Indonesia - Ministry of Communications and Informatics issues OTT Circular Letter The Ministry of Communications and Informatics has issued a Circular Letter No. 3/2016 dated 31 March 2016 on the Delivery of Application and/or Content services through internet (Over The Top) (“OTT Circular Letter”). The OTT Circular Letter clearly states that the purpose of the OTT Circular Letter is to alert all OTT Service Providers and Telecommunication Operators that they need to prepare themselves to comply with the upcoming OTT Regulation (which currently is still being prepared by the MOCI) when the regulation comes into force, and to provide notice on what the contents of the regulation will be. Given the prior statements from the MOCI that regulation on Over The Top internet products and services ("OTT Services") would be issued in March 2016 we suspect that the OTT Circular Letter may have been issued on 31 March 2016 to meet this deadline. No draft of the proposed OTT Regulation is available. Key Points The following are the key points of the OTT Circular Letter (the essence of which are not substantially different from prior press statements, although somewhat more expansive): Definitions The OTT Circular Letter defines OTT Services as the provision of applications and/or content services through the internet, as follows: • OTT Application services: the utilization of telecommunications services via internet protocol based telecommunications networks that enable communication services in the form of short messages (texts), voice calls, video calls, online conversations (chatting), financial and commercial transactions, data storage and collection, gaming, social networking and media, and all derivatives of these services. • OTT Content services: the provision of all digital information forms consisting of text, sounds, images, animations, music, videos, films, and games or any combination thereof, including in from of streaming or downloads, by utilizing telecommunications services via internet protocol based telecommunications networks. The above definitions are very broad and basically cover any services that run through the internet. OTT Service Providers The OTT Circular Letter provides that OTT Service Providers include any Indonesian individual and business entity (either in the form of a legal entity or otherwise). Further, the OTT Circular Letter also provides that OTT Services can be provided by a foreign individual or a business entity provided that a Permanent Business Entity (Badan Usaha Tetap – “BUT” or in other words Permanent Establishment) is established in Indonesia in accordance with the prevailing tax laws and regulations. OTT Service Providers Obligations The OTT Circular Letter provides that OTT Service Providers must comply with Indonesian laws and regulations on monopolies and unfair competition, trade, consumer protection, intellectual property rights, broadcasting, advertisement, pornography, anti-terrorism, and taxation. In addition, OTT Service Providers must also: • comply with all data protection laws and regulations; • conduct content filtering in accordance with the prevailing laws and regulations; • conduct censorship activities in accordance with the prevailing laws and regulations; • use the Indonesia’s National Payment Gateway; • use an Indonesian internet protocol number; • guarantee access to lawful interception and evidence collection for the prosecution or investigation of criminal cases by the relevant authorities in accordance with the prevailing laws and regulations; and • provide information and/or guidelines/manual on the use of the services in Indonesian language in accordance with the prevailing laws and regulations. OTT Service Providers are prohibited from providing services with contents which: • contradicts with the State Ideology (Pancasila) and the Indonesian Constitution (UUD 1945); and threatens the unity of the Republic of Indonesia; • incites conflicts between ethnicities, religions, races and inter-groups, and degrading, harassing, and/or blaspheming religious values; • encourages the public to (i) conduct unlawful or violence acts; (ii) abuse narcotics, psychotropic and other addictive substances; (iii) degrade human dignity and morality, (iv) violate decency and pornography, (v) gamble, (vi) conduct insulting, defamatory, extortion or threatening behavior, hate speech; and (vii) violate intellectual property rights; and/or • contradicts with the laws and regulations. Preliminary Analysis Legal Although, the scope and definitions of the proposed OTT Regulation are very far-reaching, we are of the view that the essence of the OTT Circular Letter is generally consistent with what the Minister has been saying in the press reports as regards the content of the proposed OTT Regulation. However it is now very clear that Indonesia intends to regulate fully OTT Services – and by doing so the proposed OTT Regulation will force providers to move onshore and be taxed onshore or otherwise, perhaps where foreign investment regulations restrict establishing an Indonesian foreign investment (PMA) status company, to be taxed onshore under a BUT. Based on the OTT Circular Letter, it is very likely that through the proposed OTT Regulation, the Government will require all foreign OTT Service Providers (which make their services available in and generate revenues from Indonesia) to have a local presence in Indonesia (either through a BUT or an Indonesian foreign investment (PMA) status company (if foreign investment regulations permit), in order to ensure compliance with Indonesian laws and regulations (including possibly local data center requirements) and paying Indonesian taxes. Unfortunately, it is still unclear: 1. whether foreign OTT Service Providers that have already established an Indonesian company but do not fully provide all services that the offshore companies are providing into Indonesia, will still be required to set up a BUT in Indonesia. Our view is that this would be required. 2. what are the applicable sanctions and whether there will be any grace period for OTT Service Providers to comply once the OTT Regulation is issued – e.g. whether the MOCI will give itself more expansive power to block sites (and not just rely on its current power to block negative content). 3. whether the Indonesian National Payment Gateway means the Indonesia’s National Payment Gateway or any Indonesian payment gateway. 4. how the MOCI intends to deal with OTT Service Providers that may not be able to establish an Indonesian subsidiary (given foreign investment regulations) – which then potentially results in higher tax – or whether it will push in the forthcoming updated Negative List to have a specific category for OTT Service Providers. 5. how this will be monitored (e.g. as regards ascertaining revenues for tax purposes), what the reporting requirements will be etc – while certain matters can be monitored through the Indonesia’s National Payment Gateway, and/orcarrier billing clearly but not all payments modes (e.g. credit cards) can easily be monitored. 6. whether the OTT Service Providers will be considered as Electronic Systems Operators under Government Regulation No. 82/1012, and for many who may collect data complying onshore with the requirements under this Government Regulation and more generally the Electronic Information and Transactions Law (e.g. onshore data centres and data disaster recovery). Tax There is still no specific tax regulation for OTT Service Providers to establish a BUT. Under the Indonesian tax law and regulations, a BUT is considered as a corporate resident taxpayer and must comply with all applicable Indonesian tax regulations, including the requirement to register itself as a taxpayer in Indonesia by obtaining a tax identification number (NPWP). A BUT will then be subject to Indonesian income tax on profits attributable to the PE at a tax rate that is higher than the rate that applies to resident corporate taxpayers. In general, a PE is subject to a 40% corporate income tax (25% corporate tax plus 20% branch profit tax of the after-tax profit) or certain reduced rates under relevant tax treaties. If the BUT delivers taxable goods and/or taxable services within the customs area, the BUT is also obliged to be registered as a taxable entrepreneur for VAT purposes. ***** The MOCI is still coordinating with other Government Agencies (including the Ministry of Finance, Ministry of Education and Culture and the Capital Investment Coordination Board) to finalize the draft OTT Regulation. We are also aware that the Indonesian tax office is holding focus groups with industry players to seek feedback. We have heard that the OTT Regulation is set to be issued in the 2nd quarter of 2016. However, the MOCI will not confirm when the draft regulation will be circulated to public for comments or when the OTT Regulation will be issued. Unfortunately, nothing is certain until then. We believe that the industry needs to engage the MOCI and other relevant authorities. As in other countries (e.g. China, Vietnam, etc) this issue has been brewing and hence the Indonesian Government is likely to follow and take an aggressive approach (clearly tax is a key consideration). For more information, please contact Mark Innis or Aryadharma Alimsardjono.