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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:

1. 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
2. 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:

1. A place of business, which may be in the form of premises, facilities, or installation;
2. the place of business is fixed or permanent in nature; and
3. 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:

May 2017

Copyright © 2017 AKSET. All rights reserved.

by Bonar

New Minimum Wage for Certain Sectors for DKI Jakarta Province

The Governor of DKI Jakarta Province stipulates a new provincial sectoral minimum wages (“UMSP”) that apply to certain sectors in DKI Jakarta Province under the Governor Regulation No. 20 of 2017 dated February 14, 2017 on Provincial Sectoral Minimum Wages for 2017 (the “Regulation”). The Regulation stipulates 3 (three) following sectors that have to comply with the UMSP which shall be applied retroactively as of January 1, 2017:

1. Chemicals, Energy, and Mining;
2. Metals, Electronics, and Machinery; and
3. Pharmaceuticals and Health.

It is mandatory for every employer in DKI Jakarta Province that engages in the abovementioned sectors to comply with the UMSP under the Regulation for all employees whose work period is less than 1 year. If the work period is more than 1 year, the monthly salary shall be determined between the employee and the employer.

Pursuant to the Regulation, the abovementioned sectors wage in DKI Jakarta Province are adjusted upward from the previous monthly wages under the Governor Regulation No. 8 of 2016 dated January 13, 2016 on Provincial Sectoral Minimum Wages for 2016, as elaborated in the following table.

March 29, 2017

Copyright © 2017 AKSET. All rights reserved.

by Bonar

Tax Amnesty Reporting Provisions Changed

On September 23, 2016, the Ministry of Finance issued Regulation Number 141/PMK.03/2016 (“Amendment”) amending Regulation Number 118/PMK.03/2016 (“MOF Reg. 118/2016”) concerning the Implementation of Law Number 11 of 2016 on Tax Amnesty. Tax Amnesty is designed to increase State revenues by facilitating payment of back taxes. The purpose of the Amendment is to further encourage the reporting of undeclared assets by easing certain reporting obligations.

♦  Change of Reporting Period

Pursuant to Article 38(2) of the Amendment, taxpayers participating in Tax Amnesty shall submit annual reports for a period of three years following:

• transfer and investment realization of additional assets from foreign countries; and
• placement of additional assets within the territory of the Republic of Indonesia.

The purpose of the reports is to track the assets and ensure they are not transferred outside the jurisdiction of Indonesia to avoid taxation. Previously, under MOF Reg. 118/2016, reports were to be submitted semiannually.

♦  Submission to Tax Office and Reporting Period

Reports shall be submitted to the Tax Office where the taxpayer is registered using the forms provided in attachments L and M of MOF Reg. 118/2016. Submission deadlines are the same as for the Yearly Income Tax Notification Letter (Surat Pemberitahuan Tahunan Pajak Penghasilan), as follows:

• Individuals: (i) March 31, 2017, (ii) March 31, 2018, (iii) March 31, 2019
• Business Entities: (i) April 30, 2017, (ii) April 30, 2018, (iii) April 30, 2019.

Taxpayers who participate in the last batch of the Tax Amnesty program (with deadline of March 31, 2017), shall be obliged to submit the reports in 2018 and 2019.

♦  Sanctions for Delay

The Amendment does not change the applicable sanctions for delay or failure to file annual Tax Amnesty reports.

Pursuant to Article 40(4) of MOF Reg. 118/2016, the Directorate General of Tax through the Head of the local Tax Office will first issue a warning letter. After receiving the warning letter, the taxpayer must reply with the delayed report within 14 working days, failing which, the taxpayer will be eliminated from the Tax Amnesty program and will be sanctioned in the amount of 2% of the total income tax owed for 2016.

March 28, 2017

Copyright © 2017 AKSET. All rights reserved.

by Bonar

Gross Split Production Sharing Contracts

On January 16, 2017, the Minister of Energy and Mineral Resources issued Regulation No. 8 of 2017 dated regarding Gross Split Production Sharing Contracts (“MEMR Reg. 8”). MEMR Reg. 8 partially revokes MEMR Regulation No. 38 of 2015 regarding Acceleration of Non-Conventional Oil & Gas Business, which remains in force, except for provisions related to Production Sharing Contracts (“PSCs”) using a Gross Split sliding scale.

As opposed to the long-existing cost-recovery model for PSCs, under which oil and gas contractors are entitled to recover certain production expenses before sharing the revenues with the Government, the Gross Split approach determines the allocation of production sharing between the Government and a contractor from the beginning (base split).

♦  Minimum Requirements and Provisions for Gross Split PSCs

Gross Split PSCs must adhere to the following principles:

• Ownership of oil and gas resources must be retained by the Indonesian Government up to the delivery point;

• Operational management shall be controlled by the Special Task Force for Upstream Oil and Gas Business Activities (“SKK Migas”); and

• The contractor must bear the entire capital investment and risk of the project.

There are 17 basic provisions that must be stipulated in a Gross Split PSC, including the following:

• Government’s take;
• Work Area and relinquishment;
• Expenditure obligations;
• Transfer of ownership of produced oil and gas;
• Environmental protection;
• Workplace health and safety;
• Prioritization of Indonesian manpower and domestic goods and services;
• Community development; and
• Domestic market obligation.

♦  Production Sharing Allocation

In an oil Gross Split PSC, the Government share is 57%, while 43% belongs to the contractor. In a gas Gross Split PSC, the Government share is 52%, while the contractor receives 48%.

The production sharing allocation may be adjusted depending on “variable” and “progressive” components that may impact business prospects. The variable components consist of, among others, the status of the Working Area, the site location, availability of supporting infrastructure, and the physical content/quality of the oil or gas reserves; while the progressive component consists of oil price and cumulative oil and gas production.

In order to incentivize production when investment returns might be low, the government can award the contractor an additional 5% allocation. On the other hand, if returns exceed certain economic criteria, the Government will be entitled to an additional 5%.

♦  Revenue Calculation

The Government’s take under the contract shall be calculated with respect to the Government’s share of the oil and gas proceeds, bonuses, and direct and indirect taxes paid by the contractor.

The contractor’s take includes the contractor’s proportion based on the gross production percentage, after being deducted by income tax. Whereas operational costs are deducted off the top in a cost recovery method PSC, under the Gross Split system, operational costs may only be used to reduce the contractor’s taxable income.

♦  Domestic Market Obligation

PSC contractors must hand over 25% of their oil/gas production to the Government for domestic use, which  will be repaid by the Government based on the recent Indonesian crude oil price as the benchmark.

♦  Transfer of Ownership

After a Gross Split PSC ends, all of the assets held by the contractor that had been used to carry out its activities under the contract must be transferred to, and will be managed by, SKK Migas. Those assets will then be state-owned assets. This includes all lands that had been acquired by the contractor, except for lands under a land lease arrangement.

♦  Obligation to Use Gross Split Method

Using the Gross Split method in a PSC is not mandatory for existing PSCs; rather it becomes mandatory for new PSCs and expiring PSCs that are not being extended by the parties. The obligation to enter into a Gross Split PSC applies to future contractors that will operate the same Work Area. For expiring PSCs that want to be extended, the Government will determine whether to use cost-recovery or to convert to the Gross Split method.

Expired PSCs that were extended before the issuance of this regulation may continue using an existing cost recovery method. The decision to use the Gross Split method will be up to the contractor. The same applies to new PSCs that had been executed before the issuance of MEMR Reg. 8.

Copyright © 2017 AKSET. All rights reserved.

by Bonar

Foreign NGOs Regulated Further

To further regulate the permits and validation of nongovernmental organizations (NGOs) established by foreign parties, as stipulated under of Law No. 17 of 2013 on Social Organizations, the Government of Indonesia has issued Regulation No. 59 of 2016 on Social Organizations Established by Foreigners.

♦  Regulated Organizations

The regulation applies to organizations established by foreigners that are formed as:

1. Foreign Foundations, or similar designation, headquartered in a country that has diplomatic relations with Indonesia. These may either manage their funds independently or serve as Implementing Agencies to implement programs on behalf of a foreign donor.
2. Indonesian foundations (yayasan) established by foreign citizens or foreign citizens together with Indonesian citizens.
3. Indonesian foundations (yayasan) established by foreign entities.

Both independent Foreign Foundations and Implementing Agencies shall be registered at the Ministry of Foreign Affairs (“MOFA”). They will be assigned to cooperate with a specific technical ministry or government institution. For example, an organization working on deforestation may be assigned to cooperate with the Ministry of Environment and Forestry.

♦  Permits Required

In order to operate in Indonesia, Foreign Foundations must obtain the following permits:

1. A principal license issued by the MOFA after obtaining consideration from the Permit Team, which consists of various ministries and government institutions. A principal license is valid for up to three years and can be extended; and
2. An operational license based on a memorandum of understanding (MOU) between a Foreign Foundation and the technical ministry/institution designated by the Permit Team and an annual work plan with the local government. The work plan is not required for Foreign Foundations whose only work will be with the cooperating ministry/institution. Foreign Foundations that already have an MOU and annual work plan with the local government shall be deemed to have an operational license. The validity of an operational license may not exceed the validity period of the principal license.

Indonesian foundations formed by foreign citizens (with or without Indonesian citizens) or by foreign legal entities must obtain a consideration from the Permit Team before being registered as legal entities with the Ministry of Law and Human Rights. The point of requesting the consideration is to ensure that the organization’s purpose and objectives align with the welfare of Indonesians and social good.

♦  Limitations on Personnel

A Foreign Foundation may assign a maximum of three foreign national staff members to support its activities in Indonesia. Prior to the assignment, the Foreign Foundation shall submit an application for assignment of foreign staff to the ministry/government institution designated by the MOFA. The assignment of foreign staff shall not exceed five years, which may be extended, subject to the provisions of prevailing laws and regulations on manpower and immigration.

Indonesian foundations established by foreign citizens (with or without Indonesian citizens) or by foreign legal entities that intend to employ foreign personnel shall adhere to prevailing laws and regulations on manpower and immigration.

March 2, 2017

ARFIDEA KADRI SAHETAPY-ENGEL TISNADISASTRA

Copyright © 2017 AKSET. All rights reserved.

by Bonar