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Indonesian COVID-19 emergency law eyes taxation of digital companies

Tax subjects like Netflix or Zoom are not physically present in , but are used by everyone, said the finance minister.

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A new directive, which became part of the COVID-19 emergency bill signed by President Joko Widodo on Tuesday, will allow the Indonesian government to tax electronic trading activities (PMSE) of foreign entities such as Netflix and Spotify.

According to Article 6 of the new regulation, “foreign traders, foreign service providers, and/or foreign PMSE providers who meet the provisions of significant economic presence can be treated as a permanent business entity and subject to income tax.” The Ministry of Finance will determine the company’s economic significance by reviewing their active user numbers, sales, and gross circulated product in Indonesia.

Targeting streaming services

Finance Minister Sri Mulyani Indrawati mentioned that during the pandemic, electronic transactions are increasing notably.

“In this situation, streaming is widely used and we see a lot of digital tax transactions. We need rules to be able to collect income tax for foreign platform services,” she commented to CNBC Indonesia. “Tax subjects like Netflix or Zoom are not [physically] present in Indonesia but are used by everyone. This could be the subject of our foreign taxes.”

The companies have to appoint representatives in Indonesia to collect, pay, and report their taxes. If the government cannot declare a digital company as a permanent establishment due to the existence of a tax treaty with another country, the company will be charged with electronic transaction tax based on the company’s sales in Indonesia.

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Further detailed arrangements will still be announced by the finance ministry.

The Indonesian government has been eyeing taxation of digital companies with significant economic presence for years. However, those plans didn’t generate much traction in the past as most major tech companies don’t have permanent physical footprints in the country. Taxation on the digital company was originally included in the omnibus law draft. However, due to public resistance to some parts of the draft, the government decided to delay the bill’s passage.