INSIGHT: Indonesia—Tax on Cross-Border Digital Services and Intangible Goods

The Indonesian government issued Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-Undang) No. 1 of 2020 (Perppu 1/2020), on March 31, 2020, which has been passed as a law by the House of Representatives under Law No. 2 of 2020, to mitigate the economic impact of Covid-19. This will allow more state spending and financial relief efforts to help the economy weather the crisis.

Through the issuance of Perppu 1/2020, the Indonesian government introduced taxation for trading activities through electronic systems that were initially proposed in the Omnibus Law bill. In general, transactions conducted through an electronic system will be subject to value-added tax (VAT) and Income Tax. Perppu 1/2020 also introduces a new type of tax, i.e., electronic transaction tax, which will be imposed on foreign companies or individuals.

General Provisions

Under Perppu 1/2020, the applicable taxes for trading activities through electronic systems are as follows:

VAT

In general, Perppu 1/2020 requires the imposition of VAT on the utilization of taxable intangible goods and taxable services from outside of the Customs Area in the Customs Area through electronic systems (locally known as Perdagangan Melalui Sistem Elektronik or PMSE). The VAT must be collected, paid and reported by foreign sellers, foreign service providers, foreign providers of electronic systems used for trading activities (PPMSE) and/or Indonesian PPMSE that are appointed by the Minister of Finance.

On May 5, the government of Indonesia issued an implementing regulation for collection, payment and reporting of VAT, i.e. Minister of Finance Regulation No. 48/PMK.03/2020 on Procedures to Appoint Collectors, Collection and Payment, and Reporting of VAT on Utilization of Taxable Intangible Goods and/or Taxable Services from Outside of the Customs Area in the Customs Area Through Trade Using Electronic Systems (MoF Regulation 48). This regulation will come into force on July 1, 2020.

The VAT payable is 10% of the value paid by a buyer or service recipient, and it must be collected at the time a payment is made. In addition, MoF Regulation 48 also contains some provisions the details and implementation of which have not been included in Perppu 1/2020, as follows:

VAT Object

The use of taxable intangible goods that are subject to VAT under MoF Regulation 48 includes:

• use of, or right to use, IP rights in the field of literacy, art or scientific work, patent, design or model, plan, formula or secret process, trademark, or other IP or industrial rights, or other similar rights;
• use of, or right to use, industrial, commercial or scientific equipment;
• use of knowledge or information in the field of science, technology, industry or commerce;
• use of supplements or additions related to the bullet points above, in the form of:
  • receiving or having a right to receive pictures or audio recordings, distributed to the people through satellite, cable, optic fiber or similar technology;
  • the use or the right to use pictures or audio recordings, distributed to the people through satellite, cable, optic fiber or similar technology;
  • the use or right to use radio communication spectrum, either wholly or partially;
• the use of, or right to use, motion picture films, film or video tape for television broadcasts, or audio tape for radio broadcasts;
• the right to other industrial or IP rights.

Notwithstanding the above, the use of digital goods and digital services is also subject to VAT.

Digital goods are defined as all intangible goods in the form of electronic or digital information including converted goods, and goods that are originally in electronic form, including but not limited to, software, multimedia and electronic data.

Digital services are defined as services provided through the internet or electronic networks that are automatic in nature or only involve minimal
human involvement, and where it is impossible to confirm the service provided without information technology, including but not limited to services based on software.

VAT Collectors

VAT collectors are:

• foreign sellers or foreign service providers appointed for transactions done directly between the foreign sellers or foreign service providers and a buyer or service recipient;
• foreign sellers, foreign service providers, foreign PPMSE and/or Indonesian PPMSE appointed for transactions with a buyer or service recipient through an offshore PPMSE or Indonesian PPMSE.

Under MoF Regulation 48, foreign sellers, foreign service providers, foreign PPMSE and/or Indonesian PPMSE that meet one of the following criteria may be appointed as a VAT collector:

• their transaction volume in Indonesia exceeds a certain threshold over a 12-month period;
• the amount of traffic on their platforms exceeds a certain threshold over a 12-month period.

The government through the Director General of Tax (DGT) will stipulate further details of the above thresholds and criteria. The authority to appoint VAT collectors lies with the DGT. If a foreign seller, foreign service provider, foreign PPMSE and/or Indonesian PPMSE meets the criteria to be appointed as a VAT collector, but has not yet been appointed, it may notify the DGT to get an appointment as a VAT collector.

MoF Regulation 48 further stipulates the procedures for collection, payment and reporting of VAT by the VAT collectors that are appointed by the DGT. This includes, but is not limited to, the VAT collectors having to have proof of the VAT collected, which can be in the form of commercial invoices, bills, order receipts or similar documents. The proof of VAT collection that is treated as a VAT Invoice must be issued in accordance with the requirements set out by the DGT. The VAT must be collected at the time of a buyer or a service recipient make a payment, and must be paid to the state at the latest at the end of the following month. VAT collectors must report the collected and paid VAT every three months.

For transactions related to the utilization of intangible taxable goods and taxable services that do not come under the provisions of MoF Regulation 48, the VAT must be collected, paid and reported by the buyer or the service recipient. Buyers and service recipients are defined as individuals or entities that meet one of the following criteria:

• they are domiciled in Indonesia (an individual or entity is considered to have its domicile in Indonesia if the mailing or billing address is in Indonesia, or the country chosen at registration is Indonesia);
• they make payments using debit, credit or other payment facilities provided by an institution in Indonesia;
• they enter into transactions using an internet protocol address in Indonesia, or using a phone number with an Indonesian country code.

Income Tax

A foreign seller, a foreign service provider or a foreign PPMSE that has a significant economic presence in Indonesia may be deemed a permanent establishment and will be subject to tax obligations in Indonesia, including the requirement to pay income tax.

The determination of “significant economic presence” is based on the following factors:

• consolidated gross turnover of the business group;
• sales in Indonesia;
• number of active users on digital media in Indonesia.

Further provisions and details on this matter will be stipulated in a Minister of Finance regulation. With respect to this, it appears that the Indonesian government is waiting for a global consensus to be formed on digital economy taxation before issuing any further regulations on this.

If a foreign seller, a foreign service provider or a foreign PPMSE that has a significant economic presence is not considered to have a permanent establishment in Indonesia under the applicable tax treaty, electronic transaction tax will be imposed.

Electronic transaction tax is imposed on sales of goods or provision of services through electronic systems to buyers or service recipients located in Indonesia, whether done directly or through a foreign PPMSE.

A foreign seller, a foreign service provider, or a foreign PPMSE can appoint a representative in Indonesia to fulfill the obligations related to income tax or electronic transaction tax. Details of the appointment of a representative are to be further regulated in a Minister of Finance regulation.

If a party fails to fulfill its tax obligations, it will result in an administrative penalty as stipulated under Law No. 6 of 1983 as amended by Law No. 16 of 2009 on General Tax Provisions and Procedures. In addition, after certain warnings, operational access may be blocked and cut off by the Minister of Communication and Information based on a request from the Minister of Finance. The government will issue an implementing regulation to detail how the access will be blocked and cut off.

Planning Points

• MoF Regulation 48 provides additional details of the VAT obligation for trading activities through electronic systems set out in Perppu 1/2020. But MoF Regulation 48 does not set out the criteria for a VAT collector. Therefore, taxpayers may also need to wait for further regulations to understand how VAT should be collected on transactions conducted through electronic systems.
• For income tax on trading activities through electronic systems, Perppu 1/2020 has not set out the criteria of significance economic presence. A further implementing regulation is needed to implement this provision.

Ponti Partogi is a Partner and Ria Muhariastuti is a Senior Tax Specialist at HHP Law Firm, Indonesia.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.