Indonesia Presents Google With Huge Tax Bill

In a move that has sparked deep concern among the multinationals doing business in Indonesia, Jakarta is going after Google Asia Pacific to try to force the communications giant to pay hundreds of millions of dollars in taxes. Other tech giants may be under fire as well.

The government alleges Google has obtained hefty revenue from Indonesian advertisers without paying property taxes. Special Tax Officers in Jakarta confirmed that investigators had visited Google’s office in the capital city as part of an investigation into the company’s suspected refusal to undergo a state audit of its tax obligations.

The tax office alleges PT Google Indonesia only paid less than 0.1 percent of the income and value-added taxes it owed last year.

Google, Jakarta warned, could face criminal charges on audit refusal as stipulated in the 2009 Tax Law if investigators find sufficient evidence.

Tax investigators are also seeking information about whether Google established a permanent establishment, known as a local legal entity, or BUT, the Indonesian language acronym, as the tax office plans to collect back taxes from revenue Google has generated over the past five years.

Muhammad Haniv, the head of special taxpayers at the Finance Ministry, did not specify the amount of Google’s unpaid income and value-added taxes for the five-year period, but said the firm could be subject to fines of up to Rp 5.5 trillion (US$418 million) for 2015 alone.

“If Google generates income from Indonesia, it has to pay taxes. It is immoral if Google refuses to do so,” Haniv was quoted as saying by The Jakarta Post.

Earlier this year, the Minister of Communications and Information Technology Rudiantara had warned that the Indonesian government will soon require messaging services and global providers of online content to establish BUTs and start paying tax. Companies that fail to comply with the new policy would have their services blocked, according to local media reports.

YouTube, Netflix, WhatsApp and Apple Music are among such services. These services use internet or bandwidth provided by Indonesian telecommunication companies as their infrastructure but do not pay tax or service fees to the Indonesian government or the internet providers.

“There will be punishment if they don’t comply. We can just block them from the operators,” Rudiantara was quoted as saying by Bisnis.com, adding that the government policies in the telecommunications sector had been too lenient.

The minister said the new policy will not only protect consumers but also increase tax revenue. He pointed out that in 2015 revenue from digital advertising was worth US$430 million.

According to 2015 data from the center of communication study from the University of Indonesia, there are 88.1 million of active Internet users in Indonesia, 85 percent of whom connect to the internet via smartphones.

State-owned telecommunications and internet provider Telekomunikasi Indonesia (Telkom) blocked Netflix from all of its platforms in January this year soon after the US online movie provider announced an international rollout, triggering criticism from Indonesian users.

Indonesia has been struggling to find alternative sources of state revenue as the biggest economy in the region is affected by the global economic slowdown and plunging energy prices. The government’s ongoing tax amnesty program is expected to help mend the widening state-budget deficit, with tax-revenue realization accounting for less than half of the 2016 target.

The government estimated that total internet advertising revenue could amount to around US$820 million a year, 70 percent of which was made by Google, whose video-sharing site YouTube has become an increasingly popular outlet for advertisers to air their commercials.

Finance Minister Sri Mulyani said Indonesia is committed to hunting down both Google and OTT companies alike to force them to comply with local tax regulations.

Google said it would continue to cooperate with the Indonesian authorities, but claimed that it had complied with all tax regulations in the country.

Center for Indonesia Taxation Analysis (CITA) executive director Yustinus Prastowo, said Indonesia had two options to resolve the Google conundrum, either extend the definition of a BUT or implement a regulation akin to that of the UK’s Google Tax, which targets offshore profits.

“Extending the BUT definition can be done by declaring that a virtual presence is considered to be an entity,” Yustinus said as quoted by The Jakarta Post.