By: Fabiola Rossy & Andrew Diamond, Januar Jahja and Partners
Indonesia has become the latest country to impose a tax on intangible digital goods and services from overseas providers following the lead of France, Singapore, and Malaysia, among others. The newly imposed value-added tax (VAT), which took effect on 1 July 2020 and targets overseas companies that have a “significant economic presence” in the country, aims to raise vital funds for the Indonesian government to offset the drop in tax revenue due to the COVID-19 pandemic. The tax is expected to affect a broad range of services and industries, such as streaming and data to online games. The Indonesian Government has even publicly acknowledged that the tax is targeted at companies like Netflix, Zoom, and Spotify, among others. This has prompted threats of investigations and retaliatory countermeasures by the US Government.
The newly-imposed tax is based on Ministry of Finance (MoF) Regulation No. 48/PMK.03/2020 (MoF Regulation), which sets the tax at 10% for imported digital goods and services for consumers in Indonesia. According to the MoF Regulation, digital goods and services subject to taxation now include: (1) use or the right to use intellectual property rights including copyright in literature, art, or science; (2) use or right to use image recordings or sound recordings or both, for television or radio broadcasts broadcasted or transmitted via satellite, cable, optical fiber, or similar technology; (3) the right to receive image recordings or sound recordings or both, which are transmitted to the public by means of satellite, cable, optical fiber, or similar technology; and (4) use or the right to use motion picture films or videotapes for television broadcasts.
Further, the Regulation states that digital product and service providers are obligated to charge VAT if they are either: a foreign firm that provides digital goods or services to Indonesian customers; a foreign online marketplace that sells digital products to Indonesian consumers; or a domestic online marketplace platform operator sell foreign digital products to local consumers. In each case, the firm must have a “significant economic presence” in Indonesia, which is defined by having transaction value with consumers in Indonesia that exceeds IDR 600,000,000 in one year (approx. US$41,000), or which traffic or access in Indonesia exceeds 12,000 users in one year or 1,000 users in one month. To date, the Indonesian Government has officially appointed six foreign firms as VAT collectors: 1) Amazon Web Services, Inc.; 2) Google Asia Pacific Pte. Ltd.; 3) Google Ireland Ltd.; 4) Google LLC; 5) Netflix International B.V., and 6) Spotify AB.
Indonesia’s digital economy has experienced strong growth in recent years and is expected to be worth over USD 100 billion in five years. Indonesia is the world’s fourth most populous country with approximately 267 million people and one of the highest numbers of internet users in the world (approx. 171 million), though its internet penetration rate remains relatively low at only 54%. While the COVID-19 pandemic has brought untold economic and human devastation to the archipeligo, there is an expectation, aided by suggestions from Indonesian Minister of Finance Sri Mulyani Indrawati, that the novel coronavirus has seen companies in the online and ecommerce space in Indonesia do even better as it has pushed more consumers and transactions online.
Indonesia is not the only country passing such taxes. France is the most widely reported case—in response, the US government threatened stiff tariffs on French goods including cheese and wine. Regionally, Singapore has imposed a 7% tax on overseas digital services, Malaysia a 6% tax, and Thailand has been discussing instituting a 7% tax as well. On July 3, 2020, OECD published the Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy (“Model Rules”). The primary focus of the Model Rules is on facilitating compliance of platform sellers with their direct tax obligations, but in the future the OECD may update the model rules on VAT for digital goods and services.
In the absence of binding global rules or at least norms on digital economy taxation, it is expected that the piecemeal, country-by-country approach will continue. For Indonesia, the 10% VAT will almost certainly just be passed on to the consumer, thereby increasing the cost of these digital goods and services. When in comes to the effect on the protection of intellectual property rights, there is reason for caution as price increases could cause Indonesian consumers to seek out illegal platforms and/or pirated material, which has been an ongoing problem in the country.
