As the famous saying goes, “The only thing that hurts more than having to pay income tax is not having to pay income tax,” meaning that the cost of taxation will always be substantial for companies, as rates of taxation usually correspond quite closely to their profit margins. However, the evading of tax obligations often requires large expenditures and it has now become common practice for big companies to attempt to reduce or even avoid the imposition of taxes through the formulation of complicated, multilayered financial schemes. Through such schemes profits are diverted to other countries, specifically to known tax havens.[1] Such actions are actually legal however and merely result in tax avoidance, as opposed to outright tax evasion.[2]
 
The tremendous growth and penetration of multinational corporations has inevitably led to a huge increase in the amount of taxes which are being avoided. This in turn has led several nations to start questioning the perceived mismatch that exists between the amount of profit being generated by such companies and the amount of tax that is being paid. However, attempting to collect income-tax revenues can be far more difficult from some companies that it is from others. The tech sector is especially culpable here, as it operates across multiple jurisdictions and pays low rates of tax as a result of its presence being largely virtual in nature. One high-profile recent example of this has pitted Google against the government of Indonesia.
 
In a bid to recoup some tax revenue from Google’s diverted profits, the United Kingdom (“UK”) has enacted a groundbreaking diverted-profit tax scheme through the introduction of Chapter 11 of the UK Finance Act 2015. This new scheme has become known as the infamous “Google Tax”, although it also applies to other multinational corporations in general, including Facebook, Amazon, Apple, eBay, Starbucks and others.[3]
 
The Indonesian government is now considering introducing a similar diverted-profit tax scheme of its own in order to chase down income tax from corporations such as Google. This strategy is being considered due to the fact that Google’s Indonesian arm is widely perceived here as failing to meet its tax obligations, as the company steadfastly refuses to be categorized as a permanent Indonesian establishment. As a result of this refusal, it has been claimed that substantial amounts of Google profits have been diverted to Singapore.[4] In order to implement this ambition, the Indonesian Directorate General of Tax (“Directorate General”) is currently preparing to receive information relating to the new diverted-profits tax scheme which is being implemented by Her Majesty’s Revenue and Customs (“HMRC”), the British tax authority.[5] If the Indonesian government proceeds with its plan to implement something similar to the UK’s diverted-profit tax scheme here, then it will then affect not just Google but technology businesses across Indonesia, as well as so-called “over-the-top” developers.
 
Based on these considerations, this edition of Indonesian Law Digest (ILD) will address various provisions which are set out under Indonesia’s current tax regime, particularly as they apply to permanent establishments, and compare them to the diverted-profits tax that the government is hoping to implement. Specifically, this week’s ILD will tackle and analyze the following areas: