JAKARTA -- Overseas digital companies that have a significant presence in the Indonesia market, such as Google and Facebook, will have to pay all relevant local taxes, Jakarta revealed on Wednesday.
The new regulation comes at a time when countries are grappling with how best to tax international technology companies that often pay little tax in the jurisdictions they operate in despite their significant presence.
The issue came under spotlight recently after the administration of U.S. President Donald Trump on Monday proposed 100% tariffs on up to $2.4 billion worth of French goods, saying that the country's digital services tax unfairly targeted its technology companies.
Indonesia's regulation came into force on Nov. 25. It stipulates that overseas companies that trade goods and services in Indonesia will be treated as if they had a physical presence in the country. They would thus have to comply with local taxation rules. They will also have to appoint representatives in the jurisdiction who can act on their behalf.
The new regulation will apply to companies that meet certain criteria around the number of transactions, the transaction value, the number of shipping packages and/or the amount of traffic. Authorities said that details would be decided at a later date. It also added that businesses that were conducting operations before the regulation came into effect will have a grace period of two years from the day of implementation.
Foreign digital companies will also need to "assist government programs" including prioritizing trade in domestically produced goods and services and increase their competitiveness.
Indonesia's internet economy was worth $40 billion in 2019 -- the largest in Southeast Asia -- and is set to grow to $133 billion in 2025, according to a report by Google, Temasek and Bain & Co. Top mobile applications used in the country include social media platforms WhatsApp, Facebook and Instagram.
Indonesia's tax-to-gross domestic product ratio remains low compared with its Southeast Asian peers, restricting government spending on things like fiscal boost to the economy and infrastructure. Collecting taxes from the huge domestic digital economy will give Indonesia a much-needed revenue boost to fund various projects, including the building of the new capital.
Indonesia is drawing up a new tax regime, as President Joko Widodo tries to balance boosting growth and keeping the books in check. Finance Minister Sri Mulyani Indrawati said in November the government would submit to parliament a plan to cut corporate tax rate in two stages to reach 20% by 2023 from the current 25%.