Joko Widodo is no Philip Hammond. The Indonesian president is taking a more flexible, negotiated approach to taxing large technology groups than the UK chancellor.

This is a tricky balancing act. Indonesia wants to nurture homegrown technology companies but is also expecting more investment from big global technology groups such as Amazon. At the same time, the government is struggling to enlarge its tax base. 

This gentle approach so far stands in contrast to those of foreign governments including the UK’s, which has responded to public anger over perceived corporate tax avoidance by big tech groups and pledged to hit them with a  “digital services tax” by 2020. 

Indonesia has good reasons for shying away from specific tax regulations for tech companies. Four of the Asean region’s eight unicorns — tech start-ups valued at $1bn or more — are from Indonesia. 

Besides, Indonesia appears to be making some headway in getting tech companies to pay their share. After lengthy negotiations, the government last year announced that Google had agreed to pay in full taxes it owed going back to 2015 and would pay its taxes in full in future. Other companies such as Facebook and Twitter are expected to follow suit. 

Going voluntary

The government is not only targeting global tech giants but also taking into account the view of big domestic companies in how it taxes a rapidly growing sector. FT Confidential Research estimates that the total value of sales on Indonesia’s ecommerce platforms reached Rp152tn ($10.1bn) in 2017 and will triple by 2022. The government is looking to tax 0.5 per cent of this. 

Robert Pakpahan, Indonesia’s tax chief, recently said ecommerce companies would be required to collect the tax identification numbers of all retailers on their platforms. But we think the government is likely to adopt voluntary registration. 

Mr Pakpahan said that two of Indonesia’s largest customer-to-customer (C2C) platforms, Bukalapak and Tokopedia, would trial tax identification number collection, but both companies told FTCR that no trial-runs had been conducted yet. Instead, they are planning a new feature on their platforms where potential taxpayers can voluntarily register and pay. 

This is better than nothing. Of Indonesia’s approximately 260m citizens, only about 14 per cent are registered taxpayers and less than half of these filed tax returns last year. Having access to millions of potential taxpayers using ecommerce sites could broaden the tax base. 

C2C platforms favour a voluntary mechanism as they think mandatory tax registration would prompt the micro to medium-sized businesses that comprise most of their 4m online merchants to migrate to social media platforms. Deals marketed on such platforms are typically concluded offline, making them near-impossible to track. This would also be counterproductive to the government’s aim of improving tax compliance. 

Go-Jek, Indonesia’s largest ride-hailing service, which also provides other online services, has become the first to be granted a permit for voluntary tax registration and collection. We understand that Bukalapak has applied for the same permit. Tokopedia already collects some property taxes for the government and is expected to apply to facilitate sales tax registration and collection from online merchants. 

Fear of Amazon

Domestic ecommerce companies fear that mandatory tax collection would stifle growth at a time when they are bracing for the entry of Amazon, which is slated to spend $1bn in Indonesia to expand its cloud computing service under its Amazon Web Services (AWS) subsidiary. 

Although AWS is looking to serve local ecommerce companies, the deployment of its technologies could be a springboard for Amazon’s full-fledged ecommerce business. Having seen how Amazon has taken hold in India, where it has about half of the ecommerce market, local platforms fear the Seattle-based giant’s technological heft would trounce the domestic industry. 

Under Mr Widodo, Indonesia has been supportive of the tech sector because of its public popularity as well as a desire to attract investment. We think the government will accede to the demands of ecommerce companies and maintain its soft approach. 

In 2015, Mr Widodo overruled his own transport ministry to allow motorcycle ride-hailing services to continue operating. His administration is also set to water down a 2012 regulation requiring foreign tech firms to set up local data centres, calling it impractical and costly for businesses. 

Digital tax is here to stay

Although Indonesia has been flexible on enforcement, the drive to tax the digital economy will not go away. This is a global government movement and loopholes which had been exploited by tech firms will continue to close. 

At a G20 meeting in July, Indonesia’s Sri Mulyani Indrawati was among finance ministers calling for progress on global rules to tax the digital economy. The meeting agreed to seek a “consensus-based solution” by 2020. Until then, countries are likely to act unilaterally in accordance with their differing domestic challenges. 

For now, Indonesia’s voluntary approach may generate fewer headlines than the UK’s but it appears to be the best way to balance the country’s policy priorities.

— Andi Haswidi, Indonesia Researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.