7 February, 2018
The increasing popularity of over-the-top (“OTT”) services and the rapid growth in revenues collected by OTT service providers has caught the eyes of the regulators in Indonesia and Thailand, which have both issued draft regulations targeting OTT service providers. One of the key changes under both new regimes is that onshore and offshore OTT service providers providing a service in these jurisdictions will be subject to the local tax regime and local laws.
Indonesia
The main objectives of the Ministry of Communication and Informatics (“MOCIT”) is that both onshore and offshore OTT service providers will (i) pay tax to the Indonesian tax authority in respect of their income derived from the provision of OTT services in Indonesia, and (ii) be under the supervision of MOCIT.
Tax circular targeting OTT service providers
On 6 February 2017, the Director General of Tax issued Circular Letter No. SE – 04/PJ/2017 on Determination of Permanent Establishments for Foreign Tax Subjects which are Providers of Applications and/or Content Services through the Internet (“CL No. 4/2017”). According to CL No. 4/2017, foreign providers of OTT services (which may be an application service or a content service) having a permanent establishment in Indonesia would have to pay tax in Indonesia.
A foreign OTT service provider may be regarded as having a permanent establishment in Indonesia if (i) it owns, leases or controls any fixed premises in Indonesia, which may include a computer, a server, a data centre, an electronic agent or other automatic equipment; or (ii) it has employees or parties acting for or on its behalf to conduct business activities in Indonesia.
Draft telecoms regulations on OTT services
MOCIT has issued a draft regulation on OTT services (“Draft Regulation”) which would apply to both onshore and offshore OTT service providers. The Draft Regulation requires an offshore OTT service provider to have a permanent establishment in Indonesia in accordance with CL No. 4/ 2017.
The Draft Regulation was first published in May 2016, and a second draft was released in August 2017 following a public consultation. It is unclear if the second draft will be the final text. MOCIT’s current target is to pass the Draft Regulation by the second quarter of 2018.
Based on the updated Draft Regulation, OTT service providers may be (i) onshore providers, ie. Indonesian individuals or entities; or (ii) offshore providers having a permanent establishment in Indonesia. They are allowed to generate income from: (i) sales and marketing of OTT services, (ii) advertising through OTT services, (iii) collection of OTT customers’ data (in compliance with the prevailing personal data protection regulations in Indonesia), and/or (iv) electronic transactions performed through OTT services.
Under the Draft Regulation, both onshore and offshore OTT service providers are required to register with MOCIT before providing their services in Indonesia. For offshore OTT service providers, one of the requisite documents for registration with MOCIT would be the Taxpayer Identification Number of its agent or representative in Indonesia.
Furthermore, under the Draft Regulation, onshore OTT service providers are required to, amongst other things:
(i) comply with Indonesian laws, perform content filtering and screening, use the national payment gateway for any paid services, provide access for lawful interception and for retrieval of evidence for criminal investigation by Indonesian authorities, provide user manuals in the Indonesian local language, maintain an Indonesian bank account, provide after- sales service and an information contact centre, and retain service traffic and transaction data for at least 3 months; and
(ii) report to MOCIT on the number of subscribers, service traffic, etc. annually.
The Draft Regulation is not clear on whether the obligations as set out in (i) and (ii) above are also applicable to offshore OTT service providers. However, it is our understanding that the intention of the Indonesian government is to impose the same obligations on both onshore and offshore OTT service providers. The Draft Regulation clearly requires offshore OTT service providers to enter into a contract with their customers for any paid services.
OTT service providers may cooperate with local telecoms operators in providing OTT services provided that they submit their agreement containing all prescribed contents to MOCIT within 30 days after signing.
OTT service customers may claim compensation from OTT service providers for any direct loss caused by errors or omissions made by OTT service providers.
Existing OTT service providers will be given one year to comply with the new requirements once the Draft Regulation is passed into law.
Thailand
The National Broadcasting and Telecommunications Commission (“NBTC”) has also proposed new registration requirements for both onshore and offshore OTT service providers. Providers may be required to register in Thailand and abide by Thai laws, including Thai authorities’ checks on illegal contents and copyright piracy, and subject to the Thai tax regime.
In April 2017, NBTC suggested introducing bandwidth fees for online content providers, and proposed bringing OTT service providers under an operating licence framework, taxing them and making them liable for illegal content. NBTC sought to require both onshore and offshore OTT service providers to complete a registration form by 22 July 2017, but such registration requirement was revoked prior to that deadline.
NBTC is currently in the process of passing a new notification regime for OTT service providers. Any deadline has been postponed until the new notification regime is issued. NBTC has not put forward a plan for a licensing regime for OTT service providers. Instead, a complaint based approach has been proposed whereby NBTC will only investigate or intervene in OTT operations when it receives a complaint from a consumer or other relevant party. NBTC has also considered setting up a control list setting out the top 100 social media content providers or users who influence public opinion, and these companies may be required to register with NBTC.
Further, an OTT working group committee has been set up by NBTC to develop a new OTT regulatory framework, and an official announcement by NBTC is expected. The framework would cover, amongst other things, the effect of OTT-related financial services and the impact on OTT-related telecommunications services. NBTC has also indicated that a fee needs to be imposed on OTT service providers, probably in 2018.
Conclusion
OTT services have not typically required a licence or attracted any fee to operate in most markets. However, as the use of OTT services increases rapidly, governments in a number of countries seem keen to create new rules that would subject OTT service providers to tax, security and content regulations in order to protect local consumers and to create a level-playing field between new service providers and more traditional competitors.
Both onshore and offshore providers of OTT content in Indonesia and Thailand should perform a full assessment of their business operations in light of the changing regulatory landscape to ensure compliance with these new rules.
For further information, please contact:
Mark Robinson, Partner, Herbert Smith Freehills
mark.robinson@hsf.com
