A pioneer in the video-on-demand (VOD) space, Netflix was founded in 1998 as a DVD-by-mail rental service. It started offering on-demand video streaming in America in 2007 and entered the Indonesian market in January 2016. It wasn’t long before regional competitors Iflix and Hooq followed suit the same year.
Netflix is the global streaming leader with over 167 million paying customers by the fourth quarter of 2019, according to Statista. However, despite its global popularity, Netflix is currently on fragile ground in Indonesia. Over the past year, the firm has been on the finance ministry’s radar as it has not paid any taxes since commencing operations in Indonesia.
Statista estimates that Netflix will earn USD 76.63 million in revenue from Indonesia by the end of 2020. If the firm had paid its value-added tax of 10%, Indonesia would have received a tax income of USD 3.8 million in 2019 alone. However, since the firm doesn’t have a permanent branch in the country, it doesn’t have a taxpayer number, and therefore the government cannot collect taxes from it. Netflix’s Asia Pacific headquarters is located in Singapore and there is no indication that Netflix will open an office in Indonesia anytime soon.
The government feels this can harm the country’s economy in the long run. Therefore, the government plans to use the Nexus Tax approach in pursuing potential tax income from cross border and digital transactions, including from over-the-top (OTT) service providers. With this tax, companies that make transactions and have a significant economic presence in Indonesia are required to pay taxes, even if they don’t have a physical entity in the country. Details about this new regulation are contained in the tax omnibus law draft that is due for completion in March. According to the draft, if a company fails to fulfill its obligations, it would be subject to administrative sanctions and possible termination of access.
Netflix’s partnership with education and culture ministry
Despite problems with the finance ministry, Netflix has a good relationship with the ministry of education and culture under the leadership of former technopreneur Nadiem Makarim. In January, Netflix signed a partnership agreement with the ministry that aims to help boost the domestic film industry.
The partnership will focus on developing creative skills and capabilities which include creative writing, as well as post-production training. Netflix has committed USD 1 million to these collaboration programs, including sending 15 selected Indonesian scriptwriters to Los Angeles to receive training on scriptwriting and film science.
While some people welcome this initiative, others question whether this is a wise move, considering Netflix’s tax problem has yet to be resolved. Heru Sutadi, an executive director with the Indonesia ICT Institute, said that all ministries should have one voice in addressing businesses with unresolved issues in Indonesia.
“The education and culture ministry should discuss or communicate first with the finance ministry as it is currently reviewing Netflix’s taxation. Because when companies face problems with one institution, they might approach another institution that is seen as ‘softer’,” said Sutadi. “Netflix’s tax owings are certainly way much more than its investment value in that partnership, so we have to ensure that they comply with our tax regulation,” he continued.
However, Makarim is anything but a rigid bureaucrat. He didn’t wait for the new taxation regulation since it would take months and slow down his ambition to advance local film talent. Although it has obtained the blessing of the ministry of education and culture, Netflix must comply with new tax regulations so it can operate peacefully in Southeast Asia’s largest market.
Netflix versus Telkom
Another major Netflix issue is that its service is currently blocked by the country’s largest telco Telkom Indonesia and its subsidiaries, including home internet provider IndiHome and mobile carrier Telkomsel. In a recent interview with KrASIA, Telkom Indonesia’s digital business director Faizal Djoemadi said that Netflix doesn’t want to fulfill a requirement by Telkom, namely to retract “problematic content”—which refers to sensitive content like nudity and violence—within 24 hours.
As a result, Netflix has not been able to leverage on Telkom’s huge user base. According to Djoemadi, IndiHome has seven million customers and Telkomsel had 170 million subscribers as of the third quarter of 2019, where almost 65% of them are data users.
Netflix Indonesia previously said that it has partnered with XL Axiata, Hutchinson 3, and Smartfren since 2018. So it appears that the company prefers not to compromise its content policy and has instead chosen to partner with other major telco and internet providers in Indonesia.
Incidentally, this case caught the attention of the Indonesian competition watchdog. Recently, the Business Competition Supervisory Commission (KPPU), raised the status of this case to the investigation level. This names Telkom as the reported party for alleged discrimination against Netflix. The discrimination case is regulated in business competition law, which states that business actors are prohibited from making agreements that can prevent other actors from doing the same business. This applies to businesses with external and domestic markets.
To KrASIA, Telkom’s spokesperson said that the company respects and will follow the investigation process. “Basically, Telkom Group is open to collaborating with various parties in order to provide quality content services. All of our content provider partners are willing to comply with applicable rules and collective agreements to ensure customer comfort. We also expect the same from Netflix, which we are in early negotiations with,” the spokesperson said.
Telkom said that if they exempt Netflix, it would actually be a discriminatory action towards other OTT providers who have met the applicable rules. “This decision is not based on business interests alone, but in order to protect the interests of customers and the Indonesian people in general.”
Indonesia has tough anti-pornography laws. Local law requires that digital platforms strictly police and censor any type of nudity and the government in the past has not hesitated to impose temporary bans on those who violate them. American blogging platform Tumblr and live video app Bigo had previously been blocked in Indonesia for this reason.
To date, there has been no warning from the government concerning Netflix content, which indicates no complaints from the public so far. Even so, last year, the Indonesian Broadcast Commission (KPI) proposed that they oversee digital platforms like Netflix and YouTube to ensure they comply with Indonesia’s broadcast standards. This discourse has drawn criticism from netizens, and the IT ministry is currently reviewing the broadcasting bill that will decide whether KPI can monitor Netflix’s content.
If the bill grants permission to KPI to monitor VOD content and Telkom wins KPPU’s investigation, Netflix would have to compromise its content policy to be able to offer its service in Indonesia.
Indonesia is experiencing keen competition for on-demand video streaming with many players entering this field. HBO Go recently joined the race by launching its service in the country on February 20. Netflix still charges the highest subscription fee compared to other streaming service providers. Its basic plan costs IDR 109,000, which is way above Iflix (priced at IDR 39,000 monthly) or Hooq at the price of IDR 69,000 per month. With its premium price and polemics in Indonesia, it looks like Netflix has to work hard in order to win the VOD competition in Southeast Asia’s largest market.
Netflix declined to comment for this story.
With additional reporting from Cindy Silviana