The Framework

In August 2020, Indonesia’s Directorate General of Taxes implemented an 11 percent value-added tax (VAT) on digital services supplied by nonresident companies to Indonesian consumers. This tax applies to a wide range of digital products and services, including streaming media, software, applications, and online advertising. Nonresident providers meeting certain thresholds—annual sales exceeding IDR 600 million (approximately $38,000), or more than 12,000 Indonesian consumers annually—are required to register with Indonesian tax authorities, collect the VAT from consumers, and remit the payments to the government. As of February 2024, 163 major tech companies, such as Amazon, Google, Meta, Netflix, and Apple, have complied with this regulation.[1]

Implications for U.S. Technology Companies

The enforcement of this VAT policy imposes significant administrative and financial burdens on large U.S. technology companies operating in Indonesia. These firms must navigate complex tax registration processes, implement systems for accurate VAT collection, and ensure timely remittance to Indonesian authorities. Noncompliance can result in penalties and potential legal challenges, complicating market access and operations. Additionally, the increased tax obligations may necessitate adjustments in pricing strategies, potentially affecting their competitiveness in the Indonesian market.

How China Benefits

Because Indonesia’s VAT system primarily impacts large foreign digital service providers, U.S. technology companies—many of which dominate global markets—are disproportionately affected. These firms face increased compliance costs and administrative burdens, making it more expensive to operate in Indonesia. In contrast, Chinese companies, which tend to be smaller or less entrenched in Indonesia’s digital ecosystem, may experience relatively lower tax burdens. As U.S. firms navigate complex tax obligations, Chinese companies can gain a relative advantage by facing fewer disruptions, allowing them to expand their presence in Indonesia’s growing digital market.

Endnotes