The Jakarta Post/Asia News Network
Indonesia is feeling the same headache Google has given to many countries: The American giant does not pay taxes as expected, despite the fortune it makes in those countries.
It began with the Finance Ministry recently announcing a plan to investigate Google Indonesia for possibly not paying its proper taxes although it may have booked wealth through advertising sales in South-east Asia’s largest economy, where the digital economy is thriving but under-regulated.
Google Indonesia has reportedly been resisting any probe, saying its local entity does not handle advertising revenues. It claims ad incomes fall under the auspices of Google’s arm in Singapore, a country that offers some of the world’s lowest tax rates.
The Indonesian government, like many around the world, resorts to “tax shaming” — demonising high-earners who take advantage of perfectly legal opportunities to lower their taxes — although many studies show no connection between shaming and making companies pay higher taxes.
Google is not the only company subject to tax shaming, of course. Apple, Amazon and Starbucks are some others. But the practice of diverting profits to ultra low tax countries goes beyond those companies. Numerous multinationals around the world do it and it is legal, with a lot of debates about the ethics of it.
Reports have it that many of Google’s European operations diverted their profits to tax havens via Irish and Dutch subsidiaries, and ended up paying lower taxes (reportedly single-digit figures) than what they have to pay in their home countries across the continent (double-digit figures).
This complicated tax structure is popularly known as “Double Irish with a Dutch Sandwich”.
The Organisation for Economic Cooperation and Development (OECD) refers to such behaviour as base erosion and profit shifting (BEPS) tax avoidance strategies. it is working with over 100 countries and jurisdictions to tackle the issue in the short run.
In the UK, long story short, public outcry over how little online platforms such as Google were paying in taxes on multi-billion dollar revenue from their UK clients pressured the nation’s parliament and tax office to go after the technology behemoth.
The UK finally came up with what is known as the “Google tax” law, which taxes diverted profits by 25 per cent, hence discouraging companies to divert their profits overseas into tax havens. Google also finally agreed to pay the UK government £130 million (S$ million) in back taxes from 2005 to 2015.
Australia and India followed suit. Australia set out an extremely high “diverted profit tax” rate of 40 per cent on all profit that is diverted from the country to overseas, while India has 6 percent “equalisation levy” on payments for online advertisements made by Indian business entities to non-residents such as Google.
Indonesia can certainly adopt the Google tax to contain any potential state losses from Google’s operations. However, the Google tax is not a magic wand that solves tax avoidance issues just like that.
If not set out in detail, there are still many ways for companies to avoid reporting a significant portion of their income in their home country, especially with Google’s consistent claims that a lot of its operations are carried out by its thousands of workers in Ireland. After all, the internet is borderless.
Opening a House of Representatives inquiry into the matter can help the government and lawmakers explore the inner workings of Google’s operations in Indonesia and understand what to do in terms of securing state revenues from the company’s local operations.
Previously, the Indonesian government tried to force over-the-top companies Google, Twitter, Yahoo and Facebook to set up a Permanent Establishment (BUT) through an Communications and Information Ministry circular letter. As a BUT, they are required to report all domestic earnings from work activities in the nation and pay national taxes.
But Google has yet to heed the government’s order, which demonstrates the strength of a ministerial circular letter.
What the government can do on this front is to revise regulations on BUT so as to legally force companies like Google — whose revenues do not come from product sales but advertising — to pay taxes on domestic revenues, as oil and gas companies do.
What is most crucial, but most difficult to control by the country itself, is international cooperation through tax treaties with tax havens or countries or jurisdictions with ultralow tax rates.
The OECD and G20 have begun talks on this and hopefully a definitive international tax agreement can be inked soon.
As regulations are being drafted and international cooperation planned, time goes by, and with it, potential revenue.
Internet advertising will be the fastest growing segment in the entertainment and media industry over the next five years with a growth rate of 21.3 percent to reach US$92 million by 2018, according to multinational consulting firm PricewaterhouseCoopers’ (PwC) entertainment and media outlook 2014-2018 on Indonesia.
Although it remains a tiny fraction of TV advertising’s US$4.6 billion in Indonesia, global trends suggest that internet advertising is poised to take over soon.
The use of Google’s video streaming arm YouTube, the videos of which mostly come embedded with advertising clips, is also skyrocketing in Indonesia, the country that hosts the most YouTube users in the Asia Pacific.
Indonesians spend an average of 15 to 30 minutes on YouTube every day, according to the latest figures from Google Indonesia.
The clock is ticking for the government to take advantage of this potentially massive taxation revenue stream from Google. There are many options to realise this opportunity, starting from an inquiry, regulations that fit into the company’s local business model — with the Google tax, BUT regulation revision and international cooperation — to thoroughly monitoring the implementation of such new rules.
Strong political will is required to pass through those stages, which could take months or years to complete.
The ball is in the government’s court. Google and other multinationals can currently seek legal avenues to pay as low taxes as they want; it is up to the government to find ways to call it quits.