Taxing the digital economy in Indonesia
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Taxing the digital economy in Indonesia

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Ichwan Sukardi and Sophia She Jiaqian of RSM Indonesia assess how the country has reacted to the growing digitalisation of its economy and outline the international challenges that lay ahead.

The digital economy has been developing exponentially over the past two decades, mainly as a result of the significant advances in technologies and the availability of global internet connectivity. The digital economy is increasingly intertwined with the traditional economy, and any attempt to segregate the two for tax purposes is likely to prove inordinately difficult.

The taxation of the digital economy is firmly placed on the agenda of governments of many countries, as leaders aim to create a level playing field and maintain fairness in sustaining an open global trade. In fact, many countries have already introduced and started to implement a series of unilateral tax policies to capture the ‘fish that has slipped through the net’. Unfortunately, these unilateral measures have led to complaints by multinational technology companies and conflicts from trading partners, especially the US, as it hosts most of these technology companies. As the coronavirus pandemic affects the economic situation around the world, certain countries are more eager than ever to speed up the implementation of their digital tax practices in order to finance the recovery effort.

The OECD is positioned to play a significant role to resolve these conflicts and is engaged in negotiations with over 130 countries that aim to adapt the international tax system. The OECD’s proposal to reach global consensus for an international framework on the taxation of the digital economy is due for delivery by the end of 2020. At present, it does not seem likely that a consensus would be reached by end of 2020, though it is hoped that all interests can be accommodated, and that the OECD can come up with a proposal that is acceptable for the majority of the countries.

The taxation of the digital economy project that the OECD is working on was part of the BEPS project which officially began in 2013. During the process, the scope of the project expanded, and is also referred to as ‘BEPS 2.0’. This phase consists of two pillars: pillar one is to reach a unified approach on taxation of the digital economy, and pillar two is to achieve anti-base erosion through a global minimum tax.

Countries’ unilateral measures

Unilateral measures taken by different countries to tackle the taxation of the digital economy can be broadly categorised into direct tax and indirect tax. Direct tax can be in the form of income tax, and are proposed in most countries through imposing the so called ‘digital services tax’ (DST) or withholding tax, or digital permanent establishment (PE). On the other hand, indirect tax is manifested through the collection of value added tax (VAT) or goods and services tax (GST).

As of September 2020, there are 22 countries around the world that have passed or implemented direct tax on digital economy, and there are 16 countries that have either announced the intention to implement, or are in the process of drafting legislation. In terms of applying indirect tax on the digital economy, there are approximately 75 countries that have implemented legislation, and 8 countries that are drafting the legislation.

An interesting finding is that implementation of indirect tax on the digital economy does not cause as much public controversy when compared to direct tax. In fact, as early as 2017, the OECD published consolidated VAT/GST guidelines which laid out the basic principle that VAT for cross-border transactions should be levied in the jurisdiction where the final consumption is located, referring to it as the ‘destination principle’. According to the guidelines, when digital transactions are involved, for example, in digital media streaming or online software sales, the tax should be taxed by the tax authority where the customer frequently resides. Since it is often difficult to distinguish the customer's frequent residence, the tax authorities need to formulate rules that are flexible enough to determine when to levy taxes, and there is still considerable room for interpretation in actual implementation.

Indonesia is in the list of countries that have implemented both direct and indirect tax targeted at the digital economy. The key elements regarding Indonesia’s taxing policy is further discussed below.

Implementing provisions

Initially, Indonesia’s plan for taxing the digital economy was included as a part of the proposed omnibus tax law. Following the spread of COVID-19, Indonesia introduced Government Regulation in Lieu of Law Number 1 Year 2020 (Perppu-1) dated March 31 2020, which aimed to secure the country’s national economic stability, in which two of the tax agendas under the omnibus tax law were brought forward for implementation. One of the two concerned the taxation of the digital economy.

Perppu-1 subsequently was approved by the House of Representative (DPR). The regulations stipulated thereon became effective and the Indonesian government issued Law Number 2 Year 2020 (Law No. 2) on May 18 2020, which served as a formal legal instrument on the basis of Perppu-1.

Law No. 2’s approach to taxing the digital economy is to exert both direct tax (income tax) and indirect tax (VAT) obligations on foreign sellers, service providers and foreign e-commerce platforms (foreign digital players), sourcing revenue through digital transactions from the Indonesian consumer market.

Income tax

Under Law No. 2, the income tax obligation will be applicable for foreign digital players with ‘significant economic presence’ in Indonesia, as they will be deemed to have a PE. If a PE cannot be deemed due to an existing tax treaty, an electronic transaction tax (ETT) will be imposed on direct sales or sales through the marketplace. Foreign digital players can appoint a representative in Indonesia to fulfil its tax obligations.

Furthermore, government regulation will be issued to stipulate the rate, imposition basis, and procedures for the calculation of income tax when a PE is deemed, and the ETT provision. Provisions on the threshold of constituting ‘significant economic presence’, procedures for payment and the reporting of income tax or ETT, and procedures for the appointment of representatives are all stipulated under the Ministry of Finance (MoF) Decree.


Law No. 2 does not provide much detail on VAT. However, MoF Decree No.48/PMK.03/2020 (PMK-48) was issued on May 5 2020, before Perppu was approved and converted into Law No. 2. PMK-48 serves as the implementing regulation specifically for Article 6, paragraph 13(a) of Perppu-1 which stipulated that procedures for VAT collection, payment and reporting for cross-border digital transactions will be further regulated.

Based on PMK-48, VAT at 10% needs to be applied on the provision of foreign intangible goods or services through electronic devices or systems in the Indonesian market. The scope of foreign intangible goods and services stretch out to cover pretty much all possible usage that can be delivered in digitalised format - prominent examples include Netflix, Spotify and Zoom. In order to implement VAT, these foreign digital players or domestic marketplace are required to be appointed as a VAT collector. The appointment of a VAT collector must meet the following requirements: (i) user transaction value threshold in the past 12 months, and (ii) number of traffic/access volume exceeding a certain threshold in the past 12 months.

Following the enactment of Law No. 2, the Directorate General of Taxes (DGT) issued Regulation No. PER-12/PJ/2020 (PER-12) on June 25 2020 which sets transaction thresholds and other detailed rules concerning the appointment of foreign e-commerce players as VAT collectors. PER-12 entered into effect on July 1 2020 and serves as the implementing regulation of Law No.2. PER-12 defines an electronic system as a series of tools and electronic procedures to prepare, collect, process, analyse, store, show, announce, send, or distribute electronic information. PER-12 sets the following threshold for the purposes of appointing foreign e-commerce players as VAT collectors for their activities in Indonesian market:

  1. Transaction value with customers in Indonesia exceeding IDR 600 million ($40,300) in a year or IDR 50 million in a month; or

  2. If there are 12,000 users that visit their e-commerce platform from Indonesia in 12 months or 1,000 users in one month.

The appointed VAT collectors must activate their account in the DGT system before the effective date of their appointment. This is necessary to be able to use the DGT system to comply with their VAT obligations. More details regarding the procedure for account activation and VAT collector data update are provided in DGT’s Circular Letter No. SE-44/PJ/2020 dated July 30 2020.

To date, the DGT has through its press releases (SP-29, SP-35, and SP-41) confirmed 28 entities being appointed as VAT collectors. These entities comprise some of the high-profile global technology giants such as Amazon, Google, Netflix, Spotify, LinkedIn, Microsoft, Facebook, Zoom, Twitter, Skype, etc.

Impact on foreign digital companies

The impact brought by the digital taxation rules in Indonesia on multinational technology companies, as well as the tax revenue it generates, can be enormous. Indonesia's internet economy is the biggest and fastest growing in Southeast Asia and is expected to reach $130 billion by 2025, according to research by Google, Temasek Holdings and Bain & Company.

It is needless to say that these multinational technology companies conducting transactions within Indonesia will face significant incremental cost of taxes if they are deemed to have a PE - the effective tax rate in Indonesia for a PE is currently standing at 37.6% in the absence of tax treaty. In addition, multinationals may also experience a drop in business-to-consumer (B2C) transactions as price sensitive customers may turn away with additional VAT imposed. However, the real challenge for these multinationals is not just about the incremental costs of the taxes themselves, but how they are going to reasonably project and comply with a constantly changing collection of country specific tax laws.

On one hand, multinational technology companies are anticipating an inclusive framework on digital economy which is due to be concluded by the end of 2020, and it is hoped that it can bring together a globally harmonised set of tax legislations for implementation. On the other hand, they seem to be forced to adapt the ‘new normal’, whereby each government around the world will just implement tax legislation based on their own interpretation. With countries continually competing for their fair share of tax revenue and government leaders throwing around punitive tariffs where the negotiation fails, it is a bittersweet reality for these technology businesses operating in this period of constant disruption. The digital revolution is much welcomed, though how these technology firms sustain their global pulling power with minimum tax exposure and manage uncertainties in an efficient way remains an open formula to reconcile.

US trade representative investigation

The Office of the US Trade Representative (USTR) announced on June 2 2020, the initiation of investigations under Section 301 of the Trade Act of 1974 into DST adopted or under consideration by a number of trading partners including Austria, Brazil, Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey, and the UK.

France was the first major economy to legislate a DST, but after the punitive tariffs proposed by the USTR on a wide variety of French products, it decided to postpone collecting payments until 2021.

In the USTR’s official Federal Registration Notice, it is stated that “available evidence suggests the DSTs are expected to target large, US-based tech companies”. The notice lists down the 10 jurisdictions as mentioned above, which includes Indonesia, with the basis that “earlier this year, Indonesia adopted an electronic transaction tax that targets cross-border, digital transactions. Further implementing measures are required for the new tax to go into effect.”

As of September 2020, the Indonesian government has not released an official statement responding to the US proposed probe, as Febrio Kacaribu, the head of the Finance Ministry's Fiscal Policy Agency (BKF) has said that it is a strategic matter. Indonesia has a trading incentive from the US to keep the exports of Indonesian products, with an approximate trade value of $2 billion, in the Generalised System of Preferences.

From the Indonesian government’s point of view, they should not be too worried for now because the 301 investigation is likely to target only DST legislation which is relevant for income tax, and Indonesia has not introduced any government regulation to implement the income tax measures as set out in Perppu-1, i.e. via deeming PE or charging ETT. It likely needs to wait for the OECD’s broad agreement. The VAT measures, even if it is part of investigation, should not create conflict as it aligns with the ‘destination principle’ as recommended in the OECD’s consolidated guidelines.

Click here to read the entire 2020 Indonesia Special Focus guide

Ichwan Sukardi



RSM Indonesia

T: +62 21 5140 1340


Ichwan Sukardi is a tax partner, who heads the tax practice at RSM Indonesia. With almost 25 years of experience, he provides tax advisory services to a wide range of multinational and domestic companies, mostly in the energy sector.

Ichwan is the engagement partner for leading international oil and gas firms, and regularly assists his clients in achieving efficient tax structures for restructurings, dividend distributions, financings, and exit strategies.

Ichwan serves as the chairman of the Indonesian branch of the International Fiscal Association (IFA). He regularly speaks and writes on matters concerning the taxation of oil and gas, mining, investments, and other general tax issues.

Ichwan holds master’s degrees in international tax law from Leiden University, and in business administration from Prasetiya Mulya Business School, Indonesia. He obtained his bachelor’s degree in law from the University of Indonesia.

Sophia She Jiaqian


Senior manager

RSM Indonesia

T: +62 21 5140 1340


Sophia She Jiaqian is a senior manager at RSM Indonesia. With more than six years of professional experience in providing corporate compliance and advisory services, she has served clients with a business background in both Singapore and Indonesia.

Sophia is experienced in a range of international tax issues, and possesses in-depth knowledge on the application of treaties, withholding taxes, and tax restructuring. She has handled tax cases for a wide range of multinational companies in sectors including oil and gas, manufacturing, and pharmaceuticals.

Prior to joining the firm, Sophia was based in Singapore and worked with other tax consulting firms including one of the Big Four firms.

Sophia holds a bachelor’s degree in applied accountancy from Oxford Brookes University. She is fluent in both Chinese and English.

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