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Operating a Business of Over-the-Top (OTT) Service in Indonesia

The number of internet users in Indonesia has been rapidly growing over the past years. Google, Facebook, Twitter and Whatsapp have all seen Indonesia as a big market. As of March this year, the number of Twitter accounts reached 328 million globally, representing a 14% increase from the same period last year. Indonesia emerged as the fifth-largest country in terms of Twitter users, with 4.1 billion tweets having originated here last year. Based on the intent to protect Indonesian consumer, Indonesian government will regulate the activity of foreign information and technology companies. The government is now requiring that all OTT service provider to have a presence in Indonesia.


The new regulation is currently being drafted and to accommodate the needs of some guidance, Ministry of Communication and Informatics has enacted s Circular Letter Number 3 of 2016 regarding Provision of Applications and/or Content Services Over the Internet  (“Circular Letter 3/2016”). Pursuant to the Circular OTT services are defined and differentiated as the following:


 


1. Application Services via the Internet


It refers to the use of telecommunication services over an internet protocol based telecommunication network which enables the creation of communication services in the form of short messages, voice calls, video calls, online chatting, financial and commercial transactions, data storage and collection, games, social networking and media and their derivatives;


2.Content Services over the Internet


It refers to all forms of digital information consisting of writing, sound, images, animation, music, video, films, games or combination of part and/or all of the above including those of which are streamed or downloaded, by using telecommunication services via an internet protocol-based telecommunication network;


3. Application Service Providers and/or Content Over Internet (Over the Top), (“OTT Service Provider”)


It is the provider of Application Services over the Internet and/or providers of Content Services over the Internet;


 


Indonesian national or entity as well as foreign national or entity is able to undertake the business of providing application and/or contents over the internet. In case foreigner, it must establish and register a business entity for the purpose of undertaking such business. Foreigner may establish a fully operational foreign investment company or a permanent establishment.


 


Permanent Establishment


The term of permanent establishment or Badan Usaha Tetap (“BUT”) is introduced in Indonesian taxation laws. Income Tax Law defines BUT as an establishment used by an individual/entity who does not reside in Indonesia, an individual who has been present in Indonesia for not more than 183 (one hundred and eighty three) days within any period of 12 (twelve) months, or an entity which is established outside Indonesia and is not domiciled in Indonesia but conducting business or carrying out activities in Indonesia.


The activity undertaken by a permanent establishment must be performed more than sixty days within twelve consecutive months. The form of permanent establishment pursuant to Income Tax Law jo Circular Letter 4/2017 may be as (1) management office, branch office, representative office, office building, factory, workshop, warehouse/storage facility, marketing and promotion space; (2) mining and exploration, oil and gas contract of work; (3) fishery, farmhouse, agriculture, plantation or forestry; (4) construction project, installation or assembling; (5) service provider of any kind by an employee or others; (6) person or entity acting as dependent agent.


To be categorized as permanent establishment, an entity must have a place of business that may be in the form of premises, facilities or installation; such place of business is fixed or permanent; such fixed place of business is utilized to undertake business activity in Indonesia;


BUT is divided into 3 (three) parts i.e (1) a place owned, hired, or used by a foreign tax subject to conduct business or carrying out activities in Indonesia; (2) any kind of services provided by employees or any other persons, provided that the services were done in more than 60 (sixty) days within a period of 12 (twelve) months;  (“BUT Services Provider”); (3) an individual or entity acting as a dependent agent (“BUT Agent”).


The permanent establishment covers the place where the whole of the place fulfills the requirements as a permanent establishment, provided that it is permanent and is used to conduct business or conduct activities of foreign tax subject. BUT Services Provider and BUT Agent shall not require the existence of a permanent establishment. An OTT Service Provider falls under category 1 whereas foreign tax subject is carrying out activities in Indonesia.


Despite Income Tax Law categorizes permanent establishment as a foreign tax subject, Ministry of Finance treats permanent establishment undertaking a business as OTT service provider in Indonesia, as domestic tax subject. It states that the determination of taxation rights on the taxable income of a foreign tax subject derived from a partner country or jurisdiction of a double tax treaty[1] partner is based on the existence of a permanent establishment. Profit received or obtained from business or activity by a foreign tax subject may only be tax imposed in Indonesia as long as the business or activity of the foreign tax subject is conducted through a permanent establishment in Indonesia.


A permanent establishment may be in the form of management office, branch office, representative office, etc. Based on Indonesian legal terms, management office and representative office are all considered as foreign company representative office.


 


Foreign Company Representative Office


It is a representative of an overseas company. It usually has limited functionality and generally is prohibited from directly engaging in operational activities; signing contracts; issuing official invoices; receiving payments from its clients; and directly engaging in any other profit generating activities.


In addition to the limited activity, KPPA and KP3A can only exist for a definite period of time.


Fully operational foreign investment company (“PT PMA”) on the other hand is allowed to undertake unlimited legal business activity for indefinite period of time.


Considering business model of most OTT service providers – providing service of digital content – and the lack of regulation, a permanent establishment will be sufficient to meet the requirement.


Author:    
Marini Sulaeman    
Managing Partner m.sulaeman@legisperitus.co.id

Vania Zerlinda
Associatev.sebayang@legisperitus.co.id 


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