Characterization of transaction
This definition covers a scenario where an independent cloud service provider supplies a service to an unrelated party and the applications, storage, and other resources are made available to the general public by a service provider. The provider will compete with other providers to optimize profit and market share.
To establish and provide the cloud computing service, an onshore provider should obtain permission from related government bodies such as the Indonesian Investment Board ((BKPM) - to obtain the principal license) and the Minister of Communication and Information.
The income received by the onshore provider (including income received as a permanent establishment (PE)) may be subject to withholding tax if it is paid by an Indonesian withholding tax agent (most corporate taxpayers, including government agencies, are considered to be withholding tax agents).
The payment to the onshore provider for the cloud service is deemed to be a royalty payment if the following conditions are met:
- The use or right to use copyright in the fields of literature, arts or scientific works, patent, design or model, plan, formula or secret process, trademark, or intellectual /industrial property right or other similar rights.
- The use or right to use industrial, commercial or scientific equipment/tools.
- There is a waiver of right entirely or partly related to the use or granting of intellectual /industrial property right or other rights.
The income for royalties is subject to 15 percent withholding tax, which is a prepaid corporate tax for the onshore service provider.
If the service is not deemed to be a royalty, then the income received is considered to be a rental fee and/or maintenance service, and is subject to withholding tax of 2 percent. This withholding tax can also be credited against the provider’s annual corporate income tax.
Onshore service providers are obliged to register as a VAT (Value Added Taxable company (except when the annual revenue is less than Indonesian Rupiah (IDR) 600 millions)) and impose 10 percent VAT on the royalty fee, rental fee and maintenance service fee charged to customers. This obligation includes charges to offshore customers.
With the exception of offshore customers and non-local VAT-able companies, the 10 percent VAT charged by the onshore service providers is a credit and can be claimed against VAT output/payable.
Non-resident service providers can be deemed to be a PE if the services are provided by an employee or any other persons in Indonesia for more than 60 days within a period of 12 months.
Indonesia tax laws state that income received by non-residents (including income from resident withholding tax agents for cloud computing services) is subject to withholding tax of 20 percent. This rule does not apply if the service is provided by a PE of the non-resident service providers.
Indonesian tax laws state that utilization of offshore services is subject to self-assessed VAT of 10 percent; the onshore service recipient is obliged to comply with this requirement. The requirement to self-assess the VAT also applies to payments for royalties; rental fees and other services relate to cloud computing.
This 10 percent self-assessed VAT liability is a VAT prepayment for the Indonesian payers and can be credited against their VAT output/payable.
A non-resident cannot register for VAT purposes in Indonesia.
Characterization of transaction
This definition covers a group that has several subsidiaries/branches. The group, and establishes an internal cloud service provider that only provide services to group companies, either by establishing a separate entity or using an established entity to provide the service. This internal group service provider has a different objective to an independent service provider.
Most internal service providers are not established solely to generate profit, but to have a standardized process and single data storage that creates efficiencies in group-level operation process. In addition, internal service providers may also be utilized for other functions such as help desk, security operations, security management, service support, technology information management and service quality control.
The VAT and withholding tax obligations are the same as described for the “Onshore provider” and the “Non-resident provider” (please see above).
Corporate income tax
A PE and/or other offshore branches are considered to be part of the head office; therefore payment made by the PE to its head office or its offshore branches is a turnover of funds in one entity. Consequently, payments made by the PE to its head office or its offshore branches (in the form of royalties or other compensation for services) are not a deductible expense for corporate income tax calculation purposes.
However, where the charges for cloud computing activity are included in the head office’s administrative cost allocated to an Indonesian PE, then these charges can be deductible when calculating corporate income tax payable, subject to certain requirements.
For corporate taxpayers, the group charges for cloud computing are normally deductible; however, this will be subject to a review on the reasonableness of the charges.
The application of the reduced withholding tax rate and PE requirements are subject to: the availability of tax treaty relief; and the eligibility of the recipient to apply for such relief. If the tax treaty is applied, withholding tax can be reduced from 20 percent (the local withholding tax rate) to 10 percent or 15 percent depending on the tax treaty provisions.
In order to apply tax treaty provisions, a valid certificate of domicile/residency (COD) must be made available, using a standard form issued by the Indonesian Tax Authority. The COD needs to be completed by the offshore income recipient, validated by its local competent tax authority, and sent to the Indonesian company. In the absence of this form, the standard domestic withholding tax rate of 20 percent applies.
The tax treaty benefit will be denied in the event of treaty abuse, where the transaction is not considered to have economic substance. Further guidance on this issue is included in the “Related party transaction” section.
Related party transactions
The transfer pricing environment in Indonesia has changed rapidly and the latest transfer pricing regulations are now mostly in line with the Organization for Economic Co-operation and Development (OECD) guidelines. These new regulations also stipulate that in the case of domestic transactions (i.e., those involving, onshore providers) no transfer pricing documentation is required unless the service provider and recipient are subject to a different tax rate. This issue could become more pertinent once the new tax holiday regime takes off. However, the Indonesian Tax Office (ITO) could still question the domestic related-party transactions, even if no documentation is required. Furthermore, adjustments to the value of the transaction do not lead to corresponding adjustments on the other side of the transaction, in particular when both taxpayers fall under the jurisdiction of different tax offices.
Transfer pricing documentation is only required for transactions between domestic taxpayers (including a PE) and offshore related parties if the total transactions with the service provider exceed IDR 10 billion (approximately USD 1.1 million). However, as with domestic transactions, the taxpayer should be prepared for challenges from the ITO.
The ITO is extremely wary of services transactions and often scrutinizes them. It will require proof that the services have been rendered and that they benefit the Indonesian service recipient. In some cases, evidence of the cost base has also been requested. To defend against these ITO challenges, the taxpayer should maintain adequate transfer pricing documentation.