In order to combat the negative economical impact due to the Corona virus global pandemic (“Covid-19”), governments from all over the world have started to rapidly increase and implement various economical schemes. On 1 April 2020, the President of Indonesia has officially announced a public health emergency in Indonesia due to the increase of Covid-19 cases countrywide. While the government does not necessarily desire to put into effect a total lock down at the time being, it has however implemented large-scale social restrictions e.g., temporary closure of schools and workplaces. Due to social restrictions and several measures implemented by businesses (e.g., working from home), the government have noted there has been an increasing of the number of uses of overseas OTT service providers in the midst of Covid-19, for instance, the use of Netflix, Spotify and Zoom.
Consequently, tax collection of overseas digital businesses (which does not have a physical presence in Indonesia) has become a topic for discussion within the Ministry of Finance, in fact, the government has incorporated this matter in the upcoming draft of omnibus law on taxation. However, due to the current state of affairs, the government has decided to accelerate its plan to tax overseas digital business by enacting Government Regulation in Lieu of Law No. 1 of 2020 (“PERPU 1/2020”). Although the issuance of PERPU 1/2020 is to maintain Indonesia’s economic stability during the Covid-19 pandemic, this provides an insight on how the government will implement future taxation schemes for overseas digital businesses in the near future.
A. Value Added Tax
As tax authorities around the world have started to realize the necessity to also capture tax revenues for their citizen’s spending on goods and services from overseas digital business, the increasing trend is to conduct taxation based on the customer location. Following the trend, through PERPU 1/2020, the government has emphasized that any utilization of non-material taxable goods and/or taxable service from outside custom areas to within custom areas through a ‘e-commerce system’ (or locally known as Perdagangan Melalui Sistem Elektronik or PMSE) will be subject to Indonesia’s prevailing value added tax (“VAT”) regulations. Therefore, any e-commerce operators, either domestic/overseas digital businesses, will be required to collect, deposit and report VAT to the tax authorities.
B. Income Tax and Electronic Transaction Tax
Particularly for e-commerce operators that are considered to have a significant economic presence in Indonesia, may be considered as a permanent business and subjected to Indonesian income tax regulations. Factors that will be considered as having a ‘significant economic presence’ are in accordance with the following conditions:
- Having a certain amount of gross circulation of business group consolidation;
- Having a certain amount of sales in Indonesia; and
- Having a certain number of active users in digital media in Indonesia.
A new term of tax called ‘electronic transaction tax’ has been introduced within this regulation. The electronic transaction tax will be imposed only in the case when e-commerce operators are unable to be determined as permanent establishment due to Indonesia prevailing tax treaties with other countries in relation to the avoidance of double taxation. Therefore, for such e-commerce operators, instead of an income tax, the government will impose an electronic transaction tax for any sales transaction of good and/or services from outside of Indonesia to customer or users in Indonesia which is conducted by foreign taxpayer.
In view of the above, the government allows overseas digital business to appoint representative(s) in Indonesia to ease the collection, deposit and reporting process of its taxation obligation (including VAT and/or income tax/electronic transaction tax) that has been above-mentioned. Further provisions related to the amount of tax fee, collection procedure, representative appointment procedure, and thresholds for determining significant economic presence will be governed under further government and ministerial regulations.
Violation to the above taxation obligations may lead to administrative sanctions and a potential access termination upon the digital businesses by the Ministry of Communication and Informatics.
As there is no transitional period stipulated under the regulation and lack of a clear timeline on the enactment of further regulations, overseas digital businesses should stay alert and observant to the development and enforcement of the above tax obligations following the recent enactment of PERPU 1/2020.
If there are any queries with regards to how this may affect your respective business, please contact us for any further legal consultation.
This information does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
