Newsflash on Permanent Establishment for Foreign OTT Providers
On February 6, 2017, the Director General of Tax stipulated Circular Letter No. 04 of 2017 on the Determination of Permanent Establishments for Foreign Tax Subjects Which Are Providers of Applications and/or Content Services Through the Internet. This Circular Letter is intended to provide guidance and uniformity in determining Permanent Establishment status as regards Foreign Tax Subjects that provide Over-The-Top (“OTT”) Services in Indonesia.
♦ OTT Services
OTT Services comprise internet-based applications and content services, which are defined as follows:
- Internet Based Application Services (Layanan Aplikasi Melalui Internet) is the utilization of software that allows communication services in the form of short texts, voice calls, video calls, electronic mail, chatting/instant messaging, financial and commercial transactions, data storage and retrieval, games, social media networks, and their derivatives that utilize Internet access through a telecommunications network provider; and
- Internet Based Content Services (Layanan Konten Melalui Internet) is the provision of digital information, which may be in the form of writings, voices, images, animation, music, video, film, games, or a combination or parts of all of the above, including in forms that are streamed or downloaded by utilizing telecommunications services through a telecommunications network provider.
♦ Permanent Establishments Under the Income-Tax Law
A Permanent Establishment is an enterprise that is used by an individuals who are not domiciled in Indonesia, individuals who are domiciled in Indonesia for not more than 183 days within a 12-month period, and corporations that are neither established nor domiciled in Indonesia, but that operate businesses or activities in Indonesia. Permanent Establishments can take three forms:
The treatment of Income Tax for Permanent Establishments is the same as that of Domestic Tax Subjects set out under Article 17 of the Income-Tax Law, which is currently 25%. Income Tax may be withheld, as regulated under Article 26 (1), (2) and (2a) of the Income-Tax Law, regardless of the physical presence of the Foreign Tax Subject’s Permanent Establishment within the territory of Indonesia.
♦ Double Taxation Treaties
In general, under the Avoidance of Double Taxation Treaties between the Government of Indonesia and Partnering Countries, profits that are received or accrued from a Foreign Tax Subject’s businesses or activities may only be taxable in Indonesia if the Foreign Tax Subject’s businesses or activities are operated through a Permanent Establishment in Indonesia. A Permanent Establishment is a fixed place of business through which all or part of a business is carried on. This definition outlines the following requirements:
- A place of business, which may be in the form of premises, facilities, or installation;
- the place of business is fixed or permanent in nature; and
- such fixed place of business is used to operate business or activities in Indonesia.
Determination of a Permanent Establishment in the form of servers in Indonesia may be implemented as long as the Foreign Tax Subject operates business or activities through such servers. A Permanent Establishment may take the form of services provision in any medium and be performed by employees or other parties in Indonesia, subject to fulfillment of the time test requirements under the applicable Double Taxation Treaty between Indonesia and the Partnering Country, or their dependent agents in Indonesia, which have the authority or perform activities regulated under the Double Taxation Treaty. Determination of a Permanent Establishment in Indonesia shall consider that the business or activities performed by the Foreign Tax Subject are not preparatory or auxiliary activities.
♦ Permanent Establishment for Foreign Tax Subjects providing OTT Services
A Permanent Establishment for a Foreign Tax Subject who provides OTT Services may be in the form of:
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- May 20, 2017