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Law360 (May 20, 2020, 7:37 PM EDT ) Indonesia will hit foreign companies' sales of digital products and services in the country with a 10% value-added tax starting July 1 to help pay costs of the COVID-19 pandemic, the government said.
The country's Finance Ministry published a regulation Friday saying VAT will apply to streamed music, movies and games bought on an app store by Indonesian consumers from nonresident internet companies with a significant domestic presence. VAT will also be levied on other forms of intellectual property, such as literature and artistic and scientific works, the regulation said.
The upper house of Indonesia's legislature gave final approval to the tax on April 12, fulfilling a priority of President Joko Widodo, who had introduced VAT legislation in March in connection with emergency measures to help the country cope with the pandemic. Widodo began calling for a tax on foreign digital services in 2019.
The tax will be collected by domestic digital service providers, which are appointed by the Indonesian Directorate General of Taxes, the ministry said in a statement. Further information on the criteria for these DSPs will be announced later, it added.
"Imposition of VAT on the use of foreign digital products is part of the government's effort to create a level playing field for all businesses," the statement said.
According to the regulation, VAT assessments will be based on a transaction's value or amount of internet traffic.
It added that the tax is intended in part to help close revenue gaps caused by the global outbreak of the novel coronavirus, which leads to COVID-19, a respiratory disease.
The Indonesian VAT on digital services is modeled after levies enacted in Mexico and Chile that hold large digital companies responsible for identifying taxable transactions by tracking where their customers are located, and reporting and collecting VAT.
Representatives of Netflix Inc., Spotify Technology SA and Amazon.com Inc., all of which will be affected by Indonesia's tax, didn't respond to requests for comment.
Indonesia's Finance Ministry didn't respond to a request for comment. Finance Minister Sri Mulyani Indrawati has said that imposing VAT on digital goods would ensure the government captured the shift in Indonesians' consumption patterns as they stayed home during the lockdown to curtail the spread of the virus.
In a country of nearly 270 million, Indonesia's booming digital economy was valued at $40 billion in 2019 and is expected to reach $130 billion by 2025, according to a study by Google, Singapore's sovereign investment fund Temasek Holdings and Bain & Co.
President Donald Trump's administration, after retaliating at France over that country's digital services levy, enacted in July, recently identified such taxes as barriers in U.S. negotiations with several countries and is looking to make the issue a priority of its global trade strategy. The same report from the U.S. Trade Representative's Office criticized Indonesia and other countries for maintaining policies that require American companies to store data on premises within those countries.
Nearly 140 countries from the Organization for Economic Cooperation and Development are currently negotiating the first major rewrite of international tax rules to better account for the power of big tech companies that often book profits in low-tax jurisdictions.
--Editing by John Oudens.
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