Deadline for Indonesia’s New Digital VAT Worries Business Groups

Indonesia’s 10% VAT on digital goods scheduled to take effect July 1 lacks key details that could raise compliance challenges for tech companies.

The measure imposes a value-added tax on imported digital products—like streamed music or games purchased on an app store—sold to Indonesian consumers. The tax is intended in part to help close revenue gaps created by the coronavirus, the Finance Ministry said in a May 15 announcement.

Indonesia joins other countries like Mexico and Chile who have levied VATs on e-services. Those measures generally require large digital companies like Netflix Inc. and Spotify Technology SA to be responsible for identifying relevant transactions by tracking where their customers are located, and reporting and collecting the taxes.

Indonesia will release further information on which companies will act in that role for this tax, the Finance Ministry said in its announcement. “Criteria and list of business actors appointed as VAT collectors for digital products from abroad will be announced later,” it said.

That could leave companies scrambling to set up processes for compliance in time for the measure’s July 1 start date, and some may not be sure if they will be among the ones asked to act as a collector, business groups warn.

“The clock to implement any new rules should not start running until the government has issued reasonably complete and clear guidance, so that taxpayers can start the necessary implementation knowing what they need to do,” said Carol Doran Klein, vice president and international tax counsel at the U.S. Council for International Business..

Without guidance it it’s difficult to know how long it will take companies to be ready, she said.

“Any time a government announces a significant new tax and then gives companies a very short window for compliance, especially without full compliance guidance it will create problems for companies,” said Cathy Schultz, vice president of tax policy at the National Foreign Trade Council.

More Guidance Needed

Countries with e-services VAT regimes use different criteria to determine whether a platform is facilitating a transaction, making it responsible as a VAT collector, said Richard Asquith, vice president of global indirect tax at Avalara Inc.

“There’s a lot of scope for variation on who is in the net and who isn’t,” he said.

Countries with e-services VAT regimes use different criteria to determine whether a platform is facilitating a transaction, making it responsible as a VAT collector, Asquith said.

Regulations released by the Indonesian Finance Ministry indicate that VAT collectors would be business actors “appointed by the Minister to collect, deposit, and report VAT.”

For companies that do find themselves tasked with acting as a VAT collector, there would be a number of compliance processes they’ll have to set up, including putting in place the infrastructure to track consumers’ location by IP address and credit card number, and to calculate and charge the VAT to customers, Asquith said.

“These are not small adjustments to the business process that have to be undertaken,” he said.

The Indonesian Finance Ministry didn’t immediately return a request for comment.