Decoding digital taxation

Dr Arnaldo Purba

12 minute read

As Section Head of the International Exchange of Information and Chair of the Digital Economy Team within the Directorate of International Taxation of Indonesia’s Directorate General of Tax, ANU College of Business and Economics (CBE) alumnus Dr Arnaldo Purba has several key responsibilities and tackles many moving parts. 

In this interview, he shares insights about his portfolio, the future of digital taxation and enriching academic endeavours at CBE.

Q. Sixty-four per cent of the Indonesian population have access to the internet and 59 per cent use social media. What are some examples of recent progress and changes in Indonesia in terms of digital taxation practices?

Indonesia, the world’s fourth most populous state, has around 175 million internet users, 160 million social media users and 330 million mobile connections in the country. It is no surprise e-commerce was the main driving force behind the emergence of Indonesia as the largest digital economy in the South-east Asia region, with its value of US$40 billion being recorded last year. Furthermore, a significant amount of that value was contributed by foreign e-commerce. Accordingly, Indonesia will impose Value Added Tax (VAT) for e-commerce by foreigners, effective from August 2020.

Regarding income tax, isn’t Indonesia, as a source-income country, also entitled to tax revenue obtained from the country? When it comes to cross-border or international taxation, direct taxes such as income tax are more complicated than indirect taxes such as VAT. On the one hand, existing regulations, both domestic and international, such as double tax agreements or tax treaties, allow a jurisdiction to tax income derived by a foreign entity only when it is physically present in that jurisdiction. On the other hand, a main characteristic of the digital economy is that, unlike a brick and mortar economy, the former does not need physical presence to operate in a market jurisdiction. Most digital companies run their businesses in a market jurisdiction without having a physical presence there.

I second the opinion that digital-economy taxation is a multilateral issue and, therefore, should be addressed multilaterally. In this regard, Indonesia is one of 137 jurisdictions that have joined the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting. This body focuses on collaborating to tackle cross-border tax avoidance and enhances tax transparency; one way to do it is to address the tax challenges arising from digitalisation. It has been working intensively to produce a consensus-based, long-term solution for digital economy taxation by the end of 2020.

Q. Indonesia has signalled a strong commitment to preventing the abuse of tax treaties, and base erosion and profit shifting by multinational enterprises. With the Multilateral Convention (MC) coming into effect soon, what are some key implications for multinational firms with current operations or plans to enter the Indonesian market?

The deadline for MC is only a few months away. However, there are still many pending issues, both technical and political, to be addressed. Assuming MC is achieved by end of this year, it will not create disputes as much as a unilateral measure, i.e. a domestic regulation to tax digital economy, because MC will apply as an international standard, meaning digital multinational enterprises will face “uniformity of measures” regardless of the jurisdictions they are operating in. That way, MC is expected to have minimal spill-over effects on the economy. This feature makes MC an effective tool to level the playing field because it creates less distortion to where-to-enter choices for multinational firms. Contrarily, a unilateral measure is likely to give rise to conflicts and disputes, as it potentially introduces double taxation. However, where global consensus is not achieved, many jurisdictions, including Indonesia, are likely to introduce their own unilateral measures to tax the digital economy. 

A main characteristic of the digital economy is that, unlike a brick and mortar economy, the former does not need physical presence to operate in a market jurisdiction.

Q. Could you describe a typical day of your job at the Ministry of Finance? 

As one of the 160 member jurisdictions that joined the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum), Indonesia commits to the implementation of the international standards on tax transparency. That includes ensuring the established international standards of exchange of information for tax purposes are in place in their respective jurisdiction. As part of the Exchange of Information (EOI) division, I therefore need to keep up to date with any developments in the Global Forum. In particular, I am responsible for leading the Automatic Exchange of Information team within the EOI Division, ensuring that Indonesia can maintain the standards in terms of both the implementation and regulations. That involves drafting necessary regulations, attending meetings at home and oversees, and preparing responses to questionnaires requested by the Global Forum.

My position as Chair of the Digital Economy Team requires me to be familiar with the current development and issues of digital economy taxation. As a result, my days at the office involve attending meetings with the OECD Inclusive Framework working parties to discuss the long-term solution to the digital economy taxation. Team members and I are currently involved in discussions about a potential unilateral measure for Indonesia. We are also responsible for preparing written comments to indicate Indonesia’s position to the unified approach proposal of the global consensus.

I invaluably benefited from my years at CBE, where I was able to learn how to conduct proper research.

Q. Your PhD thesis consisted of a series of studies related to base erosion and profit shifting in Indonesia. What led you to this topic and how have you utilised the findings from your thesis in your career?

The idea came from an actual issue faced by Indonesia. My country, like other developing countries, relies heavily on revenue from corporate income tax. Sadly, many large companies, particularly multinational enterprises (MNE), have avoided paying corporate income tax by shifting their profits to low or zero-tax jurisdictions. However, when I reviewed literature on the subject, there were barely any empirical studies conducted, particularly ones that use developing-countries data. Coincidentally, a project called the Base Erosion and Profit Shifting (BEPS) Project by the OECD and the G20 commenced in 2013, the same year I wrote my PhD research proposal. BEPS has been a key issue in international tax ever since. The findings of my thesis have enriched my knowledge and enabled me to have a better understanding of how MNEs arrange cross-border tax avoidance by means of profit shifting.

Q. Which skills did you develop when completing your PhD that have proven particularly important in your career? 

On several occasions, Indonesian Finance Minister Sri Mulyani Indrawati emphasised the importance of research-based policy, making a policy based on data and evidence, to have an optimal impact on society. According to her, research is an inseparable part of improving productivity and innovation. I invaluably benefited from my years at CBE, where I was able to learn how to conduct proper research. In particular, I would like to thank the ANU Research School of Accounting for providing me with not only the solid foundation to be a good researcher but also opportunities to attend and participate in conferences. These experiences enhanced my research, presentation and communication skills, and my ability to defend my argumentations.

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