Indonesia: Building Up Regulations to Support Digital Economy

In brief

The issuance of Law No. 11 of 2020 on Job Creation (commonly known as the “Omnibus Law“) and its implementing regulations, in particular Government Regulation No. 46 of 2021 on Postal, Telecommunication and Broadcasting (“Regulation 46“) and Presidential Regulation No. 10 of 2021 on Capital Investment Business Fields (commonly known as the “Priority List“), proposes significant regulatory changes to the technology and telecommunication sectors. With the various liberalization and investment incentives offered, the government expects to boost growth in these sectors, both encouraging local players as well as attracting foreign investors.

On the other hand, the government also wants to be more involved and to have more monitoring authority in the technology and telecommunication sectors, where services can be provided and offerings can be made seamlessly from offshore to Indonesia without any actual presence in Indonesia.

Contents

1. Things to Consider
2. In depth
   1. Liberalization of investment restrictions
   2. Requirements for offshore business entities
   3. Flexibility on the use of radio frequency spectrum

Prior to the issuance of the Omnibus Law, Regulation 46 and the Priority List, the Indonesian Government issued several regulations that include obligations and requirements for offshore electronic system operators that target Indonesia as their markets (or as the regulations say, conducting business activities in Indonesia).

It started with the tax regulations on digital tax, under which the Tax Authority can appoint offshore electronic system operators as Indonesian Value Added Tax (VAT) collectors and require them to collect VAT from Indonesian customers or users.

For more information on these digital tax regulations, please see our client alerts here.

After the issuance of the digital tax regulations, the Indonesian Government issued:

1. the e-commerce regulations, i.e., Government Regulation No. 80 of 2019 on Trading Through Electronic Systems (“GR 80“) and Minister of Trade Regulation No. 50 of 2020 on Provisions on Business Licensing, Advertisement, Development and Supervision of Business Actors in Electronic Systems Trading (“Regulation 50“), which require certain offshore e-commerce operators to establish a local representative office in Indonesia
2. the private electronic system operator regulation, i.e., Minister of Communication and Informatics No. 5 of 2020 on Private Electronic System Operators (“Regulation 5“), which requires certain offshore electronic system operators to register with the Ministry of Communication and Informatics (“MOCI“)

Things to Consider

Companies that operate in the technology and telecommunication space, that intend to provide services to Indonesian customers from offshore need to consider the implications of the above regulations.

Specifically, they should consider the requirements they must fulfill now that the Indonesian Government has started to target offshore entities that provide their services to Indonesia without any presence in Indonesia – through the use of advance technology.

On the other hand, companies that intend to establish a subsidiary in Indonesia that will engage in the technology and/or telecommunication sector will be able to enjoy the liberalization that has been stipulated through the Priority List. In addition, specifically for companies that intend to engage in the telecommunication sector, they can utilize the possibilities of having a cooperation to use radio frequency spectrum or assigning a spectrum allocation of one telecommunication network operator to another telecommunication network operator, both of which concepts are introduced and enabled through Regulation 46.

As both Regulation 46 and the Priority List were just recently issued, it remains to be seen how they will be enforced and implemented.

Companies may want to consider monitoring the implementation of both regulations, as not all provisions may be implemented immediately – noting that Regulation 46 does not include any transitional period, while the Priority List became effective on 4 February 2021.

Specifically on the Priority List, we have been informed that its implementation will also depend on the readiness of the Online Single Submission (“OSS“) system, which is currently being updated to be consistent with the Priority List. The government still needs time to ensure that the OSS system is updated. The OSS must be adjusted within 4 months after the enactment of Government Regulation No. 5 of 2021 on the Risk Based Business Licenses.

In depth

Liberalization of investment restrictions

One of the biggest changes in the technology and telecommunication sectors is the liberalization of the investment restrictions in these sectors.

With the issuance of the Priority List, the government has liberalized many more business lines in various sectors, allowing foreigners to invest in much more sectors. Some of the business lines that are removed from the negative list are those that have been subject to foreign investment restrictions since the negative list was first introduced, e.g., telecommunication business lines.

Aside from the liberalization of business lines above, the Priority List also reduces the number of business lines that are subject to investment limitations or prohibitions.

For more information on the Priority List, please see our client alert on the Priority List here.

On the technology and telecommunication sectors, most business lines in these sectors are liberalized and open for 100% foreign investment through the Priority List. Some business lines, such as press activities, postal services and broadcasting activities are still subject to foreign investment limitations.

The following are some of the key business lines that have been liberalized:

In addition to the liberalization below, the Priority List also provides specific leniency for start-up companies. In general, foreign investment companies must have a minimum investment of more than IDR 10 billion (excluding investment for land and buildings). However, to strengthen the ecosystem of technology-based companies, foreign investment in technology-based start-up companies that are located in a special economic zone will be allowed to have investments of IDR 10 billion or less.

Please note that for financial related business activities, such as payment service operators and payment system infrastructure operators, there are investment restrictions governed by Bank Indonesia. Please see our client alert on the new payment regulation here.

Requirements for offshore business entities

Over the past couple of years, the Indonesian Government has been trying to regulate offshore business entities in the technology sector that are targeting Indonesian markets and customers, and require these offshore companies to comply with Indonesian laws and regulations This has been mainly tax driven but has been expanded to, among other things, data privacy and customer services.

In the last two years, the government has enacted regulations to, among other things, appoint foreign platform operators and require them to collect VAT from Indonesian users, require certain foreign e-commerce operators to establish a representative office in Indonesia and obtain a license, and require certain offshore electronic system operators to register their electronic systems in Indonesia.

Digital tax regulations

With the issuance of regulations related to digital tax, the Tax Authority has appointed a number of offshore business entities as VAT collectors and requires them to collect VAT from Indonesian customers/users.

In practice, the Tax Authority will reach out to these offshore business entities, discuss their business models, and explain the requirement to collect VAT from Indonesian users.

E-commerce regulations

Under GR 80 and Regulation 50, foreign e-commerce operators that meet either of the following thresholds must establish a trade representative office in Indonesia:

1. those that annually transact with more than 1,000 consumers in Indonesia
2. those that annually deliver more than 1,000 packages to consumers in Indonesia

Regulation 50 indicates that the assessment of whether a foreign e-commerce operator meets the threshold will be done by the Ministry of Trade (“MOT“).

Private electronic system operator regulation

Regulation 5 requires offshore private electronic system operators (i) that provide services in Indonesia, (ii) that conduct business activities in Indonesia, or (iii) whose electronic systems are used and/or offered in Indonesia, to register with the MOCI.

However, in practice the registration system, which is integrated with the OSS system, is not yet able to cater for applications from offshore electronic system operators. As such, while the MOCI is reaching out to technology companies and asking them to register, they still advise that their Indonesian subsidiary be the one that registers with the MOCI.

Foreign Over-The-Top services

Regulation 46 now also touches upon foreign entities. Under Regulation 46, foreign entities that conduct their business activities through the Internet for users in Indonesia may cooperate with a local telecommunication company, and are under the supervision of the MOCI. The term “business activities through the Internet” is defined as over-the-top services, which includes telecommunication substitution services, audio and/or visual content service platforms, and other services as determined by the MOCI.

With the inclusion of “other services as determined by the MOCI”, we suspect that going forward the MOCI will actively monitor more advanced telecommunication services in Indonesia, especially those that are offered by offshore entities and may be considered as disruptive innovation.

Flexibility on the use of radio frequency spectrum

The previous telecommunication regulation, i.e., Government Regulation No. 53 of 2000 on the Use of Radio Frequency Spectrum and Satellite Orbit (“Regulation 53“), has regulated the joint use of radio frequency spectrums, where more than one telecommunication network operator can use the same radio frequency spectrum as stipulated by the MOCI. However, the joint use of the radio frequency spectrum under Regulation 53 is only performed through segregation of time, region and/or technology. Under this joint use arrangement, each spectrum user would hold a spectrum license.

In addition to the joint use of radio frequency spectrums, Regulation 46 adds the new concept of cooperation to use radio frequency spectrum. Under this new cooperation concept, a telecommunication network operator that holds a radio frequency spectrum license can perform spectrum leasing and spectrum pooling with either (i) another telecommunication network operator, or (ii) a special telecommunication operator. The cooperation would not require the other telecommunication network operator or the special telecommunication operator to obtain a specific spectrum license – but the cooperation is subject to approval from the MOCI.

Regulation 46 provides that spectrum leasing and spectrum pooling can only be performed for the implementation of new technology. The term “new technology” applies to telecommunication technology that is implemented in Indonesia after the enactment of the Omnibus Law.

Unfortunately, Regulation 46 does not elaborate further on what is deemed as “new technology” – this will be assessed, evaluated and approved by the MOCI. Regulation 46 only provides two technologies as examples of “new technology”, i.e., the International Mobile Telecommunications 2020 (IMT-2020) and the Global System for Mobile Communications-Railway (GSM-R). We believe keeping the term “new technology” broad is intentional so that the government has flexibility when assessing applications for approval of the cooperation to use radio frequency spectrums.

Another new feature introduced by Regulation 46 is the possibility of assigning the spectrum allocation of one telecommunication network operator to another. Under Regulation 53, assignment of spectrum allocation can only be done in the event of merger and acquisition. Regulation 46 now allows spectrum assignment, which can be in the form of one-way assignment and spectrum swap. The spectrum assignment is subject to approval from the MOCI.