Something not certain in life, the story about international tax avoidance

We may have heard that there are two things certain in our life, namely death and tax but what if I tell you tax is not always certain in some fortunate circumstances as it has been enjoyed by some multinational companies as well as some wealthy people. 

The story is how we may see on how international tax avoidance could be legally done and cause double non taxation. It may sounds too good to be true, but the story below is definitely not a story from utopia land.

Death and Taxes

What are certain things in life? Benjamin Franklin, a former US President said in his letter, that "The only things certain in life are death and taxes,” and “in this world nothing can be said to be certain, except death and taxes.” His remarks are quite well known as it is used many times, for instance in this publication.

People still dream of a land or a country without tax, where people could live their joyful life and not paying tax or pay as low as they can be. The rich will become richer and could please themselves with the money they have. It may refer to the so-called tax haven or low tax jurisdiction where no tax or very low tax has to be paid. There are different definition for tax haven and it could be found in many countries which may also serve as financial offshore center.

OECD surveys shows that the happiest people on earth live in high tax country not in low tax country, it is supported by the fact that the tax money is used to support welfare system including healthcare, free education, infrastructures, public service etc.

But the question is, is it really true that tax is always certain in our life?

There is even a joke saying that death and taxes may be certain, but we don't have to die every year.

Tax Avoidance

Let me share a story about Starbucks, a well-known coffee brand famous worldwide.

Let us see what the famous companies, as multinational companies has done in the last decade.

Starbucks in the UK did not pay tax for many years, the reason is they suffer losses

Amazon sold lots of books in the UK as part of the company’s operation in Europe but the company could pay no tax in UK. Tax in here refers to both income tax and value added tax (VAT) or also known as GST.

Perhaps in lower level, Google has managed to pay much lower tax rate, with only

Because of public pressure in the UK, several companies decided to pay the tax to UK government

Story about Amazon and Starbucks

Based on investigation, it is found that Starbucks had made over £3bn in UK sales since 1998 but had paid less than 1% in corporation tax. For many years, Starbucks suffered losses, for 5 consecutive years until 2012 though the management claimed that the business is profitable

Starbucks, for example,had sales of £400m in the UK in 2012, but paid no corporation tax. It transferred some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high interest rates to borrow from other parts of the business.

Starbucks has said it isdown to where the company books its profits. Accounts filed for its British, German and French units, which make up 90 percent of European revenues, show a loss of $60 million in 2011, hence very little tax.

Amazon

The company was also underthe spotlight since 2012. Online retailer Amazon had generated sales of more than £7.6bn in the UK over the past three years until 2012 but had not paid any corporation tax on the profits from those sales.

Amazon employs hundreds of staff in the UK, at several large depots, selling tens of millions of items each year to millions of UK customers. (http://www.bbc.com/news/business-17625874 )

In 2012, also reportedthat Amazon.co.uk, Britain's biggest online retailer, generated salesof more than £3.3bn in the country last year but paid no corporationtax on any of the profits from that income and it is under investigation by the UK tax authorities despite the fact that It is reported that Amazon sells nearly one in four books sold in Britain

Amazon has a near monopoly of the UK digital book publishing market. According to reliable estimates, it sells nine out of 10 ebooks in the UK.

Amazon also pays no VAT,or also known as GST, in UK, but it does pay VAT in Luxembourg. The benefit is 3% VAT on sales of ebook and not 20% VAT which applies inUK.

Amazon in UK operation pays 3% VAT on the sales of eBook to Luxembourg but not to UK Taxauthorities which applies 20% VAT. The price of ebooks in Britain is expected to plummet following a vote in Brussels this week that could cut VAT on them from 20 per cent to zero.

In Britain, printed booksare free of VAT but ebooks attract 20 per cent.

Amazon’s EU base is inLuxembourg and its customers in Britain are treated as buying theirgoods from there, even if they are distributed from a warehouse in Britain. Profit on sales to British shoppers is accounted for as a profit in Luxembourg.

Google

In 2012, it is known that despite generating $18 billion of revenue in Britain from 2006 to 2011, the Internet search giant paid only $16 million in taxes to British authorities or around 0,0056 %.

Google says it does not have a sales presence in Britain and therefore cannot be considered resident for tax purposes, lowering its obligations.

An investigation byReuters has shown that some of the 1,300 people employed by Google UK Ltd are engaged in sales-type work or have titles that suggest involvement in sales and marketing activities, but Google says it hires people with a sales background even if they are not directly involved in selling.

Google has faced fiercecriticism for designating its UK office as primarily a marketingoperation, apparently supporting its European base in Ireland. But a Reuters investigation alleged that Google's employees in the UK were actually responsible for sales and not their colleagues in Ireland.

Google brazenly arguedbefore this committee that its tax arrangements in the UK aredefensible and lawful. It claimed that its advertising sales take place in Ireland, not in the UK.

To avoid UK corporation tax, Google relies on the deeply unconvincing argument that its sales to UK clients take place in Ireland, despite clear evidence that the vast majority of sales activity takes place in the UK.

Apple sells to non-US customers from a base in Ireland, while Google has an Irish business though which the search giant’s UK sales are funneled.

A Mail on Sunday analysisin 2012 found that Apple, Amazon and Google would have paid more than £600million in corporation tax in 2010 if their sales to British customers had gone through a UK company. They actually paid £15million.

Apple Inc.

An investigation by theU.S. Senate showed that the maker of iPads and iPhones had paid just 2 percent tax on income of $74 billion over the past three years, largely by exploiting an unusual loophole in Ireland's tax code.

Apple sells to non-UScustomers from a base in Ireland, while Google has an Irish business though which the search giant’s UK sales are funnelled.

What do the companies do to deal with those issues?

Those companies abovementioned has to face boycott from the customers, name and shaming for the multinationals. Some of them had to deal with the parliament in UK and some of the videos could be seen on how to answer the questions.

Income Tax

For Starbucks, what they plan is they volunteered to pay £20m “to head off a consumer boycott”.

Starbucks offered onWednesday to pay about £10 million ($16.05 million) a year incorporate taxes in Britain — or £10 million more than it paid last year. Starbucks said that in 2013 and 2014 it would refrain from claiming certain tax deductions that helped reduce its tax bill to zero in Britain over the last three years.

It seems unfair for domestic companies in the UK while multinational companies could escape income tax.

VAT

The European commission –which oversees European Union law as the EU's executive arm – onWednesday gave Luxembourg 30 days to increase its VAT rate on digitalservices from 3% to 15%. This will close a tax loophole that hasencouraged companies such as Amazon, Skype and Netflix to be based in Luxembourg to benefit from the 3% rate when selling throughout the EU.

Tax Avoidance and Tax Evasion

The story is not always a rosy picture of how the companies or even a person could escape the certain thing in life, since Dolce and Gabbana from Italy was foundguilty of tax evasion and the duo has to go to prison for around 1 year 8 months after they transfer their famous brand to a subsidiary company in Luxembourg and accordingly accused for not declaring 1 billion euro of income.

The overall story serves as wake-up call to the government and the public about tax avoidance and its dangers.

People, the ones who tried to escape tax

What about a person? Could someone escape from tax?What about a criminal?

Let’s see the story of a notorious gangster from the US since even criminals have to pay tax

We may have heard the story of Al Capone. A story about a criminal arrested not by the police department or ordinary law enforcement but he was arrested by IRS, US Tax Authority after finding supporting documents and evidence that he did not pay tax on income he received from criminal activities.

Another story is from anyone receiving income from non legal activities or semi illegal activities also need to pay tax, including sex worker or drug dealer which lead to unique idea on how they should calculate their income by using deductible expenses:

a. A drug dealer was arrested in the Netherlands and tax authority alleged that he didnt pay for tax from his drug-dealing business. Because of it, the drug dealer claimed that he could use the purchased drugs as the cost of goods sold and he can use this as deductible expense. Due to this case, Dutch government changed the rule and stated that any expense related to crime could not be used as deductible expense.

b. Funny deductions for odd jobs which have to pay taxes as well

In the country where prostitution is legal, the woman working in that industry still have to pay income tax, and accordingly they claim that plastic surgeryt should be used as deductible expense for income tax calculation

It is the fact that criminal also have to pay the tax

Tax Evasion and US Tax Authority

In 2010, US Tax Authority or IRS has found that there were thousands of US taxpayer hiding their income or their money in Swiss banks and from that time the witchhunting began to find anyone committing tax evasion by the use of foreign offshore bank account.

As a result, like tax avoidance, tax evasion becomes more and more difficult. It is due to more complicated compliance program for the taxpayers.

Conclusion

At the end, could we say that tax is something certain? There are ways to escape or avoid taxes legally, as loopholes, but it is a fact that chances are we have to deal with it and we do have to pay tax.

In the last few years, when we have to prepare our tax returns, we could remember this that tax is certain not only for company but also for any person. At the end, I say that it is true, tax is as certain as death while it is also a fact that some loopholes could be found in any legal system in any country. 

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Note :  

-The story above is taken from my speech project for Toastmaster Club 

-The previous article about Base Erosion and Profit Shifting dan pengaruhnya bagi Indonesia has been based on similar issues about tax avoidance and it explained that Indonesia also faces similar issues about BEPS.

Multiply.com, kepindahan kantor pusat dan pajak internasional

Multiply.com belum lama ini membuat berita dengan memindahkan kantor pusatnya dari Amerika Serikat ke Indonesia dan belakangan berencana menutup layanan social network termasuk blogging yang menggemparkan blogger multiply.

Lantas apa akibat perpajakan dari kepindahan ini?
Berdasarkan data dari website-nya dipastikan bahwa perusahaan memiliki kantor pusat di Indonesia dan dipimpin oleh CEO Stefan Magdalinski yang berkedudukan di Jakarta.

Tanpa melihat kepastian hukum apakah perusahaan ini masih berbadan hukum Amerika, kita dapat melihat akibat perpajakan atas kepindahan kantore pusat perusahaan ini ke Indonesia. Kewajiban perpajakan multiply.com, khususnya pajak penghasilan akan berada sepenuhnya di Indonesia. Direktorat Jenderal Pajak dapat menggunakan Peraturan DJP No. PER-43/PJ/2011 tanggal 28 Desember 2011 untuk menetapkan multiply.com sebagai subjek pajak dalam negeri di Indonesia dan memiliki hak pemajakan atas seluruh penghasilan multiply.com  dengan menggunakan pasal 15 dari PER-43 tersebut yang menjelaskan
(1) Badan yang bertempat kedudukan di Indonesia sebagaimana dimaksud dalam Pasal 3 ayat (1) huruf b adalah Subjek Pajak badan yang:
a.mempunyai tempat kedudukan berada di Indonesia sebagaimana tercantum dalam akta pendirian badan,
b.mempunyai kantor pusat di Indonesia,
c.mempunyai tempat kedudukan pusat administrasi dan/atau pusat keuangan di Indonesia,
d.mempunyai tempat kantor pimpinan yang berada di Indonesia yang melakukan pengendalian,
e.pengurusnya melakukan pertemuan di Indonesia untuk membuat keputusan strategis, atau
f.pengurusnya bertempat tinggal atau berdomisili di Indonesia.

Jika perusahaan masih berbadan hukum Amerika, karena sebelumnya berkantor pusat di Florida, maka berdasarkan Tax Treaty Indonesia dan Amerika, pasal 4(1) dijelaskan bahwa :

In this Convention, the term "resident of a Contracting State" means any person who under the laws of that State is liable to tax therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature.

Selanjutnya menurut pasal 4(4) dari Tax Treaty tersebut dijelaskan

Where by reason of the provisions of paragraph 1 a company is a resident of both Contracting States, when it shall be deemed to be a resident of the State in which it is organized or incorporated.

Melihat pasal 4(1) dan 4(4) dapat dikatakan bahwa jika multiply.com berbadan hukum Amerika maka Amerika Serikat, khususnya IRS dapat berpendapat bahwa multiply.com meski memiliki kantor pusat dan place of management di Indonesia namun akan tetap dianggap sebagai residen di AS dan menganggap bahwa multiply.com mempunyai permanent establishment (Bentuk Usaha Tetap) di Indonesia dan memberi kredit pajak atas penghasilan yang diterima di Indonesia.

Lain ceritanya jika multiply.com tidak berbadan hukum di Amerika Serikat atau negara lain yang tidak memiliki Tax Treaty dengan Indonesia  maka DJP dapat menggunakan PER-43 serta pasal 2 UU PPh yang mengatakan bahwa subjek pajak dalam negeri dapat didasarkan atas badan yang bertempat kedudukan badan yang didirikan atau bertempat kedudukan di Indonesia.

Contoh lain, dalam skala yang jauh lebih besar adalah kepindahan kantor pusat Royal Dutch Shell dari London, Inggris ke Den Haag, Belanda  dengan tetap berbadan hukum Inggris

Dalam beberapa kasus, perpindahan kewajiban perpajakan dilakukan perusahaan multinasional untuk mendapatkan keuntungan pajak dengan memindahkan lokasi kantor pusat ke negara yang memberikan keuntungan pajak, tax incentives atau tarif pajak yang lebih rendah namun untuk kasus multiply.com yang terjadi adalah untuk mendekati pasar utama mereka di Indonesia dan Filipina.

Penulis juga mendapatkan paper ilimiah tentang Headquarter Relocation and International Taxation yang membahas kepindahan kantor pusat perusahaan multinasional dan permasalahan pajak yang ada

Perlu dicatat juga terlepas permasalahan diatas, multiply.com sebagai bentuk usaha tetap mempunyai kewajiban perpajakan atas PPN juga yang terkadang dilewatkan dalam perencanaan pajak di Indonesia

New Income Tax Act 2008 and its impact on companies

After the government revised the Income Tax Act in 2008, we might need to think of the tax consequences of the change found in this newly published Act. Companies would obviously need to consider how the revision affects their tax obligation. The impact would indeed be more than just the tax rate that is surprisingly flat for the companies namely 28 % but also other changes in the new Income Tax Act

Permanent Establishment (PE), or translated as Bentuk Usaha Tetap (BUT), now has different criterias as we could see in article 2. The new classification could make the meaning of PE have different interpretation than other countries such as the last part of the definition of PE about computer.

The change of deductible expenses, as we could see in article 6, allows the company to deduct a few kinds of expenses which were previously non deductible as we see in the deductible donation though the government regulation is needed as the elucidation for that matter.

As a matter of fact, the revision is too general and some articles require further regulation of certain matters by either the government or the finance minister by publishing the governmental decree or a decree from the finance minister. Thus, we might need to take wait-and-see attitude after the revision of this Income Tax Act and, at the same time. hope that the further regulation would be introduced before that decree becomes legally applicable.

This posting is aimed to give general idea about the revision of Income Tax Act recently, hence broad details are in need to define the tax consequences for the companies after the revision. In other words, specific business sectors could have specific tax consequences though we might need government’s regulation on specific subject in the revision.

Here’s the Indonesian version that is originally made by Google Translate though it has been edited due to some grammatical errors
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Setelah pemerintah merevisi Undang-Undang PPh di tahun 2008, kita mungkin perlu berpikir tentang konsekuensi pajak dari perubahan yang ditemukan dalam Undang-undang baru tersebut. Perusahaan akan jelas perlu mempertimbangkan bagaimana revisi mempengaruhi kewajiban pajak mereka. Dampaknya akan menjadi lebih dari hanya tarif pajak yang flat untuk perusahaan yaitu sebesar 28% tetapi juga perubahan lain dalam Undang-undang PPh yang baru.

Permanent Establishment (PE), atau diterjemahkan sebagai Bentuk Usaha Tetap (BUT), sekarang memiliki berbagai kriteria seperti yang kita dapat lihat dalam pasal 2. Klasifikasi baru dapat membuat pengertian dari PE memiliki interpretasi yang berbeda dibandingkan negara lain seperti bagian terakhir definisi PE tentang komputer.

Perubahan dalam pengertian biaya-biaya yang dapat dikurangkan, seperti yang kita dapat lihat dalam pasal 6, memungkinkan perusahaan untuk mengurangkan beberapa jenis pengeluaran yang sebelumnya tidak dapat dikurangi tidak dapat dibiayakan seperti yang kita lihat dalam sumbangan yang dapat dikurangkan dari penghasilan walaupun peraturan pemerintah diperlukan sebagai penjelasan untuk hal tersebut.

Sebagai kenyataan, revisi dalam UU PPh terlalu umum dan beberapa artikel memerlukan peraturan lebih lanjut dari hal-hal tertentu oleh pemerintah atau menteri keuangan melalui penerbitan peraturan pemerintah atau peraturan menteri keuangan. Dengan demikian, kita mungkin perlu mengambil sikap menunggu setelah revisi UU PPh ini. Diharapkan agar peraturan lebih lanjut akan diperkenalkan sebelum peraturan tersebut diberlakukan.

Posting ini ditujukan untuk memberikan ide umum mengenai revisi Undang-undang PPh baru-baru ini, oleh karenya rincian yang luas diperlukan untuk mendefinisikan konsekuensi pajak bagi perusahaan setelah revisi. Dengan kata lain, sektor usaha tertentu dapat memiliki konsekuensi pajak tertentu walaupun kita mungkin perlu menunggu regulasi pemerintah pada subjek tertentu yang diatur dalam revisi.