Review of Implementation of the Inclusive Framework on Base Erosion on Profit Shifting in Indonesia
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Review of Implementation of the Inclusive Framework on
Base Erosion and Profit Shifting in Indonesia
Haula Rosdina, Maria R.U.D. Tambunan & Edi Slamet Irianto
Tax avoidance by multinational enterprises in Indonesia has led to a massive, ongoing loss of tax revenue. A type of tax avoidance known as base
erosion and profit shifting (BEPS) has become a global issue and compelled the OECD to take measures by rcelasing the BEPS Action Plan and
launching the BEPS Project. Indonesia declared its commitment to adopt appropriate parts of the outcome of the BEPS Project for developing
countries in Indonesia's domestic tax rules, recognized as the Inclusive Framework on BEPS or BEPS Minimum Standards. This article analyses
the implementation of the BEPS Minimum Standards in Indonesia and how the government has taken action to counteract tax base erosion. The
author considers qualitative research and data collected through a litcraturc study and in-depth interviews. Indonesia is in the process of
implementing the BEPS Minimum Standards, as addressing transfer pricing issues and preventing tax treaty abuse are currently particular areas
of focus for the government.
I INTRODUCTION
Practices of tax avoidance by various multinational enti-
ties (MNEs) in Indonesia, as seen in cases such as Google
Asia Pacific at the end of 2016, have drawn the attention
of the Indonesian tax authority to improve domestic tax
rules. The Google Asia Pacific case concerned the potential
loss of Indonesian tax revenue up to trillions of rupiah,
similar to the Indofood case that was brought before the
UK Court of Appeal in 2006.1 However, it is not an easy
task to tackle such tax avoidance issues, as this is highly
correlated to the ability of a nation to adapt to changes in
the global environment and the strength of the country's
economy. Moreover, support from a reliable tax adminis-
tration is also essential to securing government revenue.
Regarding the tax avoidance practiced by Google in
Indonesia, the major source of revenue for Google Asia
Pacific was from transferring and collecting its income
generated in Indonesia to Singapore, which has a lower tax
rate than Indonesia. The Indonesian government, through
the Minister of Finance, requested that the company pay
tax for the previous five years on income that the company
generated in Indonesia, amounting to more than USD 400
million, according to the Indonesia tax authority. Google
Indonesia paid less than 0.1% of the total income tax and
value added tax (VAT) that it owed in 2015. The settle-
ment would be made if Google agreed to pay the principal
tax debt and Fenalties.
The disputes mentioned above are the result of the
international tax rules and customs that enables a country
to impose income tax on residents of other countries that
have a physical presence through a permanent establish-
ment (PE). From the example above, it can be seen that an
entity could generate a larger income in one or more
countries without paying any tax or paying less income
tax in a source country because those entities do not have a
physical presence in the source country.3
The tax avoidance practice under various schemes
recognized as base erosion and profit shifting (BEPS) has
raised international concerns, as it reduces government
revenue from taxation. This practice is common due to
the inability of tax authorities to quickly adapt to fast-
paced developments in cross-border economic activities
supported by advanced technology. This is indicated by
(1) cross-border movements of capital and human
resources, (2) the movement of business locations from
high-cost countries to the low-cost ones, (3) the common
free trade agreements between countries, (4) the develop-
ment of communication technologies, (5) the risk
Department of Fiscal Administrative Science Universitas Indonesia, Email: maria.tambunan@ui.ac.id.
UK: CA, 2 Mar. 2006, Indofood Internat onal Finance Ltd v. JP Morgan Chae Bank N.A. London Branch, (2006) EWCA Civ 158.
2 S. Gayatri & E. Daburata, Exc/n z GoogL May Face over $400 Milion Indonesia Tax Billjor 20]5: Government Offical (19 Sept. 2016), https://www.reuters.com/article/us
indonesia google idUSKCNIIPOPC (accessed 28 Mar. 2018).
3 L.G. Ogaz6n Juairez & R. Hamzaoui, Common Strategie against Tax Avoidance: A Global Overview, in International Tax Structures in the BEPS Era: An Analyis of Anti Abuse
Measurei, IBFD Tax Research Series, vol. 2, 1, 8 (M. Cotrut ed., IBFD 2015).
635
INTERTAX, Volume 47, Issue 6 & 7
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Review of Implementation of the Inclusive Framework on Base Erosion on Profit Shifting in Indonesia
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