Defining Virtual Nexus: A Comparative Study of Emerging “Digital Permanent Establishment” in Indonesia

Abstract

This normative juridical research explores the development of the Permanent Establishment (PE) concept in the context of the digital economy in Indonesia, while also comparing it to approaches adopted by various international jurisdictions and global initiatives, particularly the OECD Base Erosion and Profit Shifting (BEPS) Project. Using a comparative legal research method, this study analyzes Indonesia’s traditional PE regulations as stipulated in the Income Tax Law (UU PPh) and related regulations, and evaluates the adaptation of the concept through the recognition of Significant Economic Presence (SEP). Through a comparative analysis of approaches from countries such as India, France, and international initiatives led by the OECD, the research identifies the strengths, weaknesses, and challenges associated with the implementation of a Digital PE. The findings reveal that the traditional PE concept based on physical presence is no longer sufficient to capture the tax potential of cross-border digital businesses operating without a physical presence. Consequently, the study recommends that Indonesia adopt a broader definition and criteria for PE, aligned with international standards, while also enhancing administrative capacity and enforcement mechanisms. The implications of this research include the need for international coordination and legal harmonization to avoid double taxation risks and to promote fairness in the digital taxation system