebook, Apple, Amazon, Netflix and other OTT services.

In the early 2020, the world is experiencing the pandemic disaster of COVID-19. The spread of the COVID-19 carries health risks to all people in the world. As a pandemic, the COVID-19 has also realistically disrupted the economic activities and it has brought significant implications to the economy in most countries around the world. Indonesia is amongst the countries affected. It is predicted that Indonesia’s economic growth may decline to 4% or lower, depending on how long and how severe is the spread of the COVID-19 pandemic may affect or even paralyze people’s activities and economic activities (Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law). The disruption of economic activities will give implications to the changes of posture in the State Budget (hereinafter referred to as ‘APBN’) during the 2020 Budget Year, either in terms of state revenue, state expenditure, or financing. Based on such matters, the Government of Indonesia issued extraordinary policies and measures in the field of state finance, including in terms of taxation. The strongest legal instruments that underlies the government’s act to take such policy are the Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law (hereinafter referred to as the ‘Law Number 2 of 2020’).

One of the policies which is regulated under the Law Number 2 of 2020 is the regulation concerning the Income Taxes on Commercial Activities through Electronic System (‘PMSE’), or trading transactions made through series of electronic devices and procedures. The principal arrangement in the regulation is made against the Foreign Tax Subjects (hereinafter referred to as ‘SPLN’) with a Significant Economic Presence (hereinafter referred to as ‘SEP’), they are considered as Permanent Establishment (hereinafter referred to as ‘BUT’) and may be imposed with Income Tax. Provisions on the significant economic presence referred here may be in the form of (a) the gross circulation of the business group consolidation up to the certain amount; (b) sales in Indonesia up to the certain amount; and/or (c) active digital media users in Indonesia up to the certain number, and this shall be regulated further by a Regulation issued by the Minister of Finance (Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law).

The existence of this regulation needs to be assessed from the Indonesian Taxation Law aspect, namely, first, how is the legal certainty on the imposition of Income Taxes against the foreign business actors in Commercial Activities through Electronic System/PMSE in Indonesia before and after the issuance of the Law Number 2 of 2020? Second, how is the arrangement of the income tax against foreign business actors in Commercial Activities through Electronic System/PMSE in the Law Number 2 of 2020 based on the principle of tax jurisdiction? In May 2020, the Government Regulation in lieu of Law No. 1 of 2020 was enacted by the People’s Representative Assembly of the Republic of Indonesia to be made as Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law.

Regulation on the Income Tax for Business Actors in the Commercial Activities through Electronic System in Indonesia

Law of the Income Tax

Law Number 36 of 2008 concerning the Fourth Amendment of the Law Number 7 of 1983 concerning the Income Tax regulates the material provisions of income tax, such as the tax subject, tax object, tax base, and tax rate. The Law on the Income Tax distinguish tax subjects into two types, namely the domestic tax subjects and foreign tax subjects. Foreign tax subjects are (1) legal person who do not reside in Indonesia; (2) legal person resides in Indonesia for no more than 183 days during the period of twelve months; and (3) entities which are not established and are not domiciled in Indonesia, which conduct business or conduct activities through permanent establishment in Indonesia and which can receive or obtain income from Indonesia despite that they are not conducting business or activities through permanent establishment in Indonesia (Law Number 36 of 2008 concerning the Fourth Amendment to the Act Number 7 of 1983 concerning Income Tax).

Income Tax also recognize permanent establishment as a tax subject, it is a form of business used by a legal person who do not reside in Indonesia, legal person who resides in Indonesia for no more than 183 days during the period of twelve months, and entities which are not established and domiciled in Indonesia to conduct business or activities in Indonesia, that may be in the form of domicile of the management; the branch company; the representative office; and others, including to provide services of any kind by employees or other people, as long as delivered for more than sixty days during the period of twelve months; legal person or entities acting as agent that are in no position to freely act; as well as computers, electronic agents, or automated equipment owned, leased, or used by the electronic transaction provider in order to deliver the business activities via internet (Law Number 36 of 2008 concerning the Fourth Amendment to the Act Number 7 of 1983 concerning Income Tax). Based on such matter, it is known that the Government of Indonesia has put much endeavour in imposing Income Taxes against the business actors domiciled abroad and obtain income from Indonesia by conducting business activities in Indonesia through the collection of taxes from permanent establishment as tax subject (OECD, 2020).

Permanent establishment implies an understanding of a place of business, in the form of a facility whether lands or buildings, including the machineries, equipment, warehouses and computers or electronic agents or automated equipment owned, leased, or used by the electronic transaction provider in order to conduct business activities through Internet (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax). The place of business must be permanent in character and it must be used to conduct a business or activities of a legal person who does not live or entities that are not established and domiciled in Indonesia (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax).

The definition of a permanent establishment also include the legal person or entities that act as agents who are in no position to freely act for and on behalf of the legal persons or entities who do not reside or do not domiciled in Indonesia (Robert Hellawel, 1980). Legal person who does not reside or entities that are not established and are not domiciled in Indonesia cannot be considered as having permanent establishment in Indonesia in the event that the legal person or entity in concern is using agents, brokers or intermediaries that may freely act in conducting their business or activities in Indonesia, in so far such agents or intermediaries in fact fully act on behalf of operating its own company (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax).

There are three matters that may be used to determine whether an entity is a permanent establishment or not, namely by reviewing (1) the asset test, as the basis of the incorporation of permanent establishment in certain country; (2) the activity test, to see whether the activities conducted in a country may be resulted into a permanent establishment in accordance with the Article 2 paragraph (5) letter i and j of the Law on the Income Tax; and (3) the agency test, which is used to see whether the agent’s behaviour may be resulted into the permanent establishment, in accordance with the Article 2 paragraph (5) letter k to letter p of the Law on Income Tax (Gunadi, 2017).

The formulation of applicable provisions as mentioned above has its own consequence, the tax authority shall see the existence of physical presence as the relevance to impose taxes against foreign business actors. Including counting operation through websites on the internet or the new server as a permanent establishment, in case it has the same qualification with the permanent place of business as referred to in the definition referred above (Gunadi, 2017).

According to the international custom, foreign tax subjects are connected to the principle of resources. This principle determines the collection of taxes to the legal person or entity based on the residence or domicile abroad, where they are only be taxable for the income resourced from the tax collecting state (Rochmat Soemitro, 1990). The tax objects here are the income, namely  any increase in economic capability received or obtained by taxpayers, either deriving from Indonesia or outside of Indonesia, that may be consumed or enrich the relevant taxpayers, in any name or any form (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax).  The Law on the Income Tax adheres to the broad definition of imposition of taxes against the income. The definition of income in the Law on the Income Tax does not take consideration to the existence of certain resources of income, instead, it is focusing on the addition to the economic capabilities. Economic capability is the best measurement to the taxpayers’ financial condition, whether they can jointly incurred with the expenses required by the government to conduct its routine activities and development (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax).

Seeing from the flow of increase in the economic capability to the taxpayers, incomes may be divided into ( i ) incomes from the work in an employment relationship and independent work such as salaries, honorarium, incomes from the professional practices such as doctors, notaries, actuaries, accountants, lawyers, and so on; ( ii ) income from businesses and activities ; ( iii ) incomes from capital, in the form of movable or immovable properties, such as interest, dividends, royalties, rents, and profit from the sale of assets or unused rights for business purposes; and ( iv ) other incomes, such as cancellation of debt and gifts. Seeing from its usage, incomes may be used for consumption and may also be put into savings to enrich the taxpayer (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax).

In brief, foreign tax subjects, either legal person or entity, shall simultaneously be taxpayers if they receive and/or obtain income deriving from Indonesia or receiving and/or obtaining income through permanent establishment in Indonesia (Chairil Anwar Pohan, 2019). In other words, a taxpayer is a legal person or entity that has fulfilled both subjective and objective obligations. Therefore, it must fulfil the obligations in the taxation provisions under the Law on the Income Tax.

Tax obligations for foreign taxpayers are namely (1) income tax imposed to the income deriving from Indonesia; (2) tax imposed based on the gross income with the tax rate of 20% as regulated under the Article 26 of the Law on the Income Tax; (3) does not need to submit Annual Income Tax Returns since their tax obligations have been fulfilled through final tax deductions. (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax)

Foreign taxpayers who conduct business or perform activities through permanent establishment in Indonesia has the same responsibility to fulfill the tax obligations as the domestic entities (Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax).  Permanent establishment is classified as domestic taxpayers, consequently, it receives the same responsibilities and treatment, whereas their taxes are imposed from the income obtained within and outside of Indonesia (Rochmat Soemitro, 1990).  Furthermore, after the tax year has ended, the domestic taxpayer has an obligation to submit Annual Tax Returns that reports all income received or obtained during that year, including the calculation of taxable income, tax payable, and the settlement of the tax due.

On the other hand, in the era of 4.0 industrial revolution, as the geographical boundaries are getting dispersed and seeing the world economy has globally united, then it is indeed that entrepreneur may perform their activities anywhere other than his country of domicile (Sean Lowry, 2019).  Such expansion of these activities may be in the form of running, or doing business with or in any activities that generates income (Daniel Bunn, Elke Asen and Cristina Enache, 2020). Thus, in today’s digital transactions, physical presence is no longer relevant (OECD, 2019). Nevertheless, the provisions on the permanent establishment are still maintained up to the latest Law on the Income Tax.

Regulation of the Minister of Finance of the Republic of Indonesia Number PMK-35/PMK.03/2019 concerning the Determination of Permanent Establishment

The Minister of Finance maintain the provisions that only foreign business actors in the form of permanent establishment that may be imposed with Income Tax, on the 1st of April 2019, the Regulation of the Minister of Finance No. PMK-35 / PMK.03 / 2019 on Determination of Permanent Establishment was issued in the sense to continue the provision. It regulates the activities that can be classified as permanent establishment and the obligations of the permanent establishment in terms of taxation, one of which is to have the Taxpayer Identification Number to fulfil its tax obligations. The Regulation of the Minister of Finance also reflecting affirmation to the obligation of permanent establishment as a tax subject in Indonesia based on the provisions in the Law on General Provisions and Tax Procedures and enforcement of the permanent establishment criteria specified in the Law on the Income Tax.

Government Regulation on the Commercial Activities through Electronic Systems

Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic System/PMSE was promulgated on 20th of November 2019 and it is prepared as the execution to the provisions of Article 66 of Law Number 7 of 2014 concerning Trade (hereinafter referred to as the Law on Trade). It states that further provisions regarding the commercial transactions through the electronic systems shall be regulated by or based on the Government Regulations. The rapid Development of Commercial Activities through Electronic Systems/PMSE needs accommodation from the regulations to create trading activities which are legal, honest, based on the principle of fair competition as well as respectful and protective towards the rights of the consumers.

Commercial Activities through Electronic System/PMSE as referred to in the Law on Trade and the Government Regulation in Commercial Activities through Electronic System/PMSE, is a trading activity which transactions are executed through a series of electronic devices and procedures (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems jo. Article 1 number 24 of Law Number 7 of 2014 concerning Trade  jo. Article 4 paragraph (2) Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law). Commercial Activities through Electronic System/PMSE business actors are each legal person or business entity, either in the form of legal entity or non-legal entity, may it be  domestic or foreign business actors, who conduct business activities in the Commercial Activities through Electronic System/PMSE sector (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems). Domestic business actors are consisted of Indonesian citizens or business entities that are established and domiciled within the jurisdiction of Indonesia as a state, it includes domestic traders; Commercial Activities through Electronic System/PMSE providers, and domestic intermediary facility providers (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems). Whilst foreign business actors are foreign citizens or business entities that are established and domiciled outside of the jurisdiction of Indonesia as a state, that execute their business activities in the field of Commercial Activities through Electronic System/PMSE inside Indonesia’s territory. Based on such definition, Over The Top services shall be considered as included in the Commercial Activities through Electronic System/PMSE business actors, where some of them are also providers.

In the Government Regulation in Commercial Activities through Electronic System/PMSE, there is an article regulating the obligations of foreign business actors to appoint representatives domiciled in the jurisdiction of Indonesia that may act as and on behalf of the said business actors (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems). This means that the said foreign business actors shall be required to establish a permanent establishment/BUT in Indonesia, and towards the Commercial Activities through Electronic System/PMSE business activities, the taxation mechanism according to the provisions in the rules and regulations shall apply (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems). Foreign business actors obliged to establish permanent establishment in Indonesia are the ones with (1) the number of transactions; (2) the value of transactions; (3) the number of shipping packages; and/or (4) the amount of traffic or access, that are considered as fulfilling the same magnitude as if it has physical presence in Indonesia and has conducted its business activities regularly in the jurisdiction of Indonesia (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems).

Government Regulation in Commercial Activities through Electronic System/PMSE also stipulate sanctions for its foreign actors that has fulfilled the above criteria, however has not appointed their representative with the domicile in Indonesia’s jurisdiction to act on behalf of them. The sanctions shall be given in the form of administrative sanctions by the Minister of Trade (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic System, the Minister is the Minister who organizes government affairs in the field of trade. Article provisions which are not fulfilled by PMSE and PPMSE business actors are threatened with sanctions as contained in Article 80 paragraph (1) Government Regulation Number 80 of 2019 concerning Trading Through Electronic Systems). Administrative sanctions consisted of written warnings, that shall be given three times at most, within a period of two weeks from the date of issuance of the previous warning letter. If the foreign business actors do not complied to the written warning sanction, where there has been no improvement of behaviour after the third written warning letter, then the business actors shall be included in the priority list of supervision. In addition, there are other administrative sanctions of  blacklisted; temporary block of the foreign actors of Commercial Activities through Electronic System/PPMSE services by the authorized institutions; and/or revocation of business licenses. Other sanctions shall be further regulated in the Regulation of the Minister of Trade (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems).  Up to this date, such ministerial regulation governing this matter has not yet come into execution.

The provisions in this Government Regulation in Commercial Activities through Electronic System/PMSE came into force in November 2019 and the as for the PMSE business actors who have executed the goods and/or services trading activities prior to the enactment of this regulation, must make an adjustment within a period of no longer than two years as of the rule come into force (Government Regulation Number 80 of 2019 concerning Commercial Activities through Electronic Systems). Likewise, up to this date, there has been an absence of the enactment of the Government Regulations in Commercial Activities through Electronic System/PMSE.

Income Tax from Commercial Activities through Electronic System/PMSE in the Law Number 2 of 2020

Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law is a policy regulation issued by the government at the time when Indonesia face the COVID-19 pandemic. This regulation was issued since the condition back then has fulfilled the parameters as a compelling crisis, on that sense, the President is permitted to enact a Government Regulation in lieu of Law to serve a function as a strong legal basis for the Government to take policies and measures during a very short time period. The compelling crisis raised due to the issuance of statement from the WHO that COVID-19 is a pandemic which have had spread to the most countries in the world, it also cause economic implications , and has deteriorated the financial system stability, hence, the Government and the related Institutions need to take extraordinary policies and measures in mitigating and anticipating the worst case that might happened to the national interest and the stability if the financial system, including issuing relaxation policies through the state budget, however with due regard to the principles of good governance.

In the Law Number 2 of 2020 , one of the policies issued is within the field of taxation, where it relates to the income tax imposed to the Foreign Taxpayer Subjects who conduct Commercial Activities through Electronic System/PMSE. Several important matters to be discussed in this regard, is the principle of tax jurisdiction in the imposition of income tax to the Commercial Activities through Electronic System/PMSE business actors and its relation to the principle of non-multiplied tax imposition as well as the regulating provision on the material laws concerning the Income Tax imposed to the Commercial Activities through Electronic System/PMSE based on the principle of legal certainty.

Tax Jurisdiction Principle in the Imposition of Income Tax against the Commercial Activities through Electronic System/PMSE Business Actors

Based on the Law Number 2 of 2020, the obligation of income taxes in the field of Commercial Activities through Electronic System/PMSE arise when the Foreign Taxpayer Subjects fulfil the requirement of significant economic presence (Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law). Foreign traders, foreign service providers, and/or Foreign Commercial Activities through Electronic System/PMSE Providers who have significant economic presence may be treated as permanent establishment/BUT and imposed with Income Taxes.  The significant economic presence referred here is in the form of (a) certain amount of gross circulation of the business group consolidation; (b) certain number of sales in Indonesia; and / or (c) certain number of active users of the digital media in Indonesia (Law Number 2 of 2020 concerning Stipulation of Government Regulations in lieu of Law Number 1 of 2020 concerning State Financial System Stability for Handling Pandemic Corona Virus Disease 2019 (Covid-19) and/or in Order to Face Threats that Endanger the National Economy and /or Financial System Stability Becomes Law).

Basically, the concept of significant economic presence elaborated in the Law Number 2 of 2020 may be considered as referring to the international consensus promoted by the OECD, it specifically discuss about addressing the Tax Challenges of the Digital Economy and scheduled to be published in 2020. Such discussion from the OECD agreed on the need of main pillars to underly the taxation system in digital business , one of which is the First Pillar of Unified Approach. This First Pillar focuses on how the taxation rights over income generated from the business activities in the digital era should have allocated to each jurisdiction (OECD, 2019).  This pillar introduces a new approach of allocating taxation rights, which is by considering the amount of user participation ; intangible assets related to the marketing functions ( intangible marketing ); and the existence of significant economic activities (significant economic presence ). Each of such allocations was promoted by the United Kingdom, the United States and the G24 countries, including Indonesia and India. In the proposal, Indonesia and India as countries highly populated with Commercial Activities through Electronic System/PMSE consumers proposed that the forum includes significant economic presence as the main criteria to measure tax imposition in the digital economy era. Until the beginning of 2020, the OECD still continue to conduct meetings and discussions on these two pillars however, up to this date there still no conclusion on how should the world determine the taxation system in this regard (Directorate General of Tax, Ministry of Finance, 2020).

Whereas, even if there has been a consensus formulated by the OECD with regards to the allocation of taxation rights to accommodate the development of digital economy amongst jurisdictions of states and the international taxation systems, such consensus shall not automatically applied to the states in favour. However, the consensus needs to be formulated further in the national law of each state, which in its turn shall affect the international tax law.

Basically, Indonesia as a sovereign country has jurisdictions, including towards taxation (Arnold Knechtle, 1979). State sovereignty is an absolute authority of a state to conduct acts without the intervention from other states, it expands to the state territories, including the land, the sea, the air, and the underground (Rochmat Soemitro, 1986). Jellinek, as quoted by Rochmat Soemitro stated that sovereignty is a character of an absolute power of a state to legally determine its own determination and it also has binding power (Arnold Knechtle, 1979).

State sovereignty essentially has two aspects, first, the internal aspect in the form of the highest power to regulate any event occurs within its territorial borders, and second, the external aspect in the form of the highest power to hold relations with the members of the international society or regulate any event existing or occurs outside of the territorial borders of the state, as long as the event is connected with the state interest (I. Wayan Parthiana, 1990).

According to Rochmat Soemitro, based on such elaboration of state sovereignty, a state has the authority to create laws, regulations to control the creation of the laws, the practices as well as the court judiciary related thereto (I. Wayan Parthiana, 1990). Sovereignty of a state is limited by the sovereignty of other states (Mochtar Kusumaatmadja & Etty R. Agoes, 2003). Inside a sovereignty of a state, there is taxation sovereignty (belastingsouvereiniteit), it is  an absolute authority of a state, executed through the highest tool of a state (The People’s Representative Assembly along with the President) to create regulations on the tax collection. Therefore, in principle, each state has its own fiscal sovereignty, meaning that each state is free to impose taxation to people, either to the people who live in its territory (residents) either to the citizens who do not live in its territory in a world-wide basis. In terms of non-residents, they are only be taxable as long as they have a territorial connection with the state (Rochmat Soemitro, 1986).

The jurisdiction over tax collection was born based on such taxation sovereignty mentioned above. Jurisdiction is a legal power or authority of a state to the people, objects, or (legal) events within its territorial jurisdiction (Huala Adolf, 2011). Tax jurisdiction as a boundary in a state authority may be conducted by a state to collect tax from its citizens (Elizabeth Owen, 1989), this shall prevent the state from repeatedly collect taxation that may burdened the taxable person (Wirawan B. Ilyas & Richard Burton, 2013). Generally, a state shall adhere to the territorial principle in collecting taxes, including Indonesia. Indonesia is a state that has the right to collect income tax deriving from its country without taking consideration to the position of the owner or the recipient of the income, whether it is Domestic Tax Subject or Foreign Tax Subject. On the other hand, income deriving from outside of Indonesia shall be excluded from the taxation. This principle justifies the application of territorial taxation jurisdiction since the taxpayer is expected to participate in the state financing that has enabled production or acquisition of income, including its maintenance, and utilization. In the international tax system, there is a globally accepted and adhered norm, including by Indonesia, of submitting the primary tax rights to the state that works as the source of the income with the territorial connection and maintain the residual tax authority to the domicile state with the personal connection (Gunadi, 2017).

Indonesia built its tax jurisdiction based on the Article 2 of the Law concerning the Income Tax, which is based on two fiscal connections: (1) subjective and (2) objective. The subjective connection takes consideration to the status of the tax payer, for example the residence or the domicile, the whereabouts or the intention in the case of personal tax payer; the residence or domicile in case of entity tax payer.  The objective connection based on the geographical condition of the income source (Gunadi, 2017). The jurisdiction within subjective connection is known as the domiciliary jurisdiction, whilst the jurisdiction referring to the source of income is known as source jurisdiction (Stanley S Surrey & Robert Hellawel, 1980; David R. Tillinghast, 1984). Jurisdiction based on residence/domicile and source are well accepted both nationally and internationally (W. Hellerstein, 2003).

The jurisdiction over the tax collection of a person or its nexus entity (connection) may be based on the personal allegiance or subjective attachment; or economic allegiance that may be in the form of operating a business or professional activities followed by the receipt of income deriving from the tax collecting state; and the presence of property ownership located in the tax collecting state (Gunadi, 2017).

In the era of the 4.0 industry revolution, with the continuous development of digital economy, it is considered that the presence of a significant economy as well as the participation of active users of digital media in Indonesia, is valued as a n accurate basis to determine the allocation of the taxation rights. This is in line with the jurisdiction of the tax collection on a person or its nexus entity, which  connection can be based on the economy allegiance whether in the form of operating businesses or professional activities as well as receipt of income deriving from tax collecting state (Gunadi, 2017).

Nonetheless, the application of such regulation still need further action rather than just determining the provisions. This is caused by the fact that taxation imposed over the income by both the state of domicile and the state of income sources raised multiple imposition of international tax. As elaborated before, the tax jurisdiction as a boundary in a state authority may be conducted by a state to collect tax from its citizens, it ensures that there shall be no repeated collection of taxes which is extremely detrimental to the business actors, where then, it must be eliminated or at least be eased. The agreement between states in the endeavour to eliminate the multiple tax collection is generally arranged to fulfil at least four goals: (1) receive a fair part of income from a cross-border transactions; (2) enhance justice in taxation; (3) strengthen the competitiveness of domestic economy; and (4) neutralize the capital-export neutrality and the capital-import (Gunadi, 2017).

Next, the enactment of provisions on the Tax Income imposition towards the Commercial Activities through Electronic System/PMSE actors which create obligation in tax administration, where the Income Tax must be paid and reported by the foreign trader, foreign services provider, and/or foreign Commercial Activities Electronic System Provider (‘PPMSE’). The said subjects may appoint a representative domiciled in Indonesia in order to collect, deposit, and report their tax income in order to fulfil their obligation (Government Regulation Substitute to Law Number 1 of 2020 on State Financial Policy and Financial System Stability for the Handing of the Corona Virus Disease Pandemic (COVID-19) and/or in Order to Encounter Threats that Danger the National Economy and/or Stability of the Financial System).

The enactment of such regulation is considered as difficult since basically there is no person that would voluntarily pay tax to the state. Other difficulty is in terms of conducting surveillance to the Income Tax collection system in Indonesia which use  the self-assessment system (Law Number 16 of 2009 on the Stipulation of Government Regulation in lieu of Law Number 5 of 2008 on the Fourth Amendment on Law Number 6 of 1983 on the Common Regulations and Procedures of Tax to Law). The self-assessment system is a system that gives authority to the taxpayers to count, take into account, pay, and report their tax due (Syofrin Syofyan & Asyhar Hidayat, 2004). Therefore, the government is granting full trust to the taxpayers in this regard. The self-assessment system must be coupled with the record system towards the financial transaction as well as data or information from the relevant parties. In this case, tax administration must be able to adjust as well as to build and develop an adequate tax net system.

Each tax policy cannot be separated from administrative activities and people’s compliance. Whilst the people are expected to obey nicely to their tax obligations, the tax administration responsible for the administrative matters and the law enforcement must be able to perform their functions effectively (Gunadi, 2017).

Paying attention to the broader dimension of space and time in the activities involving the internet, as well as the complexity and disparity of the tax regulations applied in Indonesia and other states, it is most likely that there will be greater difficulties for the tax officers to receive complete and valid information in conducting surveillance. Therefore, it is considered that the application of such regulation is difficult or even not applicative considering that up to this date there has been no tax treaty related to the regulation of Income Tax for the cross-nation Commercial Activities through Electronic System/PMSE business actors, such as with the originating state of the business actors or the Commercial Activities through Electronic System/PMSE providers, the state where the IP address is located, and others.

The Legal Certainty of the Material Regulation on the Income Tax  against the Commercial Activities through Electronic System/PMSE in the Law Number 2 of 2020

Law Number 2 of 2020 states that the amount of rate, basis of imposition, and calculation procedures of Income Tax shall be regulated with or based on the Government Regulation (Government Regulation Substitute to Law Number 1 of 2020 on State Financial Policy and Financial System Stability for the Handing of the Corona Virus Disease Pandemic (COVID-19) and/or in Order to Encounter Threats that Danger the National Economy and/or Stability of the Financial System). This stipulation is actually very contradicting with the legal certainty principle in the tax law. One of the pre-requisite to create a law in the field of the taxation is fulfilling the juridical requirements, this means that a normative tax law must give a legal certainty, aside from taking equality and equity into consideration, as stipulated by Adam Smith (Rochmat Soemitro, 1990).

Legal certainty means that the legislature must pay attention to the hierarchy of the rules and regulations in arranging the tax law. It must not contradict with the higher rank of regulation, in this regard, the 1945 Constitution of the Republic of Indonesia (hereinafter the ‘1945 Constitution’) and the statute of People’s Consultative Assembly (Law Number 12 of 2011 on the Creation of Laws and Regulations). It also must not contradict with the Five Basic Principles/Pancasila as the state philosophy.

Legal certainty in arranging the tax law also mean that there are certain material laws that must be made into formal law, namely first, the tax subjects, who shall be considered as tax subjects, pre-requisite of tax subjects, exemptions for the tax subjects, and others. Secondly, the regulation on the tax object, consisting of guidelines on what can be made as tax objects, pre-requisite, definitions, boundaries, exemptions, and others. Thirdly, the regulation on the tax rates, namely the amount of tax rates, in which case shall the rates be applied, when will the rate be inapplicable, and others (Rochmat Soemitro, 1990).

As for the regulations formal in character, it does not have to absolutely be created in the form of law. However, there is no prohibition to stipulate them in the formal taxation provisions in the law (Rochmat Soemitro, 1990). In practice, formal tax provisions in the form of principles and staple of the law is incorporated in the Law on Common Regulations and Procedures of Tax. This is made to give legal certainty, to prevent them be easily changed by the executive government. The implementing regulation of the principle shall be further executed through the lower rank regulation. In this case, only the Income Tax calculation procedures that may be regulated under the Government Regulation.

The material regulation regarding taxation must be regulated under the law to adhere to the principle of people’s sovereignty in Indonesia based on the constitution. The 1945 Constitution states that tax and other compelling collectibles for the state necessities shall be regulated under the law (1945 Constitution). This must be linked with the principle of people’s sovereignty, and Indonesia is a state of law, there is also the authority of the People’s Representative Assembly to create law (1945 Constitution). Then, this will produce a concept that those regulations provide juridical base in the collection of taxes, it must be based on consent from the people as the owner of the sovereignty, and its execution mechanism must be based on the 1945 Constitution. Whereas, there is an established role of the People’s Representative Assembly as the representation of the people to create the law on taxation, hence, the law on tax was not merely born from the government’s will  to gain state income but rather it signifies the consent from the people to pay the taxes in order to participate in financing the state expenses for the livelihood of the nation and the state (Dewi Kania Sugiharti, 2010).

Based on such regulation, then the People’s Representative Assembly along with the President create and enact the law on tax for the Republic of Indonesia (1945 Constitution). Government’s authority in collecting tax is restricted with the provisions made in the law and the 1945 Constitution (Rochmat Soemitro, 1986). As put forward by Rochmat Soemitro, tax collection may be induced without immediate reward, in this sense, transfers of wealth without immediate reward shall either be known as robbery, theft, seizure (with force), or voluntarily award (without force) (Rochmat Soemitro, 1990). To have a transfer of wealth from the people to the government without considered as robbery or voluntary award, then the tax must first obtained consent from the people (Rochmat Soemitro, 1990). Therefore it is already very clear that tax collection must be conducted through law.

Based on the analysis above, then the stipulation on the amount of rate and base of Income Tax imposition against the Commercial Activities through Electronic System/PSME business actors must be incorporated in the form of law or at least in the Law Number 2 of 2020 (Rochmat Soemitro, 1990). Thus, if the provision on the tax rate and the basis of the tax imposition (tatbestand) are regulated under the Government Regulation, it shall be contradicting with the principle of legal certainty and Article 23A of the 1945 Constitution. Regarding the implementing regulation on the principal provisions, may be executed further with the regulation in lower rank. In this case, only the procedure on the calculation of Income Tax that may be regulated with the Government Regulation since it is considered as formal provisions

Income Tax of Digital Platforms in Uruguay

One of the main bridges between physical and digital applications activated by the industrial revolution 4.0 is the internet of things (IoT). In its purest form, it described as the relationship between products, services, places with people made possible by technology connected to various platforms that can be accessed via smartphones (digital platforms / online platforms) (Klaus Schwab, 2016). An alternative way to provide services through broadband internet networks is to use the OTT (OECD, 2020). International Telecommunication Union (ITU) in Recommendation ITU-T D.262 defined over-the-top is an application accessed and delivered over the public internet that may be a direct technical org functional substitute for traditional international telecommunications services. From the definition, OTTs eases international collaboration; fosters innovation and investment; encourages mutual cooperation between OTTs and network operators; considers the fundamental differences between traditional international telecommunications services and OTTs: include the cross-border and global nature of OTTs, low entry barriers for OTTs, and integration of the markets amongst other factors (International Telecommunication Union, 2020a).

The OTT business model has reshaped and expanded the technology, information, and communication ecosystem (International Telecommunication Union, 2020b). The Organization for Economic Co-operation and Development (OECD) categorizes OTT services into real-time communications services; entertainment video services; telework or telepresence; cloud computing and storage; and financial services (OECD, 2020).  OTT raises several new issues, including taxes where OTT is often low-cost locations and has tax heavens. Referring to the 2018 OECD Interim Report, the OECD / G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitalization, In Uruguay conducts tax reform on income tax (Carolina Limbatto¸2020). Uruguay imposes a 12% corporate income tax for foreign platforms. This provision takes effect from January 2018 for payments starting in December 2018. The Uruguayan government defines digital services tax into two types (Carolina Limbatto¸2020). Type A is those who carry out international activities such as the production, distribution and intermediation of cinematographic films and other audiovisual transmissions, such as Netflix or Spotify (Carolina Limbatto¸2020). Type B for those who mediate and mediate through computer means, such as Airbnb or Uber. The criteria to apply tax, for type A is considered 100% Uruguayan and pay tax for all the income. Type B pay for 50% of income if one part was located abroad. If the platform was located abroad pay 12% of non-resident income tax (IRNR) (Carolina Limbatto¸2020). Payment can be done in US$ and payments per quarter (instead of $ and monthly). The service or content provider is responsible for the tax and needs to register before tax authority (DGI). Service/content providers are liable for collection and remittance. Collection mechanism Platforms to declare tax then DGI to cross check declarations with credit card information.

CONCLUSIONS/RECOMMENDATIONS

The government of Indonesia has put endeavour in imposing income tax that may reach to the foreign business actors including to the business in digital era through the Law on Income Tax. However, the provisions in the Law on Income Tax and Government Regulation in Commercial Activities through Electronic System/PSME are considered as not applicative to be implemented in the digital economy era, specifically regarding the obligation for Commercial Activities through Electronic System/PSME and its actors to incorporate a permanent establishment. The Law Number 2 of 2020 is the manifestation of Government’s effort in imposing effective Income Tax to the Commercial Activities through Electronic System/PSME business actors, by concluding significant economic presence as the base of tax imposition. Nonetheless, according to the study above, the Law Number 2 of 2020 does not create legal certainty for the imposition of Income Tax for the Commercial Activities through Electronic System/PSME business actors since it does not regulate material provisions of the law and/or the Law Number 2 of 2020, hence, it contradicts with the tax philosophy in Indonesia. Moreover, the Law Number 2 of 2020 is considered as possible to be implemented if the Government of Indonesia follow this up by creating international agreements on the Income Tax provisions for the cross-nation Commercial Activities through Electronic System/PSME business actors. In the digital economy era, the success of the application of a state policy, whether the policies issued may be successfully implemented, are affected by the policies of other states. This means the tax policies in the digital economy era must have multilateral character, not only bilateral, or even unilateral.

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