Understanding Tax Treatment of Representative Offices in Indonesia

By Winnindo Business Consult
Editor: Mourme Taruna Halim 

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 a taxation perspective however, Indonesian tax authorities have a specific regulation for ROs regarding their tax treatment. This allows officials to determine if ROs are likely to facilitate the generation of profits for their parent company as a result of activities in Indonesia. A ruling of tax liability can be levied despite revenues being paid directly to parent companies in other countries by individuals in Indonesia.

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 tax regulations guiding indirect profits of representative offices, ROs are categorized as taxpayers that must use the special metric of gross export value when calculating corporate income tax liability. Gross export values are the revenues of a foreign company that has a representative office in Indonesia derived 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.

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