Nonresident suppliers of intangible goods and digital services within Indonesia may be appointed as value-added tax (VAT) collectors as of July 1, 2020. The nonresident suppliers are required to collect 10% VAT and pay the VAT to the Indonesian government.
The rules were introduced because the government wanted to create a level playing field for all businesses. An Indonesian business that sells digital goods or services to Indonesian customers is obliged to charge 10% VAT: until the introduction of the new rules, foreign suppliers were able to sell to Indonesian customers without charging VAT. Another obvious objective was to generate more tax revenue for Indonesia.
In this article I will discuss the new rules and some practical implications.
Law and Regulations
The digital VAT rules were first introduced in the draft Omnibus tax law at the end of 2019. The Omnibus tax law was foreseen to enter into force on January 1, 2021. However, on March 31, 2020, the government brought forward some of the provisions from the draft Omnibus tax law, including the digital VAT provisions, in Government Regulation in Lieu of the Law No. 1 year 2020 (Perppu-1). Perppu-1 was issued in order to assist in securing national economic stability during the Covid-19 pandemic.
The digital VAT provisions in Perppu-1 were quite basic and it was indicated that the provisions were to be regulated further under various implementing regulations. Therefore, in May and June 2020 the following implementing regulations were issued:
- Ministry of Finance Regulation No. 48/PMK.03/2020 relating to the procedures for the appointment of VAT collector, collection and payment, and reporting of digital VAT (PMK-48/2020) on May 5, 2020, and effective from July 1, 2020; and
- Director General of Tax Regulation No. PER-12/PJ/2020 pertaining to the threshold for VAT collector criteria, appointment of VAT collector, collection, and reporting of digital VAT (PER-12/20), on June 25 and effective from July 1, 2020.
Under the Omnibus tax law and regulations, any transaction related to the utilization of offshore intangible taxable assets (e.g., e-books, music, movies, computer software, games) and/or taxable services (e.g., advertising, design, marketing, video conference services) within Indonesia via e-commerce is subject to 10% VAT (i.e., digital VAT). In this regard, the obligation to collect this digital VAT from payments made by Indonesian customers lies with either the foreign seller/service provider or the foreign/local e-commerce platform provider that has been appointed as VAT collector (VAT collector) by the Director General of Tax (DGT).
E-commerce is defined as commercial trade transactions conducted through electronic devices and procedures.
As mentioned above, the obligation to collect the VAT may lie, depending on the circumstances, with the following parties selling digital products or digital services:
- foreign merchants or online retailers who sell digital products to Indonesian customers;
- foreign service suppliers selling services to Indonesian customers;
- foreign operators of online marketplaces who supply digital products to Indonesian customers;
- Indonesian operators of online marketplaces who supply foreign digital products to Indonesian customers.
If a foreign merchant sells its products through an Indonesian operator of an online marketplace which is appointed as VAT collector, the Indonesian operator of the online marketplace is responsible for the collection of the VAT. If the same foreign merchant also sells directly to Indonesian customers, the foreign merchant should collect VAT on these direct sales, provided that the foreign merchant is appointed as VAT collector by the DGT.
For the purposes of simplicity I will only refer to foreign suppliers in this article (which may include all parties mentioned above).
Thresholds to be Appointed as a VAT Collector
To be appointed as VAT collector, the foreign supplier provider must meet either of the following thresholds:
- the value of its transactions with buyers/customers in Indonesia exceeds 600 million Indonesian rupiah ($40,500) in a year or 50 million rupiah in a month; and/or
- traffic or visitors to its e-commerce platforms from Indonesia exceeds 12,000 users in a year or 1,000 users in one month.
If appointed by the DGT, a foreign supplier may choose to appoint a representative located in Indonesia to manage its VAT obligations on its behalf as a VAT collector (i.e., to collect, pay, and report the digital VAT due). However, it is not an obligation to appoint a local representative. It should be noted that the option to appoint a representative is only regulated in Article 6 paragraph 11 of Perppu-1. Neither PMK-48/2020 or PER-12/2020 provide further guidance on the matter.
The DGT announced that a separate regulation will be issued with regard to representatives. Choosing a representative may be beneficial if various foreign members of a group of companies would be appointed as VAT collector. A representative should be able to operate as VAT collector for all foreign members which are appointed as VAT collector.
A buyer/customer is considered to be located in Indonesia if:
- its residence/domicile is in Indonesia, as indicated by its correspondence/billing address and/or by identification of Indonesia when registering with an e-commerce provider;
- payments are made using an Indonesian payment facility; and/or
- transactions are made from an Indonesian Internet Protocol (IP) address and/or an Indonesian telephone number.
If a foreign supplier is not appointed or has not been appointed yet by the DGT, but qualifies under the thresholds, it may notify the DGT electronically to be appointed as a VAT collector using the notification letter template that is provided in PER-12/2020. The possibility to notify the DGT is an option and not an obligation. This was clearly stated by the DGT during a virtual socialization meeting on July 8, 2020. Upon receiving such a request, the DGT will determine whether or not to appoint the foreign supplier as a VAT collector.
On July 7, 2020 the DGT appointed the first batch of foreign suppliers as VAT collector (i.e., Netflix International B.V., Spotify AB, Amazon Web Services Inc. and various Google entities), and on August 7 a second batch of companies followed. The appointments are published in a Decree by the DGT.
B2B and B2C Transactions
It is important to note that the digital VAT applies both in business-to-business (B2B) and business-to-consumer (B2C) transactions. This may be considered overkill, since in a B2B transaction the Indonesian customer is generally obliged to self-assess 10% VAT under the reverse charge rule. Therefore, Indonesia should not miss out on VAT in B2B transactions. The new rules may even lead to potential double VAT charges, if, for instance, an Indonesian customer reported self-assessed VAT on a transaction and the foreign supplier also charged VAT on the same transaction.
In this case the Indonesian customer has the following options:
- the self-assessed VAT can be booked over to other tax payments;
- a refund of the self-assessed VAT can be requested;
- the self-assessed VAT can be credited as input VAT; or
- the self-assessed VAT can be claimed as deductible expense for corporate income tax purposes.
Appointment as VAT Collector and Related Compliance
The following is a summary of the various stages of the appointment as VAT collector and the related compliance:
- the DGT will issue a Decision Letter to each foreign seller/service provider that is appointed as a VAT collector;
- the foreign seller/service provider will also receive a certificate of registration and tax identification number card;
- if the DGT’s Decision Letter contains any incorrect information , the foreign seller/service provider can request an amendment electronically. Upon reviewing the information submitted, the DGT may amend the Decision Letter, but this will not change the appointment status;
- the obligation as VAT collector starts at the beginning of the month following the issue of the Decision Letter;
- an appointment as a VAT collector may be revoked if the foreign seller/service provider no longer meets one of the thresholds or based on DGT considerations. The revocation in this regard is effective from the beginning of the month following the Revocation Decision Letter issuance;
- once appointed, the VAT collector must activate its DGT online account and update its information in the DGT’s database before the effective date of its appointment as a VAT collector;
- the VAT collector should collect 10% VAT based on the sales value (excluding the 10% VAT) from its buyers/customers in Indonesia;
- the VAT collector must issue VAT collection slips providing information on each VAT collection and payment, which can be in the form of commercial invoices, billings, order receipts or other documents stating the VAT amount and indicating that the payment has been settled;
- the VAT collection slips described above can be treated as VAT invoices and claimed as input VAT by buyers/customers if they contain (or are attached with relevant supporting documents confirming) the following buyer/customer information:
- name and tax identification number (NPWP); or
- email address registered with the DGT system;
- the VAT collected must be paid electronically or by any other available method by the end of the month following the month in which the VAT charge takes place. An ID billing code must be generated for the payment using the DGT’s e-billing system. Payments may be made in Indonesian rupiah, U.S. dollars or any other currency officially accepted by the DGT; for the time being, only payments in rupiah and dollars are facilitated.
VAT reports must be submitted on a quarterly basis by the end of the month following each quarterly period and must contain at least:
- the number of buyer/customers;
- the total amount of payments received (excluding VAT);
- the amount of VAT collected; and
- the amount of VAT transferred.
The DGT may request a detailed VAT report for each calendar year, containing the following information for each VAT collection slip:
- its number and date;
- the amount of payment (excluding VAT);
- the amount of VAT collected;
- the name and tax registration number of the buyer/customer, if available; and
- the phone number, email address or other items related to the buyer/customer’s identity.
The VAT reporting should be done electronically via the DGT’s system, either in the Indonesian language or in English, and using the currency previously selected by the VAT collector. The DGT will issue receipts that the reports have been submitted.
Penalties and Sanctions
The digital VAT regulations do not regulate penalties and/or sanctions in the case of tax noncompliance (e.g., not collecting VAT if appointed, or paying the VAT late). According to the DGT this will be regulated in a specific Ministry of Finance regulation, which has not been issued at the time of writing.
During a socialization meeting with the DGT, it was explicitly mentioned by the DGT that the self-notification is not an obligation, but optional. Therefore, a non-notification should not lead to any sanctions. It is not known if the future regulation will change this.
To date there is very limited experience with the new digital VAT rules. The first foreign suppliers were appointed in July, meaning that they have to collect the VAT as of August 2020. A positive note is that the DGT seems very open to discussing the new rules with (potential) VAT collectors; but for the DGT these rules are new and unexplored territory as well. There may be cases the DGT may not have considered. The future will show if the rules will lead to any issues in daily tax practice.
Clients have asked whether they qualify under the new rules and if so, whether they should ask to be appointed. As mentioned earlier, the request to be appointed is optional. However, some nonresident suppliers may just want to notify the DGT and start collecting VAT. On the other hand, there are numerous nonresident suppliers only entering into B2B transactions who may qualify under the rules. However, the Indonesian government is not missing out on any VAT in these cases, because the recipient of the services is self-assessing the 10% VAT under the reverse charge rule. This may happen, for instance, if a foreign headquartered company has a software agreement with a provider, and the foreign headquarter is invoicing its subsidiaries all over the world for the use of this software. It may well be possible that the foreign headquarter will qualify under the digital VAT rules; however, generally the local Indonesian subsidiary will self-assess the VAT. In this case the foreign headquartered company may just decide to do nothing and wait for the DGT to be appointed. Given the fact that it only sells one service and that Indonesian VAT is levied, the foreign headquarter may not be high on the DGT’s priority list, if the DGT is aware at all. Therefore, in these cases, the foreign supplier may prefer to do nothing and wait for an appointment.
Jacob Zwaan is head of international tax and co-head of M&A tax, KPMG Indonesia.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.