Understanding Digital Tax in the Global Economy

Many countries are agreed to introduce the digital tax. The initiative's purpose is to regulate the ever-growing digital economy nowadays

Digital tax is in line with the technological developments that continue to occur, providing many conveniences in conducting digital transactions. Digital tax is also integral as we are currently in the Digital Economy Age. Information is perceived as something more than just a way of communication nowadays. It becomes a source of generating profits for the economy.

A concrete example of the digital economy age is seen through the number of e-commerce businesses providing various goods and services the community needs.

The situation generated by the digital economy age is relevant in Indonesia. It shows the number of internet users has faced a 17% increase in 2020 compared to the previous year. The growth brings the total number of internet users in Indonesia to 175.4 million people.

The number is expected to increase as e-commerce becomes consumers’ natural choice. In addition, there is a high number of companies within the nation that are engaging in digitizing their businesses. The current digitization trend makes digital tax a logical consequence of equalizing continuous progress.

Digital tax can be defined as a policy imposed or charged to companies engaged in global digital business. Therefore companies should consider assistance in understanding the new policy of taxes.

The basis for enacting an international digital policy for digital companies to pay taxes is considering economic benefits that have been taken or a significant economic presence.

The Challenges of Implementing the Digital Tax

The digitalization of the economy is a new challenge for tax authorities. The primary characteristic of digital businesses is their reliance on intangible assets, which allow them to manage the value chain in several jurisdictions.

This gives them the freedom to locate operations in countries with relatively lower tax rates, which is often different from where their consumers are located. It is due to this reason that there often tends to be a loss in tax revenue.

Further adding to the matters, there is an uneven playing field between domestic taxpayers and offshore suppliers, creating unhealthy competition. Therefore, companies should consider adding another accounting workforce to ensure financial stability.

The Indonesian government enacted Law No. 2 in the Year 2020 to counter the problem to initiate a tax policy on global e-commerce. This is an attempt to secure and retain tax revenue in Indonesia.

Postponing The Initiative

The OECD, on 24 May 2022, revealed that the global digital tax agreement is still in progress and that the process will take a year to enact. The postponement occurs because finalizing the technical details on the digital tax deal is progressing much slower than initially planned.

The timeline set was considered very ambitious for implementation. The Biden government and the European Union have struggled to pass legislation implementing the global minimum tax deal, which 140 countries agreed upon in October 2021.

The new goal set for performance is from 2024 onwards. Various finance ministers unanimously provide approval and support for the global minimum tax, which is enforced through related rules.

The Impact of Digital Tax on Business

Risk in Asian Economics

Even though the worldwide tax system is expected to increase efficiency, some parties feel that the global minimum tax imposed will impact Asian economies.

Asian countries will find it challenging to manage their finances, economic development, and employment matters if there is no consideration paid to the needs and capacity to implement the reforms.

The problems will arise primarily due to the region’s diversity and unique circumstances and conditions that would need further attention in implementing the changes.

These parties urged policymakers to weigh and consider the tax designs to achieve a good balance between the varying norms.

Difficulties in Indonesia

Indonesia has been facing significant challenges in welcoming investments due to the ever-changing collection of taxes which makes it difficult for companies operating in Indonesia to meet this aside from the incremental costs of the taxes themselves.

Even though these companies would greatly benefit from an inclusive and comprehensive tax system on the digital economy, which is to be achieved through harmonizing tax legislation, there is a common concern.

The concern is that these companies are continually forced to adapt to the new regulations, pushing them to compete for their share of tax revenue. The underlying difficulties that come alongside the digital revolution are the minimum tax exposure and uncertainties surrounding this area.

The ever-changing tax regime in Indonesia has often made it challenging for companies to manage and further assess the taxes imposed on a company. This is often challenging as companies must adhere to the taxation regulation, and the financial reports must be fully accounted for.

Cekindo extends services on accounting consultations and also tax consultations that would help companies run their business activities smoothly.

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Pandu Biasramadhan

Pandu is the Consulting Manager at Cekindo. He has extensive experience in working with government agencies. Notably, he has provided market-entry solutions for enterprises in Indonesia and managed regional partnership channels in Southeast Asia. At Cekindo, Pandu aspires to lead the consulting team to provide top-quality market-entry services and maintain a portfolio of global clientele. His specialty is market-entry advisory and business process outsourcing.