Google and Facebook, Income Tax and VAT Issues on Taxation of Foreign Digital Company in Indonesia

Could Indonesia tax Foreign Digital Company for both direct and indirect tax?  For Google, the current regulation for tax office to tax Google’s income in Indonesia seems not applicable. The Indonesia’s tax authority is still on the quest to require foreign digital company to collect VAT.

Facebook and Google, as well as most digital companies in Indonesia, have similar business activities and presence in Indonesia, hence tax treatment for these two well-known companies will effectively be applicable for the other digital companies in Indonesia even though different business model may also create different tax treatment.

How could it happen?

Foreign Digital Company, Income Tax and Permanent Establishment in Indonesia

It has been informed Google has been paying tax in Indonesia, though it is not clearly stated whether the payment has been made by Google as Permanent Establishment in Indonesia or Google as an Indonesian entity which provides supporting services to its parent company. At present, it is known that Google which has a representative office in Indonesia still has no permanent establishment in Indonesia. Hence, its income from digital services, which are mainly from advertisement, is not taxable income in Indonesia.

On the other hand, Facebook may also face the same issues since Facebook office in Indonesia is not a Permanent Establishment though it serves as representative office in Indonesia. For years, the Indonesia’s Tax Authority has been trying to ask Facebook to pay income tax in Indonesia but to no avail.

The presence of foreign digital company in Indonesia is supported by the business license provided by BKPM (Badan Koordinasi Penanaman Modal or Indonesian Investment Coordinating Board) that provides business license to foreign companies, including foreign digital company, to run its business in Indonesia. The business license allows the foreign digital company to operate a representative office in Indonesia. For tax purpose, the representative office is still registered in the tax office though the representative office is only obliged to withhold income tax for any payment, e.g. salary payment,  but there is no obligation to pay corporate income tax at all. It is  because the representative office may only  run auxiliary or preparatory activities in Indonesia hence it should not establish a Permanent Establishment in Indonesia based on the current tax treaty.

This situation may seem an opposite to the tax treatment to the representative office from trading company in Indonesia, since they could easily constitute a permanent establishment and be required to pay income tax, based on article 15 of Income Tax Law, though the status of permanent establishment (PE) of the trading company may still be debatable. Once a foreign trading company constitutes a PE in Indonesia, its income from Indonesia will be subject to final tax based on its gross income.

Foreign Digital Company, VAT and B2C Transactions

As also noted in OECD BEPS Action Plan for Digital Economy, one of the main issues is business to costumer (B2C) transactions. For business to business (B2B) transactions, the Indonesian customers, upon receiving service from a foreign digital company, may be required to collect VAT, based on reverse charge mechanism, according to article 4 of VAT Law if the customers are registered as VAT Entrepreneur.

In regards to B2C transactions, the customers are mainly not registered VAT Entrepreneur but they are required by article 3A of VAT Law to pay the VAT due on the transactions though in fact, this may be not enforceable due to various reasons. Therefore, an individual, who is not a VAT Entrepreneur is obliged to pay 10% VAT of the total payment or any amount due if the payment does not include VAT or 10/110 VAT of the payment or the amount due if the payment includes VAT. In this B2B transaction, effectively the overall burden lies on the individual customers and not on the foreign digital company. It may also not enforceable due to the procedure that the individual has to perform to pay the VAT, from using the tax payment slip until the required information needed to be disclosed in the tax payment slip.

As in Facebook as well as other foreign digital companies in Indonesia, the representative office may not be considered suitable to be registered as VAT Entrepreneur since it is not a PE and also due to the fact that the provision services are provided by the headquarter of the foreign digital company. This differing opinion results in the situation where representative office is not considered as VAT Entrepreneur hence the representative office in Indonesia is not required to collect VAT.

Is a branch, as a PE, an inseparable part of its headquarter?  Could we conclude that the representative office may meet the criteria to become a VAT Entrepreneur, therefore any digital services provided by a foreign digital company to an Indonesian customer will be subject to VAT in which the representative office in Indonesia is considered to be supplying the digital services.

This situation may become contradiction to what the Tax Court decides in a PE case where DGT was of opinion that a PE in Indonesia receiving support and administration services from its headquarter should collect VAT on reverse charge mechanism but the judges eventually decided that PE and its headquarter are one entity.  As a result, the supply of service between a branch as a PE and its headquarter is not subject to VAT. Through this case, one may argue that the provision of service provided by the headquarter might be considered to be provided through its PE.

In practice, the establishment of VAT Entrepreneur in Indonesia depends on whether a foreign company has a PE in Indonesia therefore the presence of representative office could be considered not meeting the requirement to be stipulated as VAT Entrepreneur in Indonesia. This situation may lead to more issues for applying the same VAT regulation as applied in some countries in European Union, Australia and other countries which requires the foreign digital company to be registered and collect VAT/GST for B2C transactions.


DGT still has to deal with several unsolved issues to require foreign digital company to pay tax in Indonesia for both direct and indirect tax. For income tax, the digital companies commonly have presence, with their representative office in Indonesia, though they may not constitute a Permanent Establishment in Indonesia. Regarding VAT, despite the fact that they may have office in Indonesia, the presence may not be used to stipulate that the foreign digital company be required to become VAT Entrepreneur, let alone to require foreign company that has no presence at all to collect VAT in B2C transactions in Indonesia.

For both income tax and VAT, foreign digital companies in Indonesia are likely still facing the fact that they are not obliged to pay income tax nor to collect VAT upon the services they have provided though it may change in the future once the Indonesian tax authority amends the current tax and regulation.


Author: Andreas Adoe
The author is tax professional, tax advisor and tax lecturer. Founder and Editor of who writes passionately about domestic tax issues, international tax issues as well as legal disputes in taxation. He is happy to help anyone with his tax expertise for domestic and international tax problems.

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