Posts

Indonesia Targets Taxation of Tech Companies to Boost Economy

Indonesia is set to tax tech companies that may or may not have a legal presence in the country, as electronic transactions and the use of streaming services and online telecom apps have increased notably during the COVID-19 pandemic.

The legal basis for this measure is the recently enacted emergency bill Government Regulation in Lieu of Law No. 1 of 2020 regarding State Financial Policy and Financial System Stability for the Management of the Coronavirus or COVID-19 Pandemic and/or in Facing Threats to the National Economy and/or Financial System Stability (“GR 1/2020”).

Collection of VAT

Article 6 of GR 1/2020 states that the government will collect value-added tax (“VAT”) for intangible taxable goods and/or taxable services from outside Indonesia which are utilized in the country through electronic system trade activities, in accordance with Law No. 8 of 1983 regarding Value-Added Tax for Goods and Services and Sales Tax on Luxury Goods, as lastly amended by Law No. 42 of 2009. This VAT will be collected, deposited and reported by foreign traders, foreign service providers, foreign electronic trading system providers and/or domestic electronic trading system providers appointed by the Minister of Finance. These parties can appoint representatives domiciled in Indonesia to collect, deposit and report the VAT.

Procedures for the appointment of representatives and for the collection, deposit and reporting of the VAT are further regulated under Minister of Finance Regulation No. 48/PMK.03/2020 regarding Procedures for the Appointment of Collectors and for the Collection, Deposit and Reporting of VAT for the Use Inside the Customs Area of Intangible Taxable Goods and/or Taxable Services from Outside the Customs Area through Electronic System Trade Activities (“MOF Reg. 48/2020”).

Collection of Income Tax

The government will also collect income tax from foreign traders, foreign service providers and/or foreign electronic trading system providers that have a significant economic presence in Indonesia. The determination of “significant economic presence” is based on the consolidated gross turnover of the business group, sales in Indonesia, and number of active users on digital media in Indonesia. The threshold for these criteria are to be further regulated in a Minister of Finance regulation. A party that meets the threshold for a significant economic presence in Indonesia will be treated as a permanent establishment and subject to income tax.

If foreign traders, foreign service providers or foreign electronic trading system providers are determined to have a significant economic presence in Indonesia but cannot be treated as permanent establishments due to the application of agreements with other governments in the context of avoiding double taxation and the prevention of tax evasion, they will be subject to an electronic transaction tax.

Such income tax or electronic transaction tax is to be paid and reported by the foreign traders, foreign service providers and foreign electronic trading system providers. Similar to the VAT payment, parties are allowed to appoint representatives domiciled in Indonesia to fulfil their income tax or electronic transaction tax obligations.

The rate for the income tax or electronic transaction tax, its calculation, the procedures for tax payment and reporting, and the procedures for the appointment of representatives to fulfil tax obligations are to be further regulated by Minister of Finance regulation.

Sanctions

Foreign companies that do not comply with the above provisions are subject to administrative sanctions and could also have access to their apps blocked by the Minister of Communication and Informatics.

As the government implements large-scale social distancing restrictions and businesses apply work from home policies, the number of users of streaming services and online meeting apps has increased markedly.

The government has for years been aiming to collect taxes from foreign tech companies that enjoy significant revenue from Indonesia, but to no avail. It has been a struggle because of these companies’ lack of a physical presence in Indonesia, with prevailing tax regulations only covering companies domiciled in the country or those that can be considered permanent establishments.

This is a loophole in the era of the cross-border digital economy that GR 1/2020 tries to address. As noted by Indonesian Finance Minister Sri Mulyani Indrawati, under the new regulation a permanent establishment would no longer be defined solely on physical presence. Consequently, even if foreign tech companies do not open an office in Indonesia, they would still have tax obligations if they established a significant economic presence in the country.

For example, it has been reported that, pursuant to MOF Regulation 48/2020, the government will impose a 10% tax on subscription fees for streaming apps starting July 1, 2020.

Status of GR 1/2020 

It appears that these efforts to tax foreign tech companies will continue after the COVID-19 pandemic ends. Pursuant to Law No. 12 of 2011 regarding the Formulation of Laws and Regulations, as amended by Law No. 15 of 2019, an emergency bill must be submitted to the House of Representatives for approval. If it is approved by the House it will then become a law, and if it is rejected, the emergency bill will be revoked.

In this regard, the House has approved the adoption of GR 1/2020 as a law, resulting in the promulgation of Law No. 2 of 2020 regarding Stipulation of GR 1/2020 regarding State Financial Policy and Financial System Stability for the Management of the Coronavirus or COVID-19 Pandemic and/or in Facing Threats to the National Economy and/or Financial System Stability, This new law is effective as of May 18, 2020. (May 20, 2020)

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.

Amendments to Tax Code: Azerbaijan

Law of the Republic of Azerbaijan “on Amendments to the Tax Code of the Republic of Azerbaijan” was approved by the President of the Republic of Azerbaijan on 29 November 2019. These amendments become effective from January 1st, 2020.

The amendments concerns the following matters:

  • E-tax invoice cancellation and application of various types of electronic invoices depending on the nature of the transaction;
  • Application of a single approach to VAT calculation and payment (cash method);
  • Abolition of simplified tax on building;
  • False Transactions and Potentially Dangerous Taxpayer;
  • Changes on excise rates;
  • New tax exemptions;
  • Control of installation of POS-terminals and introduction of new generation cash registers;
  • Improvements in the simplified tax payment;
  • Centralized tax registration;
  • Taxation by state-owned subsidies from residential and non-residential areas;
  • Reporting on transnational group of companies;
  • Carrying out of joint inspections with tax authorities of other state as regulated by international treaties;
  • Editing and refining.

General provisions and new concepts

The following new concepts were added to the Tax Code:

Non-Commodity Transaction – is a transaction disclosed in the course of tax control, concluded for the purpose of concealing another transaction and generating profit without the provision of goods, works and services;

Risky Taxpayer – means a taxpayer regarding whom there is a decision of the relevant executive authority (body) and who meets the criteria approved by the decision of the relevant executive authority (body), as well as a taxpayer who carries out non-commodity and/or risky transactions; A taxpayer may be considered as a risky taxpayer upon respective decision of the competent body.

Transnational group of companies – a group of companies, which includes two or more companies that are residents in different countries, or a company that is resident in one country and operates through a permanent representation in another country.

New provisions (Article 16.1.4-2) to the taxpayer’s responsibilities regarding the Transnational Group of Companies will be added in the following content:

If the total income for the fiscal year of the Transnational Group of Companies exceeds the manat equivalent of 750 million euros, the enterprise, which is a member of a transnational group of companies for the purpose of automated information exchange with the competent authorities of other countries under international treaties supported by the Republic of Azerbaijan and is a resident of the Republic of Azerbaijan, submits the report to the tax authority in the form and manner specified by the relevant executive authority (body).

A tax sanction of 500 manat is applied to the taxpayer in case of failure to submit the electronic report in prescribed manner and time to the taxpayer.

Registration of taxpayers

The article 33.7 (Registration of taxpayers) will be amended in the following content:

The following taxpayers can be registered in a centralized manner by the tax authority as determined by the relevant body (body) of the relevant executive authority:

  1. Natural monopoly subjects;
  2. Enterprises with special tax regime;
  3. Taxpayers who meet one of the following requirements:

– Average number of employees 251 and above;

– The average annual residual value of fixed assets on the balance sheet exceeds AZN 5,000,000.

Persons who have been registered at the place of their taxation are then registered in the centralized order with the previous identification numbers when referring to taxpayers or enterprises with a special tax regime.

Tax registration of taxpayers and branches, representative offices or other economic entities (objects) of the special tax regime, registered in the centralized manner, shall be carried out in the aforementioned manner.

Legal entities, registered at the place of their taxation, are required to apply to the relevant tax authority for centralized registration within 15 days of commencement of activities under the special tax regime.

Centralized re-registration or de-centralization of enterprises operating under special tax regimes, commencement or termination of their activities under a special tax regime shall be made within 15 days from the date of their application to the relevant tax authority.

III. Responsibility for violation of tax legislation

Provisions about the expiration of the term for calling to account for violation of tax legislation and application of financial sanctions (Article 56) will be amended to the following content:

Except for the results of on site tax inspection conducted in accordance with the relevant decision on the conduct of tax inspection in accordance with the criminal procedure legislation, the person cannot be called to account for violation of tax legislation and no tax liabilities may arise if the period of 3 years (the period of 5 years after the relevant information from the competent authorities of foreign countries on income received abroad) had passed from the date of the tax violation.

The period specified in this article covers a period of 3 years preceding the date of the decision of the tax authority to conduct on site tax inspection, irrespective of the date of making a decision on liability in accordance with the article 49.1 of the Tax Code.

Electronic delivery notes and purchase act of goods

The provisions regarding electronic delivery notes (Article 71-1) will be amended to the following content:

In the cases established by this Code, a person providing goods, performing work and rendering services to individual entrepreneurs and legal entities shall issue an electronic invoice to them within the following terms:

– providing goods – time of delivery of goods;

– providing not pre-ordered goods – within 5 days from the date of issuance of the document confirming delivery of goods;

– performing works and rendering services – within 5 days from the date of performance of works and rendering of services.

New provisions to the electronic delivery notes (Article 71-1) will be added in the following content:

When goods (works, services) are delivered to buyer not registered as a taxpayer, he / she will be given a receipt or a check.

Tax invoices are subject to the following types of electronic invoices, depending on the nature of the operation:

on the provision of goods, works and services;

on return of goods;

according to the article 163 of the Tax Code, except for return of goods;

on transfer of goods to agent (commissioner);

provided by agent (commissioner) to buyer of goods;

on acceptance to eventual processing of goods;

according to the article 177.5 of the Tax Code.

Purchase act of goods (Article 71-2) will be added to the Tax Code:

Within 5 days from the date of purchase of goods, purchase act and electronic purchase act (the form of which is established by the relevant executive autority) shall be drawn up for goods purchased for the purpose of economic activity (excluding individual consumption) by legal entities and individuals.

In the event that an electronic purchase act issued by a taxpayer has been printed and signed by an individual not registered within the tax authority, this document shall be considered as a document confirming purchase of goods and a purchase act shall not be drawn up on paper.

Congress Approves New Disaster-Area Tax Relief

A flurry of tax legislation passed at the end of 2019 as part of an omnibus spending package. You might have already heard about changes to the retirement plan rules and tax extenders that were part of this package.

However, there are some lesser-known changes that you might not know about. Specifically, the disaster-related provisions of the Taxpayer Certainty and Disaster Tax Relief Act provide valuable relief to taxpayers affected by federally declared disasters that happened between January 1, 2018, and January 19, 2020.

Personal Casualty and Theft Losses

Prior to 2018, individual taxpayers that itemized their deductions could write off their unreimbursed casualty and theft losses to the extent that the losses exceeded 10% of adjusted gross income (AGI). In addition, the deductible amount had to be reduced by a “floor” of $100 for each casualty or theft event.

For example, Bill had $100,000 in AGI for 2017. He incurred a $25,000 loss to his home due to hurricane damage in 2017, and his insurance company paid him $10,000 for repairs. So, his unreimbursed loss was $15,000 ($25,000 – $10,000).

Bill itemized deductions on his 2017 tax return. How much was he able to deduct for unreimbursed hurricane damages? His deduction was subject to the 10%-of-AGI threshold of $10,000 (10% of $100,000). He also had to subtract $100 per loss. So, in 2017, Bill claimed a $4,900 itemized deduction for the loss ($15,000 – $10,000 – $100).

Important: A special election allows taxpayers to deduct a loss on a tax return for the preceding year. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. Decisions regarding this election should be based on an evaluation of 1) whether you need cash quickly, and 2) your overall tax situation in the casualty event year and the preceding year.

TCJA Changes

The Tax Cuts and Jobs Act (TCJA) repealed the deduction for casualties and theft losses for 2018 through 2025 — except for losses suffered in federally declared disaster areas. The special election to speed up the tax relief available to taxpayers in disaster areas remains in effect after the TCJA.

New Relief for Victims

The Taxpayer Certainty and Disaster Tax Relief Act doesn’t restore pre-TCJA law for all casualty and theft losses. However, it does provide the following seven tax breaks to victims in federally declared disaster areas, generally for 2018 through January 19, 2020:

  1. 10%-of-AGI threshold. The new law eliminates the usual 10%-of-AGI threshold on deducting losses from federally declared disasters. It also raises the floor for qualified disaster losses from $100 to $500.
  2. Itemizing vs. taking the standard deduction. Under the new law, you don’t have to itemize deductions to claim a disaster-related loss. You can write off your loss even if you claim the standard deduction for the tax year in question.
  3. Charitable contribution limits. The new law temporarily suspends the tax return limits for charitable contributions associated with qualified disaster relief. For instance, monetary contributions are normally limited to 60% of AGI, but this limit doesn’t apply to qualified donations in a disaster area.
  4. Certain tax credits. A special rule allows taxpayers in designated disaster areas to refer to the preceding tax year for purposes of determining the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC).
  5. Early withdrawal penalty. Generally, distributions from qualified retirement plans, such as a 401(k) or Simplified Employee Pension (SEP), are hit with a 10% tax penalty in addition to regular tax liability if made before age 59½ — unless a special exception applies. The list of exceptions is lengthy. The new law now provides another exception for qualified disaster relief distributions, though qualified hurricane distributions can’t exceed $100,000.
  6. Cancelled home purchases. The new law permits re-contributions of retirement plan withdrawals for home purchases cancelled due to eligible disasters. It also provides flexibility for loans from retirement plans for qualified hurricane relief.
  7. Extended tax-filing deadlines. An individual with a principal place of residence within a federally designated disaster area, or any taxpayer with a principal place of business in such a disaster area, is granted an automatic 60-day extension for any tax filing. This provision acknowledges that victims probably have other concerns taking priority. The automatic filing extension applies to federal disaster areas declared after December 20, 2019, the new law’s date of enactment.

Special Break for Small Businesses

The new law also creates a special “employee retention credit” for 2018 and 2019. Essentially, a disaster-affected employer is entitled to a 40% tax credit for the first $6,000 of wages paid to an employee from a core disaster area. The maximum credit is $2,400 per worker.

The employee retention credit applies to wages paid regardless of whether services associated with those wages were actually performed. It’s treated as part of the general business credit.

For More Information

This article highlights the key tax breaks available to individuals and small businesses that have suffered losses in a federally declared disaster area. Other special rules may apply. If you’re hit with a disaster, consult with your tax advisor to maximize the benefits for your situation.

Repeal of”Church Parking Tax”

Starting in 2018, a provision of the Tax Cuts and Jobs Act (TCJA) triggered unrelated business income tax (UBIT) on tax-exempt organizations like churches that provide employees with transportation and parking fringe benefits. Now that provision has been repealed under the Taxpayer Certainty and Disaster Tax Relief Act.

The change is effective for amounts paid or incurred after 2017. So, churches and other not-for-profit entities that paid UBIT on applicable transportation benefits in 2018 and 2019 may be eligible for a refund. Contact your tax advisor for more information.

OECD Releases Minimum Tax Plan To Solve Digital Tax Issues

The OECD on November 8, 2019, released its plans for a minimum tax on corporate profits, which is one element of a two-pronged approach to solving the tax challenges arising from the digitalization of the economy.

In May 2019 the Inclusive Framework agreed a Program of Work for Addressing the Tax Challenges of the Digitalization of the Economy. The Program of Work is divided into two pillars:

  • Pillar One addresses the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules;
  • Pillar Two (also referred to as the “Global Anti-Base Erosion” or “GloBE” proposal) calls for the development of a co-ordinated set of rules to address ongoing risks from structures that allow MNEs to shift profit to jurisdictions where they are subject to no or very low taxation.

The OECD’s GloBE proposal is designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation. The proposal looks to minimize tax base erosion and profit shifting by ensuring that income is not inappropriately shifted to territories that levy no or low tax rates, by ensuring that income is subject to at least a minimum level of tax, wherever that may be. This would involve the introduction of a new effective tax rate test, which would also enable stakeholders to better determine in a harmonized way how much tax multinationals pay internationally, the OECD has proposed.

In a new consultation on its proposal, which will run until December 2, 2019, the OECD has explained in detail how its proposed system will work.

According to the OECD, the four component parts of the GloBE proposal are:

  • an income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate;
  • an undertaxed payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
  • a switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and
  • a subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

The OECD is proposing that the rules will be implemented by way of changes to domestic law and tax treaties. They would include a co-ordination or ordering rule to avoid the risk of double taxation that might otherwise arise where more than one jurisdiction sought to apply these rules to the same structure or arrangement.

The OECD said: “Like Pillar One, the GloBE proposal under Pillar Two represents a substantial change to the international tax architecture. This Pillar seeks to comprehensively address remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax.”

“A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shifting and establishes a floor for tax competition among jurisdictions. In doing so, the GloBE proposal is intended to address the remaining BEPS challenges linked to the digitalization of the economy, but it goes even further and addresses these challenges more broadly. The GloBE proposal is expected to affect the behavior of taxpayers and jurisdictions. It posits that global action is needed to stop a harmful race to the bottom on corporate taxes, which risks shifting the burden of taxes onto less mobile bases and may pose a particular risk for developing countries with small economies.”

The OECD added: “Depending on its design, the GloBE proposal may shield developing countries from pressure to offer inefficient tax incentives. The GloBE proposal is based on the premise that, in the absence of a coordinated and multilateral solution, there is a risk of uncoordinated, unilateral action, both to attract more tax base and to protect existing tax base, with adverse consequences for all jurisdictions. The GloBE proposal should be designed to achieve these objectives consistent with principles of design simplicity that will minimize compliance and administration costs and the risk of double taxation. To that end, the Program of Work calls for the consideration of simplifications, thresholds, carve-outs, and exclusions from the rules.”

The OECD intends that the GloBE proposal will operate as a top-up to an agreed fixed rate. The actual rate of tax to be applied under the GloBE proposal will be discussed once other key design elements of the proposal are fully developed, it said.

The consultation is seeking feedback on:

  • The use of financial accounts as a starting point for the tax base determination, as well as different mechanisms to address timing differences;
  • The level of blending under the GloBE proposal – that is the extent to which an MNE can combine high-tax and low-tax income from different sources taking into account the relevant taxes on such income in determining the effective (blended) tax rate on such income; and
  • Experience with, and views on, carve-outs and thresholds considered as part of the GloBE proposal.

Barbara Angus appointed EY Global Tax Policy Leader

EY announces the appointment of Barbara Angus to the role of EY Global Tax Policy Leader. The EY global tax policy network of professionals advises companies and engages with governments on the development and implementation of policy initiatives in more than 140 jurisdictions across the globe. Based in Washington, DC, Barbara will focus on engagement with key policymakers and clients globally.

Barbara was previously Chief Tax Counsel for the Committee on Ways and Means of the U.S. House of Representatives, where she played an integral role in the development of the Tax Cuts and Jobs Act of 2017 (TCJA), the most significant change to the US tax code in more than 30 years.

Kate Barton, EY Global Vice Chair – Tax, says:

“Today’s shifting tax landscape requires new levels of agility and preparedness as countries around the world undertake tax reform. Barbara’s deep knowledge of international tax law and direct hand in shaping the current US tax code give her a unique perspective to help clients comply with and apply the complexities of the laws in a rapidly changing global landscape. I’m thrilled to welcome Barbara back to EY at this time of incredible change.”

Congressman Kevin Brady (R-TX), the lead Republican on the House Ways and Means Committee, says:

“Few in Washington match Barbara’s intelligence, leadership and work ethic. Her efforts changed history, helping us create a tax code that works for families and Main Street businesses. I am so thankful for her guidance and friendship these past three years and wish her all the best in this next chapter – she will be missed dearly by our Committee.”

Barbara Angus, incoming EY Global Tax Policy Leader, says:

“Following US tax reform, as governments face revenue pressures in an ever-changing global economy, tax policy is being debated in jurisdictions around the world. It is critically important for companies to be actively engaged as developments play out across the countries where they do business. I am excited about the opportunity to be part of the global EY network, providing coordinated support to clients as they participate in the global tax policy dialogue and prepare for shifts in the global tax environment.”