With the Law Number 7 of 2021 (“Law 7/2021”) regarding the harmonisation of tax regulations which came into force on 1 January 20221, the Indonesian government signals its readiness to implement the Pillar Two from the Organisation for Economic Co-operation and Development (OECD) two-pillar solution. It is specifically mentioned in Article 32A of Law 7/2021, which amends the previous clause by putting broader provisions concerning agreement or cooperation with other countries or jurisdictions in the context of avoiding double taxation and the prevention of tax evasion.
Article 32A of Law 7/2021 stipulates that the government has a right to enter into a taxation agreement with a country or jurisdiction partner2, either bilateral or multilateral, for the purpose of: (i) avoidance of double taxation and prevention of tax evasion, (ii) prevention of tax base erosion and shifting profits, (iii) exchange of tax information, (iv) assistance of tax collection and (v) other tax cooperation.
The elucidation of Article 32A of Law 7/2021 explains that the provision aims to promote economic cooperation with other countries, particularly with taxation, as well as to cope with the dynamic development of international tax landscape. The implementation shall be carried out under special legal instruments (lex-specialis). It also provides further explanations on the above purposes (point (i) to (v)), which are consistent with the international conception.
Article 32A of Law 7/2021 provides foundation to the implementation of Pillar Two. It shows Indonesia’s commitment to responding positively to the OECD’s initiative, being part of the BEPS Inclusive Framework. Further implementing regulations are expected in line with the OECD’s timeline of Pillar Two implementation.
Digital service tax is covered in the OECD’s Pillar One. If Pillar One is finally released, digital service tax that is unilaterally implemented must be abolished.
Currently, Indonesia has the Law Number 2 of 2020 (“Law 2/2020”) which includes the provision of taxation on the digital economy by foreign businesses. It stipulates that foreign sellers, foreign service providers and/or foreign digital-business providers may be deemed to have a permanent establishment in Indonesia if they meet “significant economic presence”. Significant economic presence is designated by: (i) consolidated gross turnover of the business group, (ii) amount of sales in Indonesia and/or (iii) active digital media users in Indonesia. Where the tax treaty negates such a permanent establishment, they will be imposed by “electronic transaction tax”.
That said, this provision has not yet been implemented. Considering that Indonesia is part of the Inclusive Framework which has agreed to the OECD’s two-pillar approach, the implementation of digital service tax in Indonesia may follow global implementation as led by the OECD
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