A Comparative Study of Cross-Border E-Commerce Taxation Law

Application within Indonesia and The United Kingdom

INTRODUCTION

Evolution of technology encourages business people to evolve their business abroad; one
of the new business models is digital or electronic commerce. The new concept, which e-
commerce has been defined as buying or selling goods or services, utilises digital networks to
facilitate the transaction, either distribution, production, sale, or delivery. The use of tangible or
intangible assets in the digital platform has jeopardised the transfer of ownership 1. The new
business model operates remotely rather than the traditional method. Instead of visiting stores,
individuals and legal entities do business through websites and servers with the transaction, and
the business activity avoids the nexus since they conduct business remotely. 2 A legal commodity
has a permanent establishment which tax nexus to determine where business profit should be
taxed; conversely, the new business model will no longer necessitate a physical presence where
virtual products are manufactured, distributed, traded, and consumed in the absence of a
residence jurisdiction, e-commerce may be tax-free.3

A permanent establishment is a fixed location where an enterprise's business activity is

entirely or partially carried out, such as a place of management, a branch, an office, a factory, a
workshop, and also a mine, an oil or gas well, a quarry, or any other location where natural
resources are extracted4. Can the location of the customer signing on the site to conduct the
transaction and the location of the webserver be considered permanent establishment? A website
on the internet does not constitute a permanent establishment in and of itself. This is because an
internet site is made up of software and data (not tangible property), and the presence of business
personnel on the server cannot be considered a permanent establishment. 5Another issue is that e-
commerce business profits can be subject to double taxation; if an e-vendor sells the tangible
personal property to a customer in a state where the seller is not subject to tax, the income is
taxed in the seller's state of domicile. These rules do not apply to e-commerce sales of intangible
personal property and services; thus, ambiguous property classification as tangible or intangible
may result in double taxation.6
1
Jinyan Li, 'Consumption Taxation of Electronic Commerce: Problems, Policy Implications and Proposals for Reform' (2003) 38 Can Bus LJ
425.
2
Amanda R. Carpo, 'Tax Treaty Issues in Cyberspace: E-Commerce and the Permanent Establishment Concept' (2001) 45 Ateneo LJ 393.
3
Ann-Marie Schrie Pinkney, 'Taxation of the Digital Economy: The Challenges of Distinguishing Business Income from Royalty' (2019) 10
QMLJ 157.
4
Double Taxation Convention ( The United Kingdom- Indonesia (entered into force 14 April 1994), s 5.
5
Susan K. Duke. K S, 'E-Commerce and the Taxation Doctrine of Permanent Establishment in the United States and China' (2005) 14 J
Transnat'l L & Pol'y 275.
6
Jonathan Bick, 'Implementing E-Commerce Tax Policy' (2000) 13 Harv J L & Tech 597.

1
 The Organization for Economic Cooperation and Development (OECD) decided that the
existing international tax regime and principles could and should apply to e-commerce with
some modifications that do not eliminate the taxation framework principle which Neutrality,
Efficiency, Certainty and Simplicity, Effectiveness and Fairness, and Flexibility to address the
contemporary issues.7 OECD establishes two fundamental pillars to address the digital economy
as the new foundation for a new international tax system. 8The United Kingdom and Indonesia
are both members of the OECD; how can both countries implement the OECD's concepts? The
rise of the virtual economy within the borderless world of the internet has posed a severe to the
taxation system; the government’s ability to tax has traditionally been determined by territory
and jurisdiction, which traditional rules it is not working in facing the new issue; as a result,
double taxation or non-taxation which e-commerce can tax-free.

This study will be focus on comparative taxation law related to e-commerce cross-border within
Indonesia and The United Kingdom. This study will analyse the issue that the government is
facing with the new business model.
Chapter 2 will examine the regulation of cross-border e-commerce taxation in Indonesia
Chapter 3 will critically analyse the regulation of cross-border e-commerce taxation in the
United Kingdom
Chapter 4 will compare cross-border e-commerce tax regulations between Indonesia and The
United Kingdom
Chapter 5 concludes the above discussion

AIM AND OBJECTIVES

This study has several purposes and objectives, some of which are as follows:

Research Aim

- Analysing the cross-border e-commerce can be taxes?

- Assessing the regulation of taxation in Indonesia and the United Kingdom?
- Examine the critical taxation law to organise tariffs for cross-border e-commerce in
Indonesia and The United Kingdom?

Research Objectives
7
Rifat Azam, 'Global Taxation of Cross-Border E-Commerce Income' (2012) 31 Va Tax Rev 639.

8
Gene Tien and Joshua Odintz, 'OECD Rates toward Completing Final Report on Digital Economy: But Two Fundamental "Pillars" Present
Structural Challenges' (2020) 72 Tax Executive 18

2
 - To evaluate the requirement for the cross-border e-commerce to pay taxes
- To investigate the tariff statute in Indonesia and The United Kingdom
- To figure the taxations for cross-border e-commerce in Indonesia and The United
Kingdom
- To compare regulation concerning cross-border taxation law between Indonesia and The
United Kingdom
- To indicate the significance of which legal system is more applicable in terms of cross-
border e-commerce taxation law between Indonesia and the United Kingdom

RESEARCH QUESTION

Several questions about the topic will be answered during the research period, including the
following:

 What is cross-border e-commerce?

 What is the difference in cross-border e-commerce taxation law between Indonesia and
The United Kingdom?
 How does the taxation law related to cross-border e-commerce can be implemented in
Indonesia and The United Kingdom?

LITERATURE REVIEW

There are several works of literature on this subject matter which will be reviewed below:

Alex McNichol state that profit allocation rules implement the arm's length principle by using
the business profits attributable to a non-resident taxpayer's permanent establishment through its
permanent establishment to determine the permanent establishment's exact contribution to the
invention of value recollected in the entity's profits.9

Ann-Marie Schrie Pinkney argues E-commerce may be tax-free because revenue is not taxable in
any jurisdiction where the innovation no longer requires a physical presence where the virtual
products are made, allocated, traded, and consumed, which is the inverse of the conventional
9
Alex McNichol, 'An Analysis of the United States' Stance on BEPS: Pillar One' (2021) 28 Canterbury L Rev 161.

3
method, in which a legal commodity has tax nexus to determine which business profit is taxed in
which jurisdiction.10

Arthur J. Cockfield's book covers The OECD model also prohibits non-resident service providers
from claiming GATS national treatment for any other tax imposed by the original state,
including indirect taxes such as excise, value-added, and sales taxes. The OECD model non-
discrimination article (Article 24(5)) addresses a resident enterprise's expense deduction.11

Brian Jenn argues that the new taxable presence would not modify or replace the existing
permanent establishment (PE) concept but would coexist with it and generate formulaically
determined non-routine returns, and the OECD would leave the current PE concept in place to
avoid collateral consequences (VAT registration requirement) that would result from the
evolution of PE in locations where a business has no physical presence.12

Craig Elliffe argues that the new nexus rule in the unified approach bridges the gap between
highly digitalised industries and a state's right to tax those companies. The new link is solely
based on sales or users, which raises concerns and may develop primarily for nations whose
market scope is insufficient to ensure a positive outcome from the new rule. On the other hand, it
is obvious that the new rule will not benefit a country with a small sales market.13

Guan Yue, Dwidja Priyantno, and Anita Kamilah, ‘state The ITE Law does not address issues
such as cross-border online services tax income, entrusted product information services, and the
authenticity of online stores information, prompting the Indonesian e-commerce industry to enact
relevant legislation, but problems persist. There are no specific laws and regulations for cross-
border online surcharge services, instead referring to the applicable laws and regulations in the
field of online shopping and e-commerce.14

Hadi A T and others state that the agreement and the provisions of the legal basis of the
agreement outlined in the applicable Civil Code are inextricably linked to e-commerce business
activities in Indonesia. Furthermore, Law Number 11 of 2008 on Information and Electronic
Transactions states that electronic data transaction information is legal proof, and Law Number 7
of 2014 on Trade requires e-commerce business services to provide complete and correct
information on what is offered, giving legal certainty to e-commerce business activities.15
10
Ann-Marie Schrie Pinkney, 'Taxation of the Digital Economy: The Challenges of Distinguishing Business Income from Royalty' (2019) 10
QMLJ 157.
11
Arthur J. Cockfield, Globalization and its Tax Discontents: Tax Policy  and International Investment (2nd edn, Universty of Toronto 2010).
12
Brian Jenn, 'A Primer on the OECD's Unified Approach for Taxing Digital and Non-Digital Companies' (2019) 45 Int'l Tax J 7.
13
Craig Elliffe, Taxing the Digital Economy: Theory, Policy and Practice (1st edn, Cambridge University Press 2021) 187.
14
Guan Yue, Dwidja Priyantno, Anita Kamilah, ‘A comparison between Chinese E-commerce Law and Indonesian Information and
Electronic Transactions Law against Cross-border Online Services’ (2019) 8 International Journal of Scientific & Technology 1.
15
Hadi A T and others, ‘Juridicial Analysis of Liability of Income Tax a value Added Tax on E-Commerce Business Activities’ (2020)
1 Journal of Public Administration, Finance and Law 1.

4
Jason Osborn, Michael Lebovitz & Astrid Pieron state BEPS supplemented the "Pillar One"
approach to taxing digital services taxes, which aim to cover digitalised enterprises and large
consumer-facing businesses, as well as the new nexus taxation concept of the permanent
establishment, which is represented in the essential of physical existence.16

Jeremiah Coder and Pat Brown argue to prevent tax avoidance; pillar one provides three main
components to cover two types of businesses: automated digital and consumer-facing businesses,
as well as established influential and sustained concentration in a market jurisdiction instead of
physical presence; for automated digital services, will consider an overall group gross revenue
threshold and further limits based on aggregate in-scope reven.17

Lynne Oats's book cover The OECD insists that non-resident FSPs only pay taxes on profits
earned in the host country. Income earned outside of a state for services rendered to residents of
that state is treated as income from sales to residents of that state by a non-resident supplier,
place of performance, for the purpose of determining whether or not profits for services are
taxable by that state.18

Richard W, Marselinus A, and Paulus T state the OECD countries agree that collecting income
tax on e-commerce transactions with a Permanent Establishment adheres to the source principle;
otherwise, the domicile principle is applied. Taxes on e-commerce transactions can be levied in
two ways: income tax and value added tax.19

Subhajit Basu contends that the digital revolution has upended the administrative and
informational foundations of the current taxation system. E-commerce can and will be taxed; the
question is whether it will be taxed fairly and efficiently.20

Subhajit Basu defined e-commerce as a concept that covers commercial transactions in

which business entities or individuals use the electronic network to buy or sell products
that could be tangible goods, intangible goods, or services. 21

16
Jason Osborn, Michael Lebovitz & Astrid Pieron, 'Unilateral Taxation of the Digital Economy: The Fight Is Not over Yet - It's Only
Beginning' (2020) 72 Tax Executive 26.
17
Jeremiah Coder and Pat Brown, 'Searching for Shangri-La: Reflections on the OECD's Digital Tax Project: Analysis Begins and Ends with
Discussion of Two Pillars' (2021) 73 Tax Executive 26.
18
Lynne Oats, Principles of international taxation (6th edn, Bloomsbury Profesional 2017).
19
Richard W, Marselinus A, and Paulus T, ‘Online Business (E-Commerce) In Indonesia Taxation’ (2020) 1 Atma Jaya Makassar University 1.
20
Subhajit Basu, ‘International Taxation of E-Commerce: Persistent Problems and Possible Developments’ (2008) 1 Journal of Information,
Law & Technology 1.
21
Subhajit Basu, Global Perspectives on E-Commerce Taxation Law (1 st edn, Routledge 2016) 15.

5
 METHODOLOGY

The process of legal research will be comparative legal scholarship as the core of methodology,
and this method compares two legal systems with the purpose of which regulation and the legal
system is more effective when it comes to encountering the problem. This study will investigate
both primary and secondary legal sources to clarify this subject matter and elaborate on various
sources. This paper uses legal databases such as HeinOnline and Westlaw to search for journals
articles and cases, examining law statutes in Indonesia and The United Kingdom to clarify the
current condition and court ruling in case law in the United Kingdom. Also, using textbooks that
are helpful for research.

TABLE OF CONTENTS

ACKNOWLEDGEMENTS………………………………………………………………………

LIST OF ABBREVIATION……………………………………………………………………...

ABSTRACT………………………………………………………………………………………

OBJECTIVES…………………………………………………………………………………….

METHODOLOGY………………………………………………………………………………..

LITERATURE REVIEW…………………………………………………………………………

CHAPTER 1: INTRODUCTION………………………………………………………………..

CHAPTER 2: THE REGULATION OF CROSS-BORDER E-COMMERCE TAXATION IN

INDONESIA…………………………………………………………………….

CHAPTER 3: THE REGULATION OF CROSS-BORDER E-COMMERCE TAXATION IN

THE UNITED KINGDOM……………………………………………………..

CHAPTER 4: COMPARING CROSS-BORDER E-COMMERCE TAX REGULATIONS

BETWEEN INDONESIA AND THE UNITED KINGDOM………………….

6
CHAPTER 5: CONCLUSION…………………………………………………………………..

BIBLIOGRPHY…………………………………………………………………………………

7
 BIBLIOGRAPHY

Primary Sources:

List of Case Laws

Fenix International Limited v The Commissioners for Her Majesty’s Revenue and Customs
[2020] UKFTT 499 (TC)

List of Legislation

Information and Electronic Transactions Act 2008

Trade provides of e-commerce business services Act 2014

Conventions

OECD Model Tax Convention on Income and on Capital (signed 7 June 2017)

Treaty

Double Taxation Convention ( The United Kingdom- Indonesia (entered into force 14 April
1994)

Secondary Sources:

Textbooks

Basu S, Global Perspectives on E-Commerce Taxation Law (1 st edn, Routledge 2016)

Cockfield J A, Globalization and its Tax Discontents: Tax Policy and International Investment
(2nd edn, Universty of Toronto 2010)

Elliffe C, Taxing the Digital Economy: Theory, Policy and Practice (1st edn, Cambridge
University Press 2021)

Oats L, Principles of international taxation (6th edn, Bloomsbury Profesional 2017)

Journal Articles

8
Azam R, 'Global Taxation of Cross-Border E-Commerce Income' (2012) 31 Va Tax Rev 639

Basu S, ‘International Taxation of E-Commerce: Persistent Problems and Possible

Developments’ (2008) 1 Journal of Information, Law & Technology

Bick J, 'Implementing E-Commerce Tax Policy' (2000) 13 Harv J L & Tech 597

Carpo R. A, 'Tax Treaty Issues in Cyberspace: E-Commerce and the Permanent Establishment
Concept' (2001) 45 Ateneo LJ 393

Coder J and Brown P, 'Searching for Shangri-La: Reflections on the OECD's Digital Tax
Project: Analysis Begins and Ends with Discussion of Two Pillars' (2021) 73 Tax Executive 26

Duke K. S, 'E-Commerce and the Taxation Doctrine of Permanent Establishment in the United
States and China' (2005) 14 J Transnat'l L & Pol'y 275

Jenn B, 'A Primer on the OECD's Unified Approach for Taxing Digital and Non-Digital
Companies' (2019) 45 Int'l Tax J 7

Li J, 'Consumption Taxation of Electronic Commerce: Problems, Policy Implications and

Proposals for Reform' (2003) 38 Can Bus LJ 425

McNichol A, 'An Analysis of the United States' Stance on BEPS: Pillar One' (2021) 28
Canterbury L Rev 161

Osborn J, Lebovitz M and Pieron A, 'Unilateral Taxation of the Digital Economy: The Fight Is
Not over Yet - It's Only Beginning' (2020) 72 Tax Executive 26

Pinkney S A, 'Taxation of the Digital Economy: The Challenges of Distinguishing Business

Income from Royalty' (2019) 10 QMLJ 157

Tampubolon A H and others, ‘Juridicial Analysis of Liability of Income Tax an value Added Tax
on E-Commerce Business Activities’(2020) 1 Journal of Public Administration, Finance and
Law 1

Tien G and Odintz J, 'OECD Rates toward Completing Final Report on Digital Economy: But
Two Fundamental "Pillars" Present Structural Challenges' (2020) 72 Tax Executive 18

Wiratama R, Asri M, Tangke P, ‘Online Business (E-Commerce) In Indonesia Taxation’ (2020)

1 Atma Jaya Makassar University 1