More than three months most of us have shut ourselves up at home. The 2019 Corona Virus Disease (Covid-19) pandemic has succeeded in forcing a large part of Indonesian people—even the world—to study, work, and worship from home. Routines without physical interactions may be fun in the short term but gradually become boring imaginary breaks.
One of the ways to kill boredom is by playing games. The activity, which is dominated by young people, is no longer an entertainment and has become a global scale business with billions of US dollars in return. Games are no longer exclusive consoles games only but can be played online using a variety of gadgets and computers (PC). In fact, online games are now included as a sport (e-sport) category, with generously rewarded competitions.
For instance, the game developer of DOTA 2 (Valve Corporation) last year allocated a prize pool of more than USD30 million for the winners of the annual DOTA 2 tournament—the world's most prestigious e-sports competition since 2011. Recently, on 25 May 2020, Valve released a Battle Pass in the form of additional content or special DOTA 2 features priced starting from USD9.99 to USD44.99, depending on the level and the exclusive game package offered. Valve promises that 2.25% of the revenue from Battle Pass sales will be earmarked as a prize pool in this year's DOTA 2 international tournament. If it is converted, the DOTA 2 prize pool value is estimated to reach USD35 million at the end of the Battle Pass purchase period.
Based on the Global Games Market report published by Newzoo, Southeast Asia and Taiwan (Greater Southeast Asia) generated the largest revenue from the gaming business, which was around USD7.2 billion or equivalent to IDR1,018 trillion. The turnover of the gaming industry from this region is predicted to reach USD8,3 billion in 2023
Without a pandemic, Indonesia is indeed a huge gaming market. In a country with the fourth-largest population in the world and over 60% of it is dominated by productive age groups, the gaming business is experiencing rapid growth in recent years. ??
Asosiasi Game Indonesia (AGI) estimates that, from a total of 52.6 million Indonesians connected online, more than half of them or around 34 million people play online games. If it is calculated based on the amount of Rupiah spent on gaming, the value reaches USD1.1 billion. That is the calculation of the market value in 2018, while in 2030, Indonesian gaming market value is predicted to reach USD4.3 billion and become the Global Top 5. Unfortunately, from 100% market share of the Indonesian gaming industry, local developers only get a cake of 0.4%. It means that a 99% turnover of money in the Indonesian gaming market flows to the pockets of digital service providers abroad.?
At least it illustrates that games are not only fun to play, but also interesting to be monetized. It is only natural if the booming of games along with tremendous euphoria of the digital industry then becomes the concern of tax authorities in various parts of the world. In fact, efforts to tax these digital-based products have been seriously discussed in the OECD and G20 frameworks in Base Erosion and Profit Shifting (BEPS) Project. The project that aimed at tackling the double tax avoidance raises the issue of taxation challenges in the digital age, expecting the global consensus to be achieved at the end of the year 2020.?
The basic element of taxation becoming the global discourse is when and where—besides how much—taxes shall be imposed on transaction values ??or profits from digital businesses, including the gaming industry. This is a complicated tax challenge if we look at the nature of the digital economy, intangible and scale without mass, which is often being the basis for determining the allocation of profits.
While awaiting the global consensus, Indonesia has followed a number of countries such as England, India, Australia, France, Korea, and Japan, who are firsts to took a unilateral step by collecting a new tax type (other than Income Tax). To be able to impose a tax on digital-based economic transactions, unfortunately, Indonesia seems to take the credit of the Covid-19 pandemic issue. It can be seen in Government Regulation in Lieu of Law (Perppu) Number 1 of 2020 concerning State Financial Policy and Financial System Stability for Corona Virus Disease 2019 (COVID-19) Pandemic Management and/or Dealing with Threats Endangering the National Economy and/or Financial System Stability, which was recently officially passed into law.?
Through Perppu Number 1 of 2020, the government provides special tax treatment for Trade Through Electronic Systems (Perdagangan Melalui Sistem Elektronik/PMSE) activities, especially targeting marketplaces or foreign platform and service providers. As of 1 July 2020, the use of intangible goods or services from outside the customs area through an electronic system is subject to Value Added Tax (VAT) and the game is categorized as a tax object. The terms and conditions are any providers of goods and services electronically, both inside and outside the country, are obligated to collect and remit the VAT to the Directorate General of Taxes (DGT). The VAT rate is applied generally, which is 10 percent, and it is charged to Indonesian customers—no exception to local gamers.
Besides that, immediately following is the imposition of income tax and/or electronic transaction tax (pajak transaksi elektronik/PTE) on online trade transactions carried out by foreign tax subjects who meet the provisions of significant economic presence. With the change in nexus—from physical presence to economic presence—foreign PMSE administrators meeting the provisions of significant economic presence can be treated as a permanent establishment (PE) and may be subject to income tax. This is similar to the OECD recommendation in BEPS Action Plan 1, which has been adopted by India through the equalization levy, the UK with Diverted Profit Tax (DPT), or France with Digital Services Tax (DST).
So, it is understandable that giant digital companies such as Google, Facebook, Netflix, or Spotify are worried about this Indonesian policy. Not only they are running out of time but also haunted by bills. Even US President Donald Trump was outraged and threatened to retaliate against countries that were discriminating against digital companies the majority of which were under US protection.
Indonesia was mentioned by Trump! A high-ranking superpower leading figure. Should we be proud or anxious? Relax, the Indonesian president is not Emmanuel Macron, who was threatened with retaliation by Trump and immediately postponed the collection of French digital services tax. This is a matter of state policy and sovereignty of a country, not a game of strategy battle in online games. Or, is it?
Regardless of the country leaders' high tension, it is certain that taxation on digital-based economic activities will provide a very significant extra income for the country. If we look at Statista data, the circulation of money in the Indonesian gaming market ranges around USD1 billion a year, or roughly equivalent to IDR14 trillion (exchange rate of IDR14,000). Assuming that the VAT rate is 10%, the Indonesian gaming industry has the potential to contribute at least IDR1,4 trillion to the state treasury. Such number is just from VAT, without calculating the potential remittance of income tax and/or PTE which will certainly be much bigger. ?
Equality & Neutrality
Pascal Saints-Amans, Director of the Center for Tax Policy and Angel Gurria, OECD Secretary-General said that the unilateral policies that have been implemented by a number of countries are difficult to prevent until a global consensus is reached. So, Trump may be reactive as usual, but the unilateral tax policy that is increasingly spreading is hardly stopped, like the Covid-19 pandemic that has plagued in the US nowadays.
Laura Simmonds, related to her perspective on DST, emphasized the principles of equity/equal treatment and neutrality that every country needs to pay attention to if they want to implement unilateral measures. According to her, the implementation of DST referring to the income threshold has the risk of double taxation for digital companies that offer two or more products or services with different characteristics. In free online streaming services, for example, DST is exempted for its digital content but the revenue from advertising is taxed. Another issue related to equity is the ability to pay for digital companies which, in the imposition of DST, refers to net income, regardless of the level of profitability. In terms of neutrality, the tax should not intervene in decision making. Of course, the additional "levies", which are non-deductible, will increase the burden on consumers because it is very possible that these charges are included in the price component.
The point is the impact of careless policy design can also affect small and medium-sized businesses that depend on the digital platforms subject to DST. It is also likely that the policy will reduce the company's future investment decisions. Therefore, the Indonesian government needs to pay attention to the principles of equality and neutrality in implementing the electronic transaction tax policy.
Next, Indonesia's "homework" is how to optimize state acceptance from potential and new tax sources that have been described above, especially from the game industry. If they do not want to keep "being cheated"—or, as the mass media usually called it, tax "leakage"—the tax authorities must ensure that they have a qualified IT-based tax administration system to be able to tax digital service providers who are mostly hiding overseas. Although there are already administrative sanctions, ranging from warnings to termination of access or online networks, it is not enough. Essentially, the government needs to do extra efforts to be able to capture the tax potential of digital service provider companies abroad.?
Apart from all that, playing games is now not only for fun but has become a professional career choice with promising income for some people. If you get a prize, then you will be subject to tax, so do the content and the income. So, dear gamers in Indonesia, do not just have fun playing without having any idea of the consequences and tax burden that should be paid. Will you let the benefit only for foreign players? Where is your nationalism?
**) This opinion has been published in CNBC Indonesia, 16 June 2020