Business activities are inseparable from various legal provisions that must be complied with, ranging from the selection of the business entity form, licensing, and operational implementation, to tax compliance. The continuous advancement of information technology has brought drastic changes to the structure and operational mechanisms of businesses. In today’s era of digitalization, business actors can offer and deliver goods and/or services to consumers across borders through open and easily accessible digital platforms.
This transformation allows business actors domiciled outside the territory of Indonesia to obtain income or economic value from consumers in Indonesia through the digital ecosystem, without having to first establish a physical office or local entity in Indonesia. The implementation of this commercial model is reflected in various digital services that have now become routine public necessities, including e-commerce platforms and subscription-based applications such as Roblox, Zoom, and OpenAI. In practice, the entire series of transactions for these digital services takes place electronically when the business actor and the consumer are in different legal jurisdictions. This reality gives rise to a phenomenon that triggers essential judicial challenges, especially regarding the state’s capacity to implement its sovereignty and collect taxes on digital transactions, particularly when the foreign business entity does not have a physical presence in Indonesia.
Tax Aspects of Electronic Systems Trading (PMSE)
In the context of business law, cross-border digital commercial transactions are classified under the terminology of Trading Through Electronic Systems (PMSE). Referring to Article 1 point 115 of the Minister of Finance Regulation Number 81 of 2024 concerning Tax Provisions within the Framework of the Implementation of the Core Tax Administration System, as most recently amended by the Minister of Finance Regulation Number 1 of 2026, PMSE is defined as commercial activities whose transaction processes are facilitated by electronic instruments and procedures. In its development, PMSE not only involves domestic business actors but also facilitates foreign business actors in marketing goods and/or services directly to consumers in Indonesia.
This approach is fundamentally different from the approach using conventional tax doctrines. Under conventional Income Tax (PPh) regulations, the existence of a Permanent Establishment (Bentuk Usaha Tetap / BUT) is an absolute prerequisite to determine Indonesia’s taxing rights over the business profits earned by foreign tax subjects. Considering that foreign digital business actors can massively expand their markets without physically forming a BUT, PMSE requires a distinct legal breakthrough. In the context of PMSE Value Added Tax (VAT), taxation is implemented through a mechanism of appointing specific business actors as PMSE VAT Collectors, enabling the collection of consumption tax on digital transactions to be enforced without requiring the existence of an office or physical facility in Indonesia.
The Mechanism of PMSE Tax Collection
The characteristics of the digital economy that transcend national territorial boundaries have prompted a paradigm shift in taxation, moving from the physical presence approach to the concept of significant economic presence. This concept provides a foundation for tax jurisdiction over foreign entities measured by the significance of their economic existence in the domestic market, regardless of the presence or absence of a physical Permanent Establishment (BUT) in Indonesia. The normative foundation of this significant economic presence concept is regulated in Article 6 paragraph (7) of Law Number 2 of 2020, as amended by Law Number 7 of 2021 concerning the Harmonization of Tax Regulations (“UU HPP”), which stipulates that:
“The provisions for significant economic presence as referred to in paragraph (6) consist of:
- the consolidated gross circulation of the business group up to a certain amount;
- sales in Indonesia up to a certain amount; and/or
- active users of digital media in Indonesia up to a certain amount.”
Technically, the government appoints PMSE business actors—both domestic and foreign—that have exceeded certain transaction value and traffic thresholds in Indonesia as PMSE VAT Collectors. VAT is collected when the consumer makes a payment for a transaction that is the object of PMSE VAT. The PMSE VAT Collector is obliged to issue proof of collection in the form of a commercial invoice, billing, order receipt, or similar document stating the VAT collection, and subsequently remit the collected VAT for each Tax Period and report it to the Directorate General of Taxes (DGT) according to the prescribed deadlines. The procedures for the appointment, collection, remittance, and reporting of PMSE VAT are now consolidated in PMF Reg. 81/2024. Furthermore, the threshold parameters for appointing PMSE VAT Collectors are detailed in Article 4 paragraph (1) of the Director General of Taxes Regulation Number PER-12/PJ/2020, as amended by the Director General of Taxes Regulation Number 12 of 2025, which states:
“The threshold of specific criteria as referred to in Article 3 paragraph (1) includes:
- a transaction value with the Beneficiary of Goods and/or Beneficiary of Services in Indonesia exceeding Rp600,000,000.00 (six hundred million rupiahs) in 1 (one) year or Rp50,000,000.00 (fifty million rupiahs) in 1 (one) month; and/or
- the amount of traffic or accessors in Indonesia exceeds 12,000 (twelve thousand) in 1 (one) year or 1,000 (one thousand) in 1 (one) month.”
The authority of the Ministry of Finance in mandating the tax collector to carry out the functions of withholding, collecting, remitting, and reporting taxes is based on Article 32A of the General Provisions and Tax Procedures Law (UU KUP) updated by the UU HPP, which is further delegated to the Director General of Taxes by referring to the indicators in Article 4 paragraph (1) of DGT Regulation Number 12 of 2020 in conjunction with DGT Regulation Number 12 of 2025. The elucidation of these provisions explicitly affirms that the scope of other parties includes organizers of transactions conducted electronically.
Unlike the PMSE VAT mechanism which focuses on consumption tax for the utilization of digital goods and services within the Customs Area, the imposition of Income Tax (PPh) within the PMSE ecosystem has its own juridical basis and object of taxation. For foreign PMSE business actors that meet the significant economic presence criteria, the taxation of their business profits directly intersects with the international taxation architecture. The discrepancy between the effectively running PMSE VAT collection and the complexities of cross-jurisdictional taxation is what subsequently gives rise to various legal and technical challenges in taxing foreign PMSE entities.
Challenges in Tax Collection for Foreign PMSE Entities
Although the regulatory framework for PMSE VAT collection has provided a normative foundation for the fiscal authority, this instrument has not entirely resolved the taxation issues within the digital economy ecosystem. The characteristics of electronic transactions that occur cross-border without physical presence give rise to legal and administrative problems in terms of supervision and law enforcement. Broadly speaking, the main challenges in taxing foreign PMSE business actors encompass the following two crucial aspects:
1. Cross-Jurisdictional Law Enforcement and International Treaty Obligations
The discrepancy between the corporate legal domicile abroad and the jurisdiction where consumption occurs in Indonesia creates executorial jurisdictional constraints. In the event of non-compliance, the fiscal authority faces structural obstacles in conducting audits, forced collection (distress warrants), and executing sanctions against entities and assets located outside Indonesia’s sovereign territory—an obstacle confirmed by the Directorate General of Taxes (DGT) during the 7th Belt and Road Initiative Tax Administration Cooperation Forum (BRITACOF) in October 2026, regarding the evaluation of 248 foreign PMSE organizers without a BUT in Indonesia. Furthermore, domestic taxing authority over the profits of multinational companies is restricted by Double Taxation Avoidance Agreements (DTAA / Tax Treaties), which still require physical presence to form a BUT, as well as the dynamics of international agreements. As a concrete illustration, although Law No. 2 of 2020 regulates the concept of significant economic presence, the implementation of Income Tax (PPh) or Electronic Transaction Tax (PTE) on multinational technology companies by 2026 cannot yet be applied due to bindings to DTAAs and bilateral trade agreements. This includes clauses within the Indonesia–United States Reciprocal Trade Agreement in February 2026, which restricts the unilateral imposition of digital service taxes on US-based corporations such as Google and Netflix, meaning the government can only optimize the non-discriminatory PMSE VAT instrument.
2. Validation and Supervision of Digital Transaction Data
Digital business operations—ranging from cloud computing services, digital advertising, marketplace platforms, to Software as a Service (SaaS)—generate massive data flows with multi-layered cross-border payment structures, complicating the fiscal authority’s ability to accurately verify consumer locations, real transaction values, and revenue streams. In practice, the DGT discovered information asymmetry where the VAT remittance reports from several global PMSE organizers appeared inconsistent with their high volume of activity and user traffic in Indonesia. To address this supervisory loophole, the national tax administration is now transforming from conventional document auditing to technology-based supervision through the implementation of the Coretax system and the application of the Foreign Digital Transaction Tax Collection System (SPP-TDLN) based on Presidential Regulation Number 68 of 2025 and Minister of Finance Regulation Number 49 of 2026. Through the SPP-TDLN scheme managed by PT Jalin Pembayaran Nusantara, which involves dozens of domestic banks and payment service providers (fintech) as VAT collectors at payment gateways, the DGT successfully detected approximately 5.5 million cross-border digital transactions with a potential VAT reaching Rp1.1 Trillion up to October 2026, although technical integration with international payment card principals is still being refined.
Conclusion
The development of the digital economy has overhauled the global business architecture and shifted the doctrine of jurisdictional nexus in tax law. The existence of an office, factory, or physical facility is no longer the sole determining indicator of a country’s taxing right, considering that economic connections can now be substantially formed through millions of electronic transactions and an active cross-jurisdictional user base without the physical presence of the business actor in the market country. Indonesia responded to this paradigm shift through the establishment of PMSE tax law instruments, which allow the government to appoint foreign digital business actors meeting specific criteria as VAT Collectors to fulfill tax obligations in Indonesia despite lacking a physical office or BUT.
In line with this doctrinal shift, determining the tax consequences of a multinational entity in Indonesia no longer solely relies on the corporation’s physical domicile. The focus of legal assessment has now shifted to the location where the transaction occurs, the jurisdiction where the digital goods or services are utilized by the consumer (destination principle), the scale of economic activity generated, and the positive legal foundation connecting these electronic transactions with Indonesia’s tax sovereignty.
Nevertheless, the availability of a domestic regulatory framework has not completely eliminated law enforcement challenges on the ground. The harmonization between national tax law and Double Taxation Avoidance Agreements (DTAA), the dynamics of international tax consensus, the effectiveness of cross-border collection jurisdictions, and the technological capability to supervise digital transaction data through the Coretax and SPP-TDLN systems will continue to be primary determinants in the evolution of digital tax law in Indonesia. Therefore, for business actors, both national digital companies and multinational corporations conducting cross-border transactions, understanding this regulatory transformation is not merely a matter of tax compliance, but a strategic step to identify legal risk exposure, structure contracts and transactions appropriately, and formulate early tax dispute mitigation.
For business actors, understanding these changes is necessary to identify risks, determine transaction structures, and take mitigating steps from the outset.
If you face business law issues, tax disputes, or other digital regulatory concerns, Mangatur Nainggolan Law Firm (“MNL”) is ready to provide comprehensive and professional legal consultation and assistance, utilizing an approach tailored to the needs and characteristics of each client’s business.
References
Law Number 7 of 2021 concerning the Harmonization of Tax Regulations.
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Author : Estomihi, S.H.
Editor : Robby Simamora, S.H., M.H.