[ad_1]
Amid growing anxiety concerning the current budget deficit, the Indonesian government is seeking alternatives for potential government revenues. The most recent idea, proposed by the Finance Ministry, is an introduction of tax charges on information and computer technology (ICT) companies, Google being the biggest target. Google began in January 1996. The company was initially a research project by Larry Page and Sergey Brin, PhD students at Stanford University at the time.
Almost 20 years later, the 2014 European Commission’s research and development scoreboard data reported that Google, with €54 billion in revenues, is the third largest company in the world after Microsoft and IBM in the software and computer services industry. Google’s revenues are equal to Rp 789 trillion (US$60.75 billion) or almost one-third of Indonesia’s national budget .
In the taxation domain, “Google” has become an infamous term. “Google tax” is a term referring to avoidance of provisions when profits are deflected to other jurisdictions aiming for lower or nil tax rates. The Finance Ministry plans to charge Google for five years of taxes, making the giant company face a bill of approximately $400 million in 2015 alone.
The amount is determined based on the judgment that Google operations in Indonesia have contributed less than 0.1 percent to the total income in 2015. Ironically, Google brushes aside the auditing process, which further triggers the Finance Ministry to make this issue a criminal case. Indonesia is not alone. Italy also plans to take the Google taxation issue to court not long before Google paid €2.2 million of tax in 2014, a considerable amount for a country not seen as a revenue generator in the European market.
Indonesia should strategize to find reasons to charge Google that are not only based on the bottom line of Google’s income but also consider Google’s business model.
Fransman and the 2014 European Commission have provided a framework of analysis to understand the Google business model by which the value added creation can be assessed.
There are four layers. The first layer concerns two important stakeholders, customers and users. The users, like most of us, benefit from free services and applications that provide internet connection through computers, tablets and mobile devices. The customers are those contributing directly to the Google revenues, mainly advertisers.
A search industry is also categorized as a two-sided market. Google stands in between customers and users. Google, as the company, knows more about the behavior of the users than their customers, the advertisers. This information includes, but is not limited to, profiling and market segmentation and thus allows them to charge a premium for this information which illustrates how the lock-in process happens.
The second layer examines the main activities, searching, advertising, operating systems and platforms and enterprise. These activities are tools to maintain customers and users. Statista — an online statistics portal headquartered in Hamburg, Germany — predicts that the total revenue of Indonesia’s digital advertising amounted to $108 billion this year and search advertising leads the market volume with $479 million.
In addition, the World Bank recorded that Indonesia’s internet penetration rate was about 17 percent, the total internet user population reaching 47 million people in 2014, a market base larger than Belgium, the Netherlands and Sweden combined.
Layer three is Google’s network, companies adopting Google’s advertising programs to create ads based on Google search results and content. The Android Open Handset Alliance, for instance, is at this layer — a group business alliance of more than 75 technology and mobile companies Layer four concerns Google’s research and innovation teams, which are based in California, Israel, London and Zurich. The teams work to support the other layers of the Google business model.
Developer Advocates create a system of third party developers and user experience team — a multi-disciplinary team connecting the designers, visual designers, user researchers and copywriters is one of several groups at this layer.
From the layers of the business model, Indonesia is positioned at the very end of the value chain.
While the Finance Ministry is trying to force regulation for Google to abide by the taxation law in Indonesia, they should be more specific about amount charged to the company based on the business model.
Google’s revenue could be adjusted to the capacity of Indonesia’s digital marketing to reflect Google’s value generated in the country. Moreover, the value could be factored in with the number of internet users in the country relative to other neighboring countries marking the potential market size. Google tax experiences in other countries can provide inspiration.
In early January, Google agreed to a 130 million pound settlement with the British taxation authority. This could be considered high success as Google went from paying nothing to some amount of money. However, the European Commission sees this as a trivial sum of money since information was not disclosed when the calculation was made meaning that Google might owe more money.
To tax Google necessitates strong justification and an evidence based analysis. Detailing and itemizing Google’s business model in Indonesia might serve as a better alternative to charge Google to ensure fairness for both parties.
______________________________
The writer obtained a PhD in technology management and economics at Chalmers University of Technology in Gothenburg, Sweden.
[ad_2]
Source link