Google & Indonesia Agree on Tax Settlement after Long Dispute
Although the amount remains a secret, the government of Indonesia and Alphabet's Google finally managed to reach an agreement on the tax settlement after a long dispute that started in mid-2016. The news was confirmed by Indonesian Finance Ministry Sri Mulyani Indrawati. The dispute started because Indonesian authorities felt the so-called "over-the-top content" giants, referring to those companies that deliver content through Internet, deliberately did not set up permanent establishments in Indonesia in order to avoid taxes. Besides Google, other examples are Yahoo, Facebook and Twitter.
Google only has a representative office in Indonesia (which is not a permanent establishment), while transactions and revenue (generated in Indonesia) are booked at Google Inc's Asia Pacific headquarters in Singapore. This means Indonesia misses out on significant tax revenue as online advertisement spending is growing rapidly in Indonesia where Internet and smartphone penetration is rising rapidly. About 100 million Indonesians now have Internet access. Therefore, global tech businesses have been flooding Indonesia in recent years. It is estimated that total online advertising revenue in Indonesia was worth USD $830 million in 2016, with Google and Facebook - combined - taking about 70 percent of the total.
A representative office in Indonesia cannot generate any income or be engaged (directly) in sales. It can only represent, promote, and facilitate deals for the mother company. Therefore, strictly speaking, a representative office only needs to pay withholding tax (the amount of an employee's pay withheld by the employer) as income tax has to be zero (while it also has to report the monthly social security report to the government).
Read more: What is a Representative Company (Rep Office) in Indonesia?
However, the Indonesian government is not too pleased when big companies only build a representative office in Indonesia that facilitates plenty of profit for their parent company abroad, while few taxes are paid to the Indonesian government. Indonesian tax officials regard these companies liable for corporate income tax as well as value added tax. Last year an Indonesian tax official said Google would have to pay USD $418 million of back taxes for the year 2015 alone.
Southeast Asia's largest economy is keen on generating more tax revenue to fund its ambitious infrastructure and social development programs. Not only Indonesia is encouraging Google to pay taxes to the government, also authorities in England, Italy and France have been pushing the American search engine giant to pay more tax. Thailand is currently studying plans to tighten tax collection regulations for internet and technology firms.
