Indonesia Digital Services Tax.

The Indonesian government on 5 May 2020 issued Minister of Finance Regulation (Peraturan Menteri Keuangan) No. 48 of 2020 ("PMK 48/2020") as the implementing regulation of Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-Undang) No. 1 of 2020 ("Perppu 1/2020")
 

This requires appointed foreign intangible goods sellers, foreign service providers, foreign e-commerce operators, or domestic e-commerce operators ("Digital Providers") to charge VAT in Indonesia, when they supply intangible goods and/or services from outside Indonesia's customs area to Indonesian customers through an electronic system ("Digital Value Added Tax" or "Digital VAT").
 

The introduction of these taxes is intended to support the Indonesian government's efforts to fight the adverse economic impacts of the COVID-19 pandemic, and more generally to shift Indonesia's tax base towards digital taxation to address the significant growth of online transactions.
 

II. Key Aspects of the Digital Service Tax
 

Effective 1 July 2020, the Digital VAT is to be charged and levied at the rate of 10% on the supply of taxable intangible goods and / or taxable services ("intangible goods and services") from outside Indonesia through an electronic system to Indonesian customers.
 

Intangible goods and services
 

Under PMK 48/2020, the following goods and services are regarded as digital ones when they are transacted through an electronic system. These are broad definitions which encapsulate a wide range of intangible goods and services.
 

Intangible goods include, but are not limited to:
 

▪ The use of or the right to use any copyright of literary, artistic or scientific work, patent, design or model, plan, secret formula or process, trademark, or the form of intellectual/industrial property right, or other any kind of right.
 

▪ The use of or the right to use motion picture films, film or video tape for television broadcasting, or sound tape for radio broadcasting.
 

▪ Digital goods, i.e., intangible goods in the form of electronic or digital information, including goods as the result of conversion or transformation or goods originally in the form of electronic, including but not limited to software, multimedia, and/or electronic data.
 

Services are defined as any taxable services, including but not limited to:
 

▪ Digital services, i.e., services sent through the internet or an electronic network, that are automatic or have little human intervention, and cannot function without information technology, including but not limited to softwarebased services. 
 

Indonesian customers
 

The Digital VAT is applicable to Digital Providers that provide intangible goods and services to Indonesian customers through an electronic system. Three criteria are used to determine when a customer, whether an individual or a corporate, is an Indonesia customer for the purposes of Digital Service Tax. 
 

An Indonesia customer is defined as an individual or corporation who meets any of the following requirements:
 

i. Reside or domiciled in Indonesia. This criterion is met if the customer's correspondence or billing address is in Indonesia and/or the customer selects "Indonesia" upon account registration in the page/system provided by the VAT collector;
 

ii. Makes payment for digital goods or services using a debit facility, credit facility, and/or other payment method provided by an Indonesian institution; and/or
 

iii. Makes the transaction through an internet protocol address in Indonesia or by using a telephone with Indonesia phone code.
 

Foreign (and Domestic) Provider
 

Two main types of Digital Providers are covered by PMK 48/2020, Foreign Intangible Goods Sellers / Service Providers and e-Commerce Operators.
 

Foreign Intangible Goods Sellers / Service Providers are individuals or corporates who reside or are domiciled outside Indonesia's customs area which transact with Indonesian customers.
 

e-Commerce Operators are providers of electronic facilities for e-commerce purpose. This includes both foreign and domestic operators
 

Appointment Thresholds
 

Under the Digital VAT, Digital Providers who meet certain threshold may be appointed by the DGT as a VAT collector. To qualify as a VAT collector, Digital Providers must meet the following criteria:
 

i. Transaction value with Indonesian customers exceeds a certain threshold within 12 months; and/or ii. Numbers of traffic or accessors exceeds a certain threshold within 12 months.

As of 26 May 2020, these thresholds have not been defined by the Director General of Taxes ("DGT"). Further, appointment as a VAT collector is solely performed by the DGT once these thresholds have been met. Nevertheless, once these thresholds have been defined, Digital Providers who meet the threshold may submit a notification to the DGT to be appointed as a VAT collector. There are currently no provisions regarding penalties for non-registration.
 

Operation of the Digital VAT
 

A Digital Provider appointed as a VAT collector will be given an ID number for tax administration purposes.
 

Following such appointment, VAT is to be collected upon payment by Indonesian customers. The VAT collector will be required to issue a VAT collection slip that can be in the form of a commercial invoice, bill, order receipt, or other such documents.
 

The VAT collector is to settle VAT that it collects by the end of the following month to the state's treasury account. This may be settled in: Rupiah, USD, or other foreign currency as determined by the DGT.
 

Finally, the VAT collector must submit quarterly electronic reports on the VAT collection for 3 periods. The DGT may request that VAT collectors submit a report on transaction details every calendar year.
 

III. Observations
 

As PMK 48/2020 will come into effect from 1 July 2020, it is expected that the Indonesian government will define the thresholds and procedures for the appointment of Digital Providers as VAT collector within the next few months.
 

Under the Digital VAT regime, Digital Providers must be prepared to ensure that their administrative processes are able to accommodate the VAT collection, reporting, and settlement requirements under the new Digital VAT regime should they be appointed as VAT collectors.
 

Further, Indonesian customers should expect price increases which would likely be around 10% higher than current prices. However, if the customer is registered as a VAT-able entrepreneur in Indonesia, Digital VAT paid may be used as input VAT credits against output VAT.
 

Finally, under Perppu 1/2020, the Indonesian government also plans to charge income tax if foreign Digital Providers have a permanent establishment, or electronic transaction tax ("Electronic Transaction Tax") if foreign Digital Providers have a significant economic presence without a permanent establishment in Indonesia. However, no further implementing regulations have been issued yet.
 

 

For further information, please contact:

 

Eugene Lim, Co-Founder and Principal, TaxiseAsia