Balim - 2020

Tax Challenge of Digital Economy: Will Pilar 1

and 2 solve the problem?
 “Uber, the world’s largest
taxi company, owns no
vehicles. Facebook, the
world’s most popular media
owner, creates no content.
Alibaba, the most valuable
retailer, has no inventory.
And Airbnb, the world’s
largest accommodation
provider, owns no real
estate. Something
interesting is happening.”

2
What is Digital Economy?

Online advertising/ Cloud Computing/ Fintech

“Targeted Profiles/ Data Cloud Storage
advertising”

e-Commerce/ Sale of Intermediary

Websites Subscription Fees
Digital and Physical
for Digital Content
Goods

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International
tax planning
in digital age
No physical presence in the market country

A is a company that developed software and sold

it online to B (natural person) in Indonesia.

Country A
Indonesia

Tax Implication:
Company A’s revenue will not be taxed at all in
Indonesia, despite the fact, that the revenue
derives from Indonesia.
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 Provision of services in market country
B is a service provider Company who performs
support service to Company A’s to accommodate
customer need in Indonesia

Country A
Indonesia
Support services

Tax Implication:
Indonesia can only tax limited to the service
income of Company B without taxing sales
generated by Company A from Indonesia

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Establish a limited risk entity in the market
country (e.g. Limited risk distributor)
B is a limited risk distributor entity in Indonesia
who performs as an intermediary between
Company A and Indonesian customer

Country A
Indonesia

B
Customers

Tax Implication:
Indonesia can only tax limited to the income
generated by B (low margin as LRD)

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 PRELIMINARY CONCLUSIONS

Domestic Law may Prevailing tax Transfer pricing rules

need to adopt treaty definition insufficient to tax
development of tax on of permanent ‘value creation’
digital economy establishment
does not
recognize digital
presence

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 Global Tax Trends of Digital Economy

Non-Turnover Based

DPT (and MAAL, AUS)

/ Turnover Based
Equalization Levy

01
25% / 40% 6% / 5% / 10%
2015 (/18), 2016 2016, 2019, TBC
United Kingdom, Australia India, Pakistan, Chile

Virtual PE VAT/ Sales Tax

Various

02
28% / TBC
2019, TBC 2016, 2017, 2018, 2019
Italy, Korea Russia, Israel, Saudi, Canada…

Novel New Source/ Deeming Provisions Digital Services Tax

2% - 7%

03
20% / CT rates
2017, 2018, 2019 2019, 2020
United Kingdom, Hong Kong, Taiwan France, Italy, UK, Spain, Czech Republic, Poland

Significant Economic Presence Digital Advertising Tax

04
CT Rates 3% / 5%
Rate 2019 In force, 2020
Effective from India Hungary, Austria
Countries

OECD proposal: Pillar one – Pillar two

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Pillar one
The
implementation Sales: $600

of pillar one
Profit: $9

Before pillar 1

• Hypothetically fixed percentage for

routine returns: marketing and
distribution: 4%

• Under the fixed percentage rule, QCO

should earn : 4% *600 = $24
Current profit: $9
Sales: $600
Profit: $9 + Amount B: $24-$9 = $15
$12 + $15 =
$36

Profit: $9 + $12 : $21

After pillar 1
 Technical
20% over 10% rule
Possibility that Indonesia will left with nothing or small portion
of amount A, if the consolidated profit is less than 10% (i.e
Amazon)
Certainty
Indonesia tax authority may surrender a degree of freedom to
make adjustment in return for which they are allocated an
incremental formulaic Amount A
Potential impact from
Indonesia perspective Possibility of double counting
There is possibility that Indonesia would tax twice the same
item of profit if they were allocated Amount A on top of certain
existing withholding tax liabilities (i.e royalty)

The deviation of amount B from ALP

The standardize operating margin will unable distributor earning
lower profit due to market condition
 Administrative

Assurance on the recognition of amount A

There is no assurance when Indonesia will be entitled to receive
and recognized the Amount A.

Complexity of amount A
The complexity could potentially hamper the sustainability of an
eventual consensus
Potential impact from
Indonesia perspective The need of additional documentation to report the revenue
of the group
Currently, Indonesia implement three-tiered documentation,
including CbCR. Nevertheless, none of the documentation
required disclosure of group revenue from each jurisdictions,
regardless the digital presence
 1) UN solutions (insertion of article 12B)

“Income from automated digital services arising in

a Contracting State and paid to a resident of the
other Contracting State may also be taxed in the
Contracting State in which it arises and according
to the laws of that State”

“The term “income from automated digital

services” as used in this Article means any payment
An alternative in consideration for any service provided on the
internet or an electronic network requiring minimal
human involvement from the service provider”

the taxing right is not conditioned on revenue

thresholds. Unlike the US’s preferred version of Pillar
One, it only applies to companies engaged in the
digital economy.

2) Unilateral measures (GR in Lieu of Law

Number 1 Year 2020 (Perppu-1)

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Pillar two
Before Pillar 2 Pillar 2 Proposal
After Pillar 2
Top-up Taxes under IIR: $6.03 paid
by RCo

Top-up Taxes under STTR $7.5 withheld

by SCo
 Technical
Indonesia as an Ultimate Parent Entity

Indonesia may have new taxing rights

As an UPE, Indonesia may have new taxing rights in performing
income inclusion rules

Indonesia as a constituent entity

Potential impact from
Yet, forecasted to not have a significant impact to Indonesia
Indonesia perspective
(current CIT rate at 22%)
The proposed new global minimum tax rate of 15% under
Pillar 2 is too low to make a meaningful difference
 Administrative
Indonesia may need to amend its domestic tax law
Implementation of the rules will likely involve a combination of
changes to domestic tax laws and bilateral tax treaties

The need of additional documentation to quantify and

document the ETR in each jurisdiction
Additional effort and documentation may be required to
Potential impact from calculate whether a jurisdiction is regarded as being
Indonesia perspective undertaxed, and therefore a top-up is required.
THANK YOU