Indonesia is Preparing to Use Significant Economic Presence Test in Determining Permanent Establishment



Indonesia is preparing to use significant economic presence test in determining permanent establishment (PE). This is regulated under Government Regulation in Lieu of Act (Perppu) No. 1 of 2020.

Perppu No. 1 of 2020 is mainly intended to secure national economy and maintain stability in financial system under the current situation of COVID-19 pandemic. To reach these purposes, some policies on national finance and financial system stability are introduced, among of which is e-commerce taxation. Finance Minister Sri Mulyani Indrawati said that COVID-19 pandemic has increased electronic transactions because people are no longer much engaged in physical mobility.1

Under the regulation, nonresident sellers, nonresident service providers and nonresident E-Commerce Intermediaries with significant economic presence in Indonesia may be treated as having a PE in Indonesia.2 As the consequence, income attributed to such entities may be subject to tax under Indonesian Income Tax Act.

Significant economic presence test is satisfied where consolidated gross revenue, sales in Indonesia, and/or the number of Indonesian active users of their digital media is over a limit. The limit will be determined later by Finance Minister.

Electronic Transactions Tax

Perppu No. 1 of 2020 also introduces electronic transactions tax to anticipate the case where a tax treaty prevents Indonesia to treat a nonresident enterprise as having a PE under the significant economic presence test.3

As we know, the OECD Model Tax Convention (2017) prevents a country to tax business profits of a nonresident enterprise unless the enterprise has a PE in the country.4 However, the definition of PE under the OECD Model cannot capture business carried on by nonresidents through e-commerce. The OECD Model only recognises two types of PE. First, a fixed place of business PE.5 The Commentary explains that “place of business”  of a nonresident enterprise means a facility, such as premises, machinery or equipment,6 where the enterprise is present and performs business activites at its disposal.7 Second, a dependent agent acting on behalf of a nonresident enterprise.8 Such person is treated as a deemed PE of the enterprise.

Electronic transactions tax will be imposed on e-commerce transactions between nonresident sellers or nonresident service providers and buyers or users located in Indonesia, either directly or through nonresident E-Commerce Intermediaries.9

Effective Date

Perppu No. 1 of 2020 is in effect on 31 March 2020. However, the significant economic presence test and electronic transactions tax have not applied yet. The government confirmed that Indonesia is waiting the G20 global consensus on how permanent establishment is defined under digital economy era before starting to apply the new tax policies as mentioned above.10




2 Perppu No. 1 of 2020, Art 6(6).

3 Ibid, Art 6(8).

4 The OECD Model Tax Convention (2017), Art. 7.

5 Ibid, Art 5 para 1.

6 The Commentary of Art 5 of the OECD Model, para 10.

7 Ibid, para 12.

8 The OECD Model Tax Convention (2017), Art 5 para 5.

9 Perppu No. 1 of 2020, Art 6(9).


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