• Understanding Tax Treatment of Representative Offices in Indonesia

    By Dezan Shira & Associates

    26-05-2016

    In early April 2016, Indonesia Tax Authority indicated that Google Indonesia, Yahoo Indonesia, Facebook Singapore Pte Ltd and Twitter Asia Pacific Pte Ltd were avoiding tax in Indonesia.

    Among the four companies, Facebook and Twitter are established in Indonesia in form of Representative Offices (RO). This article will not analyze the pros and cons of the representative office compared to other investment vehicles, but instead will focus on application of tax regulation to representative offices; and highlight regulations that caused tax authorities to target Facebook and Twitter.

    Limitations on Representative Offices

    Looking to the purpose of the representative office in Indonesia, it is common for overseas companies to utilize this investment vehicle as a means of entering the Indonesian market for the first time. Potential investors, and particularly those with limited resources, such as startups, often need to explore Indonesia’s business environment to ensure that future operations can be carried out effectively.

    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.

    Tax Treatment of Representative Offices

    According to current regulations, ROs are restricted from generating profits and often do not end up paying corporate income tax. As a result, ROs established in Indonesia often think that their tax compliance can be achieved solely in the form of conducting withholdings and paying their employee income tax. From taxation perspective however, Indonesia tax authorities have a specific regulation for ROs regarding their tax treatment. This allows officials to determine if ROs are likely to generate profit as a result of their activities in Indonesia, or from their customers in Indonesia, despite revenues being paid directly to parent companies in other countries.

    In the case of Twitter and Facebook, Authorities indicated that their respective RO’s were in fact generating profit from doing business in Indonesia. The basis of this profit was said to be primarily in the form of advertising revenues. While the companies did not receive payment in Indonesia, it was pointed out that Indonesian customers paid service fees directly to respective parent companies of the RO’s in Singapore. On the basis of these transactions, the ROs were found to be liable for corporate income tax and value added tax relating to service delivery in Indonesia.

    According to special tax regulations for representative offices, ROs are categorized as taxpayers that must use special metrics when calculating corporate income tax liability. A key area of compliance for ROs is that of gross export value. Gross export values are overall or revenues of a foreign company that has a representative office in Indonesia, and whose revenues come from good or service deliveries to persons or corporations which are located in Indonesia. The applied rate for gross export values is 0.44 percent. For ROs of foreign companies which come from a country that has Tax Treaty with Indonesia, the corporate income tax rate should follow branch profit tax rates according to the tax treaty.

    We strongly suggest each RO in Indonesia, especially for technology based startup companies, to institute prudent procedures to comply with related tax regulations. All firms considering investment within the country should be sure to conduct a careful review of their opportunities and maintain a clear understanding of regulatory responsibilities. In the event that questions arise, relevant government officials or professional services should be contacted to ensure compliance.

    This article was first published on www.aseanbriefing.com.

    Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia's complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

    For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

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