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Indonesia Issues Guidance for Online Licensing Service

The Indonesian Investment Coordinating Board (“BKPM”) on April 1, 2020, issued BKPM Regulation No. 1 of 2020 regarding Guidelines for the Implementation of Electronic Integrated Licensing Services (“BKPM Reg. 1/2020”).

The BKPM issued this regulation as part of its authority to provide guidance on business licensing services through the Online Single Submission System (the “OSS System”) under Article 94(1) of Government Regulation No. 24 of 2018 regarding Electronic Integrated Business Licensing Services (“GR 24/2018”) and Presidential Instruction No. 7 of 2019 regarding Acceleration of Ease of Doing Business.

With the issuance of BKPM Reg. 1/2020, the BKPM has set the norms, standards, procedures and criteria for the business licensing framework through the OSS System, as presently governed under BKPM Regulation No. 6 of 2018 regarding Guidelines and Procedures for Capital Investment Licensing and Facilities, and its amendment, BKPM Regulation No. 5 of 2019. BKPM Reg. 1/2020 does not revoke or amend any past BKPM regulations.

Scope of New Regulation

BKPM Reg. 1/2020 covers:

a. Services relating to:

i. access right to the OSS System;
ii. issuance of Business Registration Number (Nomor Induk Berusaha or “NIB”);
iii. business license;
iv. issuance of licenses related to business infrastructure;
v. representative offices; and
vi. other services relevant to business licensing.

b. Supervision of business licensing compliance.

Noteworthy Provisions

With 69 articles, BKPM Reg. 1/2020 provides technical guidance on the application for and the issuance of business licenses through the OSS System and a legal basis for new features implemented in OSS System version 1.1.

BKPM Reg. 1/2020 contains provisions applicable to all businesses, foreign and domestic, individuals or entities. However, we will limit our discussion here to provisions relevant to foreign investment. In that context, below are some of the more noteworthy provisions in BKPM Reg. 1/2020.

  • a. Minimum total investment value. In general, the BKPM requires a minimum total investment value of more than IDR 10 billion (excluding land and buildings) for each line of business per project location as determined by the five digits of its Indonesian Standard Business Classification (Klasifikasi Baku Lapangan Usaha Indonesia or “KBLI”) number.This means that if a foreign investment company, typically referred to as a PT PMA, intends to engage in the mining services business under KBLI No. 09900 and wholesale trading of office and industrial machinery, spare parts and paraphernalia, which falls under KBLI No. 46591, the total investment value of that company must be more than IDR 20 billion. Or if a PT PMA operates as a data center service provider under KBLI No. 63112, but does so in Jakarta, Surabaya, and Medan, the total investment value of that company must be more than IDR 30 billion because it has three separate project locations.

    This has long been an unwritten policy of the BKPM, albeit with inconsistent enforcement, and has now been made an express requirement under this new regulation.

    The BKPM provides the following exceptions for wholesale trading, food and beverages, and construction business activities:

1. For wholesale trading, the BKPM requires an additional minimum total investment value of more than IDR 10 billion if a PT PMA engages in wholesale trade activities under KBLI classification numbers whose first two digits are different. For example, if a PT PMA engages in wholesale trading of office and industrial machinery, spare parts and paraphernalia under KBLI No. 46591, and wholesale trading of new cars under KBLI No. 45101, the PT PMA will be required to have a minimum total investment value of more than IDR 20 billion because the first two digits of the KBLI numbers are different. In contrast, if a PT PMA engages in wholesale trading of bread products under KBLI No. 46332 and wholesale trading of confectionary items under KBLI No. 46331, the PT PMA will not be required to have a minimum total investment value of more than IDR 20 billion.

2. For food and beverage services that are open to foreign investment, the BKPM requires an additional minimum total investment value of more than IDR 10 billion only for project locations that are not in the same regency or city.

3. For construction services that are open to foreign investment, the BKPM requires an additional minimum total investment value of more than IDR 10 billion only if the business activity is not part of one activity. BKPM Reg. 1/2020 does not offer an explanation as to what constitutes one activity. However, in our discussions with a BKPM official, we were informed that this means an additional total investment value of more than IDR 10 billion would be required for each construction project/work. We note, however, that this view is far from official policy and is subject to change as the BKPM begins to put this regulation into actual practice.

Interestingly, the above total investment value requirement is being imposed on PT PMAs that obtained their license on or after the effective date of GR 24/2018, which was June 21, 2018, not after the effective date of BKPM Reg. 1/2020 itself. A possible explanation for this is that the BKPM intended to expressly impose this investment value requirement with the introduction of the OSS System by GR 24/2018, but the system was not yet capable of such implementation and now the BKPM is playing catch up with the rollout of the upgraded OSS System version 1.1.

  • b. NIB can be revoked. BKPM Regulation No. 7 of 2018 regarding Procedure and Guidance for the Supervision of Investment Implementation discusses the revocation of business licenses as one of the administrative actions the BKPM can take in its supervisory role, but it does not contemplate the revocation of NIBs.Under BKPM Reg. 1/2020, the BKPM can revoke a PT PMA’s NIB if it finds that the company has conducted business activities that are inconsistent with its NIB or has violated any provisions of prevailing laws and regulations, or if the PT PMA’s NIB is declared voided or invalid based on a binding court decision and/or the PT PMA requests the revocation of its NIB.
  • c. Main project and supporting project. Under OSS System version 1.1 and BKPM Reg. 1/2020, a PT PMA can now separate business activities into main project and supporting project. A business activity is considered to be a supporting project if it:1. falls under a different KBLI number than the main project;
    2. is intended only to support the main project;
    3. is not utilized to generate revenue; and
    4. is carried out in accordance with the applicable laws and regulations.

    A PT PMA is required to fulfill the commitments under both the main project and supporting project, although only the main project is used to determine the minimum total investment value.

  • d. Business licenses and commercial or operational licenses. BKPM Reg. 1/2020 addresses business licenses and commercial or operational licenses at length, particularly the technical details of fulfilling commitments related to the licenses. BKPM Reg. 1/2020 divides business licenses and commercial or operational licenses into four categories, depending on the commitments the PT PMA must fulfill to effectuate the relevant license. BKPM Reg. 1/2020 also changes the format of business licenses and commercial or operational licenses issued under BKPM Reg. 1/2020.BKPM Reg. 1/2020 also specifies measures to be taken by the BKPM in the event of incompliance by a PT PMA.

    e. BKPM to issue registration and licenses as well as NIB for representative offices. The BKPM now issues registration and licenses for all types of representative offices – foreign company representative office (KPPA), foreign trade company representative office (KP3A), foreign construction company representative office (BUJKA), foreign franchisor and foreign futures traders. A representative office is also required to obtain an NIB, in addition to the appropriate registration or licenses.

    Conclusion

    Through the issuance of BKPM Reg. 1/2020, it appears the BKPM is trying to minimize uncertainty in the licensing process. It remains to be seen, however, whether OSS System 1.1 itself and the enforcement in the field will raise more questions than BKPM Reg. 1/2020 can answer.

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.

Indonesia Targets Taxation of Tech Companies to Boost Economy

Indonesia is set to tax tech companies that may or may not have a legal presence in the country, as electronic transactions and the use of streaming services and online telecom apps have increased notably during the COVID-19 pandemic.

The legal basis for this measure is the recently enacted emergency bill Government Regulation in Lieu of Law No. 1 of 2020 regarding State Financial Policy and Financial System Stability for the Management of the Coronavirus or COVID-19 Pandemic and/or in Facing Threats to the National Economy and/or Financial System Stability (“GR 1/2020”).

Collection of VAT

Article 6 of GR 1/2020 states that the government will collect value-added tax (“VAT”) for intangible taxable goods and/or taxable services from outside Indonesia which are utilized in the country through electronic system trade activities, in accordance with Law No. 8 of 1983 regarding Value-Added Tax for Goods and Services and Sales Tax on Luxury Goods, as lastly amended by Law No. 42 of 2009. This VAT will be collected, deposited and reported by foreign traders, foreign service providers, foreign electronic trading system providers and/or domestic electronic trading system providers appointed by the Minister of Finance. These parties can appoint representatives domiciled in Indonesia to collect, deposit and report the VAT.

Procedures for the appointment of representatives and for the collection, deposit and reporting of the VAT are further regulated under Minister of Finance Regulation No. 48/PMK.03/2020 regarding Procedures for the Appointment of Collectors and for the Collection, Deposit and Reporting of VAT for the Use Inside the Customs Area of Intangible Taxable Goods and/or Taxable Services from Outside the Customs Area through Electronic System Trade Activities (“MOF Reg. 48/2020”).

Collection of Income Tax

The government will also collect income tax from foreign traders, foreign service providers and/or foreign electronic trading system providers that have a significant economic presence in Indonesia. The determination of “significant economic presence” is based on the consolidated gross turnover of the business group, sales in Indonesia, and number of active users on digital media in Indonesia. The threshold for these criteria are to be further regulated in a Minister of Finance regulation. A party that meets the threshold for a significant economic presence in Indonesia will be treated as a permanent establishment and subject to income tax.

If foreign traders, foreign service providers or foreign electronic trading system providers are determined to have a significant economic presence in Indonesia but cannot be treated as permanent establishments due to the application of agreements with other governments in the context of avoiding double taxation and the prevention of tax evasion, they will be subject to an electronic transaction tax.

Such income tax or electronic transaction tax is to be paid and reported by the foreign traders, foreign service providers and foreign electronic trading system providers. Similar to the VAT payment, parties are allowed to appoint representatives domiciled in Indonesia to fulfil their income tax or electronic transaction tax obligations.

The rate for the income tax or electronic transaction tax, its calculation, the procedures for tax payment and reporting, and the procedures for the appointment of representatives to fulfil tax obligations are to be further regulated by Minister of Finance regulation.

Sanctions

Foreign companies that do not comply with the above provisions are subject to administrative sanctions and could also have access to their apps blocked by the Minister of Communication and Informatics.

As the government implements large-scale social distancing restrictions and businesses apply work from home policies, the number of users of streaming services and online meeting apps has increased markedly.

The government has for years been aiming to collect taxes from foreign tech companies that enjoy significant revenue from Indonesia, but to no avail. It has been a struggle because of these companies’ lack of a physical presence in Indonesia, with prevailing tax regulations only covering companies domiciled in the country or those that can be considered permanent establishments.

This is a loophole in the era of the cross-border digital economy that GR 1/2020 tries to address. As noted by Indonesian Finance Minister Sri Mulyani Indrawati, under the new regulation a permanent establishment would no longer be defined solely on physical presence. Consequently, even if foreign tech companies do not open an office in Indonesia, they would still have tax obligations if they established a significant economic presence in the country.

For example, it has been reported that, pursuant to MOF Regulation 48/2020, the government will impose a 10% tax on subscription fees for streaming apps starting July 1, 2020.

Status of GR 1/2020 

It appears that these efforts to tax foreign tech companies will continue after the COVID-19 pandemic ends. Pursuant to Law No. 12 of 2011 regarding the Formulation of Laws and Regulations, as amended by Law No. 15 of 2019, an emergency bill must be submitted to the House of Representatives for approval. If it is approved by the House it will then become a law, and if it is rejected, the emergency bill will be revoked.

In this regard, the House has approved the adoption of GR 1/2020 as a law, resulting in the promulgation of Law No. 2 of 2020 regarding Stipulation of GR 1/2020 regarding State Financial Policy and Financial System Stability for the Management of the Coronavirus or COVID-19 Pandemic and/or in Facing Threats to the National Economy and/or Financial System Stability, This new law is effective as of May 18, 2020. (May 20, 2020)

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.