Over-the-Top (OTT Services) Operating in Indonesia Obliged to Establish Indonesian Permanent Establishment

OTT Services in Indonesia

The use of OTT services in Indonesia has been rapidly growing in less than a decade with the introduction of smartphones in the market that enable the use of mobile internet. Referring to the definition used in Wikipedia, OTT services are understood as ‘delivery of audio, video, and other media over the Internet without the involvement of a multiple-system operator in the control or distribution of the content’. Google, Facebook, WhatsApp, Twitter, YouTube exemplify global OTT players in Indonesia. OTT services have not been specifically regulated under certain Law in Indonesia. However, they are subject to the general obligations under Law No. 11 of 2008 Electronic Information and Transaction. Now, the problem is that most of the OTT service providers are global players with no legal entity established in Indonesia. Thus, despite being subject to Indonesian Law for operating within Indonesian market, the matter of legal enforcement remains questioned. In order to tackle this problem, by the end of March, the Government will issue a new regulation to oblige foreign OTT to establish a permanent establishment (‘Bentuk Usaha Tetap’-BUT) legally recognized in Indonesia. A transition period will be applied to give time for those companies to adjust to the new regulation.

Innovation, Competition, and Consumers

OTT services have become an example of how innovation could make life easier. Telecommunication services that previously majorly relied on the fixed line provided by telecommunication service provider like Telkom, international calls that depended on services provided by Telkom and Indosat, or messaging services that earlier could be done only via SMS, now are available with competitive to free price by using online communication services such as Google Hangouts, Facebook Messenger, Skype, Line, or WhatsApp. Earlier in my post, I discussed about online platform used to offer transportation moda, Uber. Similar services are now also available in the market such as GrabTaxi for cars and GrabBike or GoJek for motorbike ride. Those services run on the internet and while they challenge and become new competitors for conventional service providers, either for telecommunication or transportation, regulators have to keep up with the current development in order to safeguard the interest of different parties in the market, most of all: consumers.

While consumers benefit from low to zero prices in the short term, in the long term, it is necessary to keep the existence of multi players in the market for the following reason. It is important to ensure that market structure will not allow monopolistic behaviours, for instance when one or more player(s) become(s) dominant in the market. Competition authority, thus, shall keep their eyes open when prices in the market are very low to zero in order to hinder from predatory pricing practices prohibited under Art. 20 of Law No. 5 of 1999. However, low or zero prices are not per se illegal. For gaining the right understanding on pricing in online platform services, it is significantly important to keep in mind that the pricing model might subject to the practices of multi-sided-platform (MSP) which allow different pricing for different sides of the of market served by the online platform,[1] which might falsely be suspected as predatory or discriminatory when it comes to the side with the low or zero prices. Having said this, it does not mean that the need to keep multi players in the market should defeat the importance of efficiency. Thus, consumers shall not be forced or left with the option of having inefficient service providers merely in order to keep the existence of those providers. What necessary is keeping the market open by hindering and removing entry barriers.

The New Obligation and the Way Forward

(1) Permanent Establishment and Taxation

The new obligation to establish an Indonesian permanent obligation has been recognized in the field of energy sector[2] and for taxation purposes.[3] However, the new obligation for OTT services like Google, Facebook, Twitter, and others, might be intended to also meet other purposes than taxation.

Permanent establishment in Indonesian law according to Law No. 7 of 1983 as Amended by Law No. 36 of 2008 on Income Tax is understood as ‘an establishment used by an individual who does not reside or stay in Indonesia for 183 days or less within a period of 12 months, or entities that are not established or domiciled in Indonesia, but to run the business or activities in Indonesia’.[4] Law No. 22 of 2001 on Oil and Gas defines a permanent establishment as ‘an entity established and incorporated outside the territory of the Republic of Indonesia which have activities in the territory of the Republic of Indonesia and shall comply with the laws and regulations that applicable in the Republic of Indonesia’.[5] According to Law No. 36 of 2008, a permanent establishment can take form of one of the following: seat of management; branch; representative office; office building; factory; workshop; warehouse; space for promotion and sales; mining and quarrying of natural resources; mining area of oil and gas; fisheries, cattle farms, agriculture, farms or forestry; construction, installation or assembly project; provision of services of any kind by employees or others, all made more than 60 days within a period of 12 months; person or entity acting as a free agent; agent or employee of an insurance company that is not established or domiciled in Indonesia who receives insurance premiums or bears risk in Indonesia; computers, electronic agents, or automated equipment owned, leased, or used by the organizers to perform electronic transactions business activities through the Internet.

In order to establish a permanent establishment, it requires a notarial deed certifying that the company has a legal seat in Indonesia, permanently operates a business in Indonesia, and has a dependence on and clear connection to the headquarter abroad. An individual who does not reside or entity not established and domiciled in Indonesia cannot be deemed to have a permanent establishment in Indonesia if the individual or entity doing business or conducting activities in Indonesia use a free agent, broker or intermediary who in fact acts completely to run its own company.

Certain companies offering OTT services like Facebookand Google already have a representative office in Indonesia. The question is whether they are also subject to the new obligation to create a permanent establishment, because a representative office is already considered as a form of permanent establishment according to the Income Tax Law. A supporting argument for creating a permanent establishment despite the existence of a representative office is that not all representative offices in practice are taxable when they merely play a role as a business connector without real business activities. However, more clarification is needed to avoid ambiguity, especially when an interpretation is made to narrow down the definition provided in a law.

(2) Data Protection

Data protection becomes one of the concerns of the Government. However, the scope of concern seems limited to the protection of customer data and does not extend to the interest of data owners who do not qualify as customer.

The Minister of Communication and Information argued that the setting up of a permanent establishment will provide legal assurance for law enforcement. This would be important in cases where for instance customer data is abused by a data holder, i.e. a foreign company providing OTT services in Indonesia. Although currently Indonesia still does not have a particular data protection law, the protection of customer data can be anchored to the obligation provided for in Law No. 11 of 2008 that unless otherwise provided by laws, any use of information through electronic media concerning personal data is subject to the prior consent of the data owner.[6] Any violation against this obligation is subject to claims for damages.[7] When a data owner has to deal with a foreign company, such claim for damages would be difficult to process without the existence of a permanent establishment of the company in Indonesia. The same argument also applies for the protection of consumers in other aspects, for instance in cases of dispute as regards the provision of services, and for transportation services, typically as regards the compliance with safety and security regulations.

(3) Consumer Responses

Despite the intention to protect the best interest of consumers, concerns raise that the true intention behind the enactment of the new regulation was to monitor and steer the content provided over the internet. At least two cases are referred to in this regard. Since 27 January 2016,Telkom (an internet services provider) has blocked Netflix from using its networkfor video streaming services. While a different issue brought up in this case, such as the issue of pornography content, Telkom argued that the blocking was based on the reason that Netflix has not complied with the existing regulations in Indonesia. It was not clear, which regulations being referred to. However, the Minister of Communication and Information supported the act clarifying that a permanent establishment is required in order to run a business activity in Indonesia. The Minister also referred to the issue of content monitoring and censorship mechanism. Unwilling to take the same measure, Telkom’s competitors: Smartfren and XL choose to keep providing the access for Netflix and allow the American company to offer its services over their network.

In the other case a microblogging platform and social networking site, Tumblr, has been required to adjust its content to comply with Indonesian regulations concerning the obligation to not include pornography content over the internet. Rumours have been around, that the service would be blocked by the Government, i.e. the Ministry of Communication and Information, due to its content issue. Seeing both cases, it seems that consumers concerns are not without ground.

The Government needs to clarify its policy for the interest of providing legal assurance for business players operating in the country. While the Government argues for supporting consumer interests, it seems that consumers are less interested in the way the Government approaches the issue. There are several issues to deal with in order to clear the air: security - when it comes to necessary actions against terrorism and cybercrimes; content – when it comes to protection of the minor, a typical case against pornography; legal enforcement – in cases of procedures for claims for damages and liability according to the applicable law in Indonesia; competition – when local players have to compete with global players, a similar phenomenon with the issue of protecting traditional retailers from the entrance of modern foreign competitors in the market; data protection – in cases of abuses of personal data and other types of data which have been done in many fields, on- and offline; and net neutrality – whether internet service providers have the right to limit access to content providers. Each of those issues requires different approaches and measures which can be done only after the Government is clear with what it wishes to achieve.

[1] J.C. Rochet and J. Tirole, 'Two-Sided Markets: A Progress Report' (2006) 37 The RAND Journal of Economics 645, 645.

[2] The obligation is mandated by Law No. 22 of 2001 on Oil and Gas, see e.g. Art. 6; Ministerial Decree No. 1480 of 2004 on Arrangement and Offering of Working Area for Oil and Gas, see e.g. Art. 2 par. (3).

[3] Law No. 7 of 1983 as Amended by Law No. 36 of 2008 on Income Tax, Art. 2 par. (1).

[4] Law No. 7 of 1983 as Amended by Law No. 36 of 2008, Art. 2 par. (5).

[5] The obligation is mandated by Law No. 22 of 2001 on Oil and Gas, Art. 1 no. 18.

[8] Law No. 11 of 2008 Art. 26 par. (1).

[9] Law No. 11 of 2008 Art. 26 par. (2).

Uber: Ex-Ante Regulation, Innovation, and Challenges to Competition Law (Series III)

Legal Compliance for Market Entrance

Uber might mark the day on 8 December 2015 to celebrate their lawful market entry in Indonesia as the ride-sharing company gained the approval from the Governor of DKI Jakarta to operate in the capital of the country.  The approval was given after Uber met certain requirements to legally operate in Indonesia: establishing a legal entity in Indonesia, providing suitable insurance for both passengers anddrivers, complying with tax and safetymeasures regulations.

To safeguard the work of effective competition in the market, competition law plays its role ex-post to assess on case by case basis whether or not certain behaviour of a firm is anti-competitive or might have anticompetitive impacts. Applying this approach will hinder business players from being limited by too rigid rules that in turn might discourage or impede them from doing business. However, there are cases where regulating a market ex-ante is necessary. Such market regulations can be found for instance in food retail industry and other heavily regulated market such as telecommunication and energy.

In transportation industry, ex-ante regulation could intervene in order to safeguard the interest of consumers, such as safety, and public welfare by means of tax regulation. In some cases, ex-ante regulation in transportation industry may also be applied for the interest of small players.

Innovation and Challenges to Competition Law

Uber was banned in August 2014 from operating in Indonesia (read more discussions in my previous posts about Uber: Manakala Kebijakan Persaingan Diuji oleh Inovasi (Seri I) and Uber: Mendefinisikan Pasar Bersangkutan (Relevant Market), Masihkah Relevan? (Seri II)). While the ban was based on a sound ground to protect the interest of consumers, i.e. by providing clarity about whom they are dealing with when using the service, it was at the same time feared that it could create entry barriers for innovators to enter the existing market or create a new market that has not been known before.

Although Uber responds to the need of transportation in the market, it does not necessarily respond to it in the same way as conventional transportation service providers do. It neither rents out cars nor provides taxi services. Rather, it provides platform to bring together car owners and passengers for the purpose of optimizing the use of cars by sharing them under certain conditions with others. The introduction of the new business model combined with new technology, the online platform, makes it problematic to qualify the services provided by Uber under the same category with the existing services known in the market. Thus, Uber does not only challenge regulators in how to deal with a new market, but also test the existing basis for competition law analysis.

Market Response

It is interesting to see how market responds to the entry of Uber in transportation services albeit taking different business scheme. Apart from gaining more confidence from consumers, it also triggers other transportation service providers to keep up with the make use of mobile phone applications, such as Blue Bird. With the application for mobile taxi reservation, users now can order a taxi nearest to the pick-up location without having to make phone calls. Similar service is also offered by Grabtaxi. It seems that market players tend to respond to innovation brought by the new entrant with further use of the innovation.

Looking at another market: online reservation for transportation services with motorbike, GoJek, Grabbike, and alike almost had to face a different fate when the Minister of Transportation banned its operation on 17 December 2015.[1] The reason for the prohibition was that motorbikes are not recognized as vehicles for public transportation. Thus, the operation of such service was considered as a violation of the current transportation regulations.[2] Strangely enough, the prohibition was not applied for conventional transportation service providers with motorbike, widely known in Indonesia as Ojek. This raised critics that the ban was imposed to favour of the conventional Ojek. However, the ban was removed shortly after it was released. Protests from drivers and passengers, as well as objection addressedby the President have resulted in the removal.

Should Cheap Ride Raise Concern for Competition Law?

Consumers should be the ultimate beneficiary of the work of competition law. Competition should result in low prices, good quality of products, sufficient product choices, and encourages innovation. Competition law authority will usually be alarmed, when prices are rocketing. What if the prices are so low that it is extremely hard for competitors to beat? Uber is resembled by its low prices and this is one major concern for competitors, among other things, although it cannot be automatically qualified as extremely hard to beat. A cost analysis is necessary.

First of all, competition law does not prohibit offering products with low prices. However, selling a product with such a low price that is hard to compete and forces competitors to exit the market might qualify as predatory and under certain circumstances is prohibited. The prohibition of predatory pricing in Article 20 of Law No. 5 of 1999 reads: ‘Business actors shall be prohibited from supplying goods and or services by selling at a loss or by setting extremely low prices with the aim of eliminating or ruining the business of their competitors in the relevant market which may result in monopolistic practices and or unfair business competition.’

Article 20 of Law No. 5/1999 specifies two scenarios of predatory pricing: (1) by performing “selling at a loss” and (2) by “setting extremely low price.” The first scenario refers to actual cost as the benchmark to measure the existence of loss, in which the price is set below the actual cost.[3] While the definition of ‘selling at a loss’ relies on the actual cost, the qualification of ‘setting extremely low price’ relies on the average prices demanded in comparable markets. The problem with this second scenario is first of all there is no measurement to define a comparable market. Defining actual comparable markets is even harder. Moreover, extremely low prices can be resulted from high efficiency and very low cost, which still enables the firm to gain justified profit.

In both cases, the provision requires the element of intention to eliminate competitors and the effect of harm, i.e. potential results of monopolistic practices and unfair competition.  It is also important to note down that predatory pricing is typically enabled by the possession of market dominance or at least market control. Article 20 of Law No. 5/1999 addresses only firms with a significant level of market control. Although the provision does not require the element of market control in its wordings, from the heading ‘market control’ of the Chapter IV Part 3 of the Law under which Article 20 is structured, it is to be interpreted that the provision refers only to firms with the ability to influence the market. Only big firms are able to sustain such a loss from selling either at loss or with extremely low prices until they can recoup the loss by increasing the price after eliminating competitors.

According to KPPU Guidelines for the Implementation of Article 20 of Law No. 5/1999,[4] KPPU applies the following measurement to indicate the occurrence of predatory pricing. The first test is to determine if the price set by a firm is unreasonably low using indicators of market share of 35% and average variable cost (AVC).  Although the market share indicator was not required in Law No. 5/1999, this indicator is used to limit the test only to powerful undertakings (although there is no explanation about the reasoning of adopting the benchmark of 35%). Only if an unreasonably low price exists, a second test is applied to determine whether there is a recoupment after the selling below the AVC by an increase of price. The downside of using the recoupment test is that it is not clear, whether the increase of price per se is sufficient for the test or there should have been a recoupment of the loss. If the second alternative is used, competition law enforcement will be too late to prevent the negative impact of the predatory pricing. This means that there is no legal protection to hinder the anticompetitive conduct in an early stage and the loss resulted by the conduct. To avoid this, another measurement to prove the recoupment intention can be used without relying on a factual recoupment, for instance by assessing whether the selling under AVC is systematically carried out, e.g. on a regular basis.[5]

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[1] Surat Pemberitahuan Nomor UM.3012/1/21/Phb/201.

[2] Law No. 22 of 1999 on Traffic and Transportation; Decision of the Minister of Transportation No. KM. 35 Tahun 2003 on Provision of Human Tranportation with Public Vehicle; Decision of the Minister of Transportation No. KM. 69 Tahun 1993 on Provision of Transportation of Goods.

[3] Heermann, in: Undang-undang Larangan Praktek Monopoli dan Persaingan Usaha Tidak Sehat (Law Concerning Prohibition of Monopolistic Practices and Unfair Business Competition), Hansen, Knud/Heermann, Peter W./Karrte, Wolfgang/Micklitz, Hans-W/Pfletschiner, Wolfgang/Säcker, Franz Jürgen/Sauter,Herbert, Jakarta 2002, Article 20-21, Margin No. 9.

[4] KPPU Regulation No. 6 of 2011 on Guidelines for the Implementation of Article 20 of Law No. 5 of 1999 concerning Selling at A Loss.

[5] Wahyuningtyas, S.Y.; Unilateral Restraints in the Retail Business: A Comparative Study on Competition Law in Germany and Indonesia, Stämpfli, Bern, 2011, p. 125-126.