US-based streaming platform Netflix is one of the most recent tech giants to have become subject to taxes in Indonesia, as its popularity increases during the pandemic and the government hunts for untapped sources of revenue.
While the streaming service has not disclosed its Indonesian subscription numbers, the company has met a threshold for taxation stipulated by a Finance Ministerial Regulation. The regulation holds that nonresident foreign firms selling digital products and services in Indonesia worth more than Rp 600 million (US$41,345) a year or generating yearly traffic of more than 12,000 users are subject to a 10 percent value-added tax (VAT).
According to Netflix’s second-quarter report, the company has 193 million paid memberships worldwide, having grown by 10.1 million from the same period last year as a greater number of people seek home entertainment during the health crisis.
Indonesia’s digital economy is a hotbed for foreign companies like Netflix, and the sector is expected to be worth $130 billion by 2025, according to the e-Conomy SEA 2019 report by Google, Temasek and Bain & Company.
However, Netflix has arguably the most complicated relationship with Indonesia of all of its rivals.
Since it entered the country four years ago, Neflix has experienced a changing regulatory and political landscape, from the bumpy beginning of a state-owned enterprise access ban to a million-dollar deal with a ministry more recently.
Censorship and sensibility
When Netflix became available in Indonesia in January 2016, the streaming service was quickly blocked by state-owned telecommunications company Telkom Group.
The giant banned access to Netflix on all of its platforms, namely IndiHome, Telkomsel and WiFi.id. It cited a permit issue and unfiltered content, including some displaying violence and adult situations, according to Telkom’s then-director of consumer relations, Dian Rachmawan.
He urged Netflix to cooperate with internet providers in the country so its content could be censored according to Indonesian regulations.
Then-communications and information minister Rudiantara said Telkom’s move did not represent the government's stance, calling it a “purely corporate decision”, despite Telkom being a state-owned enterprise.
However, he mentioned that the streaming service’s presence might affect the country’s entertainment industry and other online businesses.
Institute for Development of Economics and Finance (Indef) researcher Nailul Huda echoed Rudiantara’s sentiment.
"If that were the case [that the government was opposed to Netflix], it should have been blocked from all internet providers, not just Telkom," he told The Jakarta Post on Tuesday.
Telkom ended up partnering with now-defunct Singapore-based over-the-top (OTT) video streaming service HOOQ as well as Malaysia’s iFlix, which expanded its operation in Indonesia in 2016.
The public was largely in favor of Netflix’s expansion into Indonesia. Some argued that the service had an age restriction mechanism that would prevent children from seeing adult content.
“Foreign platforms coming to Indonesia often think that they don’t need Indonesian companies, so there is a sense of defeat. Netflix was pressured so that we could have a better standing in the negotiation,” Indonesia ICT Institute executive director Heru Sutadi told the Post on Thursday.
Chummy with the government
During President Joko “Jokowi” Widodo’s second term, his Cabinet changed.
Jokowi appointed Nadiem Makarim, the founder of Indonesian multi-service app company Gojek, education and culture minister, while Johnny G. Plate succeeded Rudiantara as communications and information minister.
No stranger to digital business, in January 2020, Nadiem announced a $1 million partnership between the Education and Culture Ministry and Netflix to hold scriptwriting workshops and a short film competition, among other initiatives.
“We will partner with local companies and policymakers to support digital skills growth,” said Netflix Asia-Pacific managing director Kuek Yu-Chuang, adding that the programs would be helpful for the Indonesian film and television industry.
In June, the ministry announced a second partnership with Netflix to air some of the streaming service’s documentaries on state-owned television network TVRI. The program sought to assist at-home educational efforts during the pandemic, especially for students, teachers and parents with limited internet access.
Minister Johnny G. Plate, on the other hand, stirred public controversy with a comment about Netflix in January.
“We ask for Netflix originals not to be in Indonesia. Just utilize Indonesian people’s creativity, if possible,” he said.
He later clarified that he meant that he wanted Netflix to stream more films made by Indonesians.
INDEF researcher Nailul said that Nadiem’s decision to partner with Netflix was likely a way to gain public sympathy as a government appointee who supported the platform.
"It gained Pak Nadiem a lot of sympathy, especially from fellow millennials," he said.
Cashing in during the pandemic
The COVID-19 pandemic has caused a significant economic slowdown in the country. As of May, tax collection had fallen 10.8 percent year-on-year to Rp 444.6 trillion as revenue in almost every economic sector declined.
The government expects the state budget deficit to reach 6.34 percent of GDP this year as it allots Rp 695.2 trillion for COVID-19 relief spending while revenue dwindles.
In an effort to make up for the lost revenue, the government announced in late March that it would impose a 10 percent value-added tax (VAT) on certain intangible goods and services, including video and music streaming services.
The government pressed on with the tax even after an announcement by the United States Trade Representative (USTR) Office that it would investigate the policy amid concerns that it targeted US digital companies unfairly.
“Indonesia’s tax base will move toward digital taxation as online transactions have been growing significantly, especially during the COVID-19 pandemic,” Finance Minister Sri Mulyani Indrawati said at the time.
A survey from the Mobile Marketing Association (MMA) showed that 25 percent of Indonesian respondents had tried digital entertainment, such as streaming or online gaming, for the first time during the pandemic.
“Ultimately, it’s for governments to decide the rules on taxes, and in every country in which we operate, Netflix respects those rules,” a Netflix spokesperson stated previously. “Taxation is an important and much-debated issue in Indonesia, and we've had conversations over the last few months with the tax authorities.”
Heru Sutadi of the ICT Institute encouraged the government to urge Netflix to establish a business entity in Indonesia so that income tax could be collected from the company.
Telkom comes around
After five years of barring Netflix from its platforms, Telkom announced in early June that it would allow its users to access the streaming service.
Arif Prabowo, the company’s vice president of corporate communications, said the decision was made after Netflix committed not to air “prohibited content that includes child pornography and terrorism” and agreed to respond to customer complaints within 24 hours.
Nailul from INDEF viewed the opening as a business decision.
“Telkom prioritized other OTTs that already had a partnership with them. But during the pandemic, Netflix’s users rose, and it became an attractive partner for them,” he said.
Local or foreign? The floodgates open
Recently, Netflix raised its subscription fee in Indonesia to account for the VAT. Now its prices range from Rp 54,000 to Rp 186,000 monthly, making it arguably more expensive than local streaming services.
Local streaming services such as video-on-demand platform Vidio and GoPlay have also gained popularity as they carry more local content and have lower subscription fees.
Vidio, which was established in 2014 and has more than 60 million active users, offers a subscription to its Premier Platinum package for Rp 42,000 a month.
Disney Plus, the streaming service of entertainment giant The Walt Disney Company, is expected to be available in the country soon.
“The video on-demand business will grow rapidly in the future as other services enter Indonesia,” said Nailul. “The rise of Indonesia’s middle class and consumers’ shift to online activities during COVID-19 are some of the push factors for this trend.”