Understanding Tax Treatment of Representative Offices in Indonesia
On early April 2016, Indonesia Tax Authority indicates that PT Google Indonesia, PT Yahoo Indonesia, Facebook Singapore Pte Ltd and Twitter Asia Pacific Pte Ltd are avoiding tax in Indonesia.
Among those four companies, Google Indonesia and Yahoo Indonesia are foreign investment companies in form of limited liability Company (Perusahaan Terbatas / PT). Meanwhile, Facebook and Twitter are established in Indonesia in form of Representative Office (RO). This article will not involve on pros and cons about the corporate income tax avoidance indication, but we would focus on application insight of tax regulation for representative office; a regulation that cause Tax Authority determine that Facebook and Twitter representative offices should pay corporate income tax from the tax regulation view.
Representative office limited activities by regulation
Looking back to the purpose of representative office establishment purpose, it is common for overseas company to start their business in Indonesia by establishing a Representative Office (RO). Potential investors, and particularly those with limited resources, such as startups, may therefore need to explore the market to ensure operations are conducted in a seamless manner.
While full incorporation within Indonesia comes with costly capital requirements, many of the preliminary activities a company may wish to carry out are readily accomplished through a Representative Office (RO). Prospective investors that wish to limit due diligence to any of the following activities should strongly consider the establishment of Representative Offices over investment such as limited liability companies:
- market research and testing
- negotiating with local companies
- distributing products or services through local distributors
- promoting products or services without doing direct business activities and profit generation
A representative office in Indonesia falls under the authority of the Indonesia Investment Coordinating Board (BKPM). According to BKPM, the range of activities that may be conducted by ROs, however, are quite narrow. In particular, they may not undertake trading activities, own production facilities, or undertake operational business activities. As a result, ROs cannot accept orders, participate in tenders, sign contracts, or engage in the import, export or distribution of goods. Representative Offices are mainly reserved for firms wishing to participate in marketing, promotional, and other information gathering activities on behalf of the parent company.
ROs tax treatment from taxation view
According to ROs limited activities by regulation, actually we will assume that RO activities are not allowed to generate profit; therefore RO should not pay corporate income tax from the profit that is generated. That’s why ROs in Indonesia probably think that their tax compliance mostly just in form of withholding and paying their employee income tax, not for the corporate income tax. But from taxation view, Indonesia Tax Authority has a specific regulation for ROs tax treatment, to anticipate if the ROs are indicated to generate profit in their actual activities from Indonesia, or from their customers in Indonesia, even though the revenues are paid directly to the parent companies in other countries.
In this case, Indonesia Tax Authority indicates those Facebook & Twitter ROs generate profit from doing business in Indonesia, primarily from advertising revenues. Those companies did not receive payment in Indonesia, because all Indonesian customers paid the service fees directly to the parent companies in Singapore, and the ROs did not pay corporate income tax and value added tax of service delivery in Indonesia.
According to special tax regulation for representative office, ROs are categorized as certain taxpayers that have to use special calculation norm to calculate its corporate income tax liability, and the income tax characteristic is final tax. The tax rate is 0.44% from Gross Export Values. Gross Export Values are overall replacement values or revenues of foreign company that have a representative office in Indonesia, and the revenues come from goods or services delivery to persons or corporate which are located in Indonesia. For the RO of foreign company which come from a country that has Tax Treaty with Indonesia, the corporate income tax rate should follow Branch Profit Tax Rate according to the tax treaty.
We strongly suggest each RO in Indonesia, especially for technology based Startup Company, require prudent procedures to comply with related tax regulation. All firms considering investment within this country should be sure to conduct a careful review of their opportunities and maintain clear a understanding of regulatory responsibilities. In the event that questions arise, relevant government officials or professional services should be contacted to ensure compliance.