The application of Value Added Tax (VAT) on foreign entities especially in the context of Online Travel Agents (OTA), has become a critical topic. The rise of digital transactions and foreign service providers operating within Indonesia’s borders has prompted the government to strengthen the regulatory framework.
This article will explore how VAT applies to foreign OTAs operating in Indonesia, based on the current Indonesian regulations.
The Regulations on VAT for Foreign OTAs in Indonesia
Indonesia’s VAT system applies broadly to goods and services consumed within the country, regardless of whether the supplier is local or foreign. Here’s the breakdown of the VAT regulation for OTA’s foreigners:
1. VAT Law Overview: Law No. 8 of 1983 and Amendments
Indonesia introduced VAT under Law No. 8 of 1983, later amended by Law No. 42 of 2009. It mandates that any entity supplying taxable goods or services in Indonesia must pay VAT, now set at 11% as per Law No. 7 of 2021. This includes foreign entities like OTAs, though VAT on digital services was not regulated until recently.
2. VAT on Digital Services: Regulation No. 48/PMK.03/2020
Regulation No. 48/PMK.03/2020 clarified VAT obligations for foreign digital service providers, including OTAs. Foreign OTAs serving Indonesian customers must now register for VAT, collect it from Indonesian clients, and remit it to the government, aligning Indonesia with global digital tax trends.
Why do Local and foreign OTAs Need to Pay VAT?
Based on the Regulation of The Minister of Finance of The Republic of Indonesia No 164/2023, companies with annual revenue of IDR 4,8 billion or more must register as Pengusaha Kena Pajak (PKP), or Taxable Entrepreneur, to charge and collect VAT.
Since OTAs local and foreign facilitate transactions and services such as hotel booking, transportation, and other tourism-related activities for customers in Indonesia, they are considered part of the supply chain for these services.
VAT collected from OTAs is a crucial revenue source for the Indonesian government, particularly within the tourism sector. This revenue supports public infrastructure, services, and improvements that directly benefit the tourism industry.
By ensuring that both local and foreign OTAs pay VAT, Indonesia maintains a fair contribution toward supporting tourism infrastructure, which benefits both consumers and businesses.
This requiring VAT payments from foreign OTAs helps maintain fair competition between local and international service providers. Without VAT, foreign OTAs could potentially offer services at a lower cost compared to their local counterparts, leading to an imbalance.
Compliance with VAT laws helps maintain transparency and fairness in the market, supporting the growth and development of Indonesia’s tourism sector.
Key Points on VAT for OTAs in Indonesia:
When discussing VAT for OTAs (Online Travel Agencies) in Indonesia, it's essential to understand the key points that impact both local and foreign platforms, as well as property owners and managers.
According to the Indonesian Tax Authority (Direktorat Jenderal Pajak - DJP) site, here's an overview of the critical aspects:
1. VAT Rate
As of 2022, Indonesia's standard VAT rate stands at 11%, applying to goods and services, including hotel bookings, villa rentals, and tourism-related services facilities by OTAs.
Under Article 7, point 1 of Law 7 of 2021 on Harmonization of Tax Regulations, the VAT rate in Indonesia currently ranges between 5% and 15% and it can fluctuate within this range. However, starting in 2025, it will be set at a rate of 12%. Here is the obligation for OTA:
- Local OTA: Indonesian OTA is required to charge and remit VAT to the government on transactions made through their platforms.
- Foreign OTA: Foreign-based OTAs that operate in Indonesia or facilitate booking in the country are also required to comply with Indonesian VAT Laws. They must register for VAT if their business activities generate income from customers in Indonesia.
2. Who Pays the VAT
VAT is typically included in the final price paid by the consumer, such as tourist booking through the OTA. Those OTA collects the VAT and remits it to the Indonesian government.
3. VAT for Property Owners or Managers:
If property owners or managers use OTAs for renting out their properties, they need to ensure that VAT is properly accounted for in their pricing. If they are VAT-registered, they can claim input tax credits on VAT paid for goods and services used in their operations.
4. Digital Tax Regulations:
Indonesia also imposes a digital services tax for foreign digital businesses, including OTAs, which further ensures that these platforms contribute to Indonesia’s tax revenue.
5. Compliance and Penalties:
OTAs both local and international must ensure compliance with Indonesian VAT regulations. Failure to comply can lead to penalties, including fines and restrictions on doing business in Indonesia.
Based on all of the information, OTAs in Indonesia are subject to VAT regulations, and property managers or owners must incorporate this tax into their pricing models when using these platforms for booking purposes.
