A. Legal Basis

The legal sources underlying these tax guidelines are as follows:

(i)

Law Number 7 of 1983 concerning Income Tax as amended several times, last amended by Law Number 7 of 2021 concerning the Harmonisation of Tax Regulations (Law 7/1983 as last amended by Law 7/2021, hereinafter referred to as the ITL);

(ii)

Law Number 8 of 1983 concerning Value Added Tax on Goods and Services and Sales Tax on Luxury Goods as amended several times, most recently with Law Number 7 of 2021 concerning the Harmonisation of Tax Regulations (Law 7/1983 as last amended by Law 7/202, hereinafter referred to as the VAT Law);

(iii)

Minister of Finance Regulation No. 40/PMK.03/2010 concerning Procedures for the Calculation, Collection, Remittance and Filing of Value Added Tax on the Utilisation of Intangible Taxable Goods and/or Taxable Services from Outside the Customs Territory (MoF Reg. 40/2010);

(iv)

Minister of Finance Regulation Number 141/PMK.03/2015 concerning Types of Other Services Referred to in Article 23 Paragraph (1) Subparagraph c Number 2 of Law Number 7 of 1983 concerning Income Tax as Amended Several Times, Last Amended by Law Number 36 of 2008 (MoF Reg. 141/2015);

(v)

Decree of the Director General of Taxes Number KEP-316/PJ./2002 concerning the Income Tax Treatment on Computer Software Costs/Expenses (KEP 316/2002);

(vi)

Director General of Taxes Letter Number S-56/PJ.43/2006 concerning the Application for Clarification and Affirmation of Article 23 Income Tax on Licensed Microsoft Office Software Transactions (S 56/2006); and

(vii)

Director General of Taxes Circular Letter Number SE-147/PJ/2010 concerning the Elucidation of the Minister Of Finance Regulation Number 40/PMK.03/2010 concerning Procedures for the Calculation, Collection, Remittance and Filing of Value Added Tax on the Utilisation of Intangible Taxable Goods and/or Taxable Services from Outside the Customs Territory (SE 147/2010).

B. Background

Software purchase transactions frequently occur in the business industry. Generally, Software purchase transactions are limited, and the buyer does not have the authority to increase the amount of the software.

Basically, the purchase of software only purchases the right to use the software because the copyright remains held by the software developer itself. In daily use, software is crucial, specifically to support ease of work. It is logical that currently, a considerable number of companies engaged in the IT sector develop software and sell the right to use to other parties.

Because there are several points that need to be understood in this discussion of the purchases of software, let us delineate the tax treatment of purchase of software transactions.

C. Definitions

S-56/2006, elucidates that in general, software can be defined as a product that can be marketed freely. In contrast, KEP-316/2002 elucidates that software is all programs that can be used on computer operating systems.

Purchases of software can be categorised into 2 (two), namely:

(i)

the purchase of software accompanied by the purchase of the license; and

(ii)

the purchase of software not accompanied by the purchase of the license.

The categories of purchases of software need to be taken into account because they are related to the tax treatment of these transactions. In this discussion, software purchase transactions are only limited to the domestic tax treatment thereof.

D. Tax Treatment

In the scope of Indonesian domestic taxes, we can distinguish the tax treatment of software purchase transactions based on 2 (two) types of taxes, namely income tax and Value Added Tax (VAT).

D.1

Income Tax Treatment of Purchases of Software

A software purchase transaction may be accompanied by the purchase of a license or not accompanied by the purchase of a license. The purchase of software with a license implies granting the right to use the software but is not accompanied by the copyright. Referring to MoF Reg. 141/2015, services related to software or hardware or computer systems include care, maintenance and repair services.

The income tax treatment of the purchase of software is categorised into 2 (two), namely:

(i)

purchases of software only

In this case, the purchase of software is not included in the Article 23 Income Tax objects because it is not accompanied by the purchase of a license, thereby, cannot be categorised as another type of service subject to Article 23 Income Tax. If the owner of the software is a business entity, the sale of software will be taken into account in corporate income tax.

(ii)

purchases of software accompanied by purchases of license

A purchase of software accompanied by the purchase of the license is subject to Article 23 Withholding Tax. The tax treatment for the purchase of software with a license is as follows:

a.

if in the contract or invoice, the amount of computer software purchase and the amount of computer software license purchase can be distinguished, Article 23 Income Tax is only imposed on the amount of the license at the rate of 15%.

b.

in the contract or invoice, the amount of computer software purchase and the amount of computer software license purchase cannot be distinguished, Article 23 Income Tax is imposed on the entire value of the contract or invoice (including the purchase of software) at a rate of 15%.

c.

If the purchase of software is accompanied by software maintenance or the like, the services are included in the definition of maintenance services. Pursuant to MoF Reg. 141/2015, the maintenance services are subject to Article 23 Withholding Tax of 2% of the gross amount, excluding VAT.

D.1.1

Software Acquisition Expenses or Costs

KEP-316/2002 elucidates that computer software is categorised as an intangible asset. This regulation states that software has a useful life of more than 1 (one) year and is included in group 1 as referred to in Article 11A paragraph (2) of the ITL. Thus, the calculation of the amortisation of software as an intangible asset is with a useful life of 4 years pursuant to the ITL.

D.2

VAT Treatment of Purchases of Software

D.2.1

Purchases of Software from Within the Customs Territory

Referring to the legal character of VAT, VAT is imposed on supplies of taxable goods (Barang Kena Pajak/BKP in Indonesian) and/or taxable services (Jasa Kena Pajak/JKP in Indonesian) in general. Further, purchases of software are included in supplies of taxable goods. This is as referred to in the provisions under Article 4 paragraph (1) subparagraph a of the VAT Law that supplies of taxable goods conducted by taxable persons (Pengusaha Kena Pajak/PKP in Indonesian) are subject to VAT. The rate applicable to these transactions is as follows:

D.2.2

Purchases of Software from Outside the Customs Territory

As aforementioned, software is a type of intangible goods. Referring to the provisions under Article 4 paragraph (1) subparagraph d of the VAT Law, one of the transactions subject to VAT is the use of intangible taxable goods from outside the customs territory within the customs territory.

The calculation of VAT payable on the use of software from outside the customs territory is calculated as follows:

a.

amount paid excludes VAT

b.

amount paid includes VAT

c.

amount paid is not found in the contract/agreement or not explicitly delineated, the contract amount includes VAT

D.2.3

VAT Collection Systematics

VAT payable on taxable goods supplied by entrepreneurs referred to in Article 4 paragraph (1) subparagraph a of the VAT Law must be collected and remitted by taxable persons (Pengusaha Kena Pajak/PKP in Indonesian) conducting the supplies. Further, Article 3A paragraph (3) of the VAT Law elucidates that individuals or entities that utilise intangible taxable goods from outside the customs territory are required to collect, remit and file VAT payable.

E. Case Illustration

Case 1

PT. Aroma purchases computer software X from PT. Digital. These two companies are domestic companies that already have a TIN and are of taxable person status. The purchase of software is accompanied by a license with the following details:

Price of X Computer Software	:	IDR10,000,000
Price of Software License	:	IDR4,000,000
Total Purchase	:	IDR14,000,000

Based on the price details, what is the income tax and VAT treatment of the purchase of X computer software?

Answer

SE-56/2000 emphasises that the of Article 23 Income Tax treatment is only imposed on the amount of the license at a rate of 15%, Thus the calculation of Article 23 Income Tax is as follows:

Article 23 Income Tax payable	=	15% x IDR4,000,000
	=	IDR600,000

The Article 23 Withholding Tax of IDR600,000 needs to be performed by PT. Aroma on the payment for the purchase of the software accompanied by the license.

Further, because PT. Digital is a taxable person, PT, Digital is required to collect VAT on the supply of the software and its license. The calculation is as follows:

VAT	=	11% x IDR14,000,000
	=	IDR1,540,000

Thus, PT. Digital must prepare a tax invoice of IDR1,540,000 to PT. Aroma when performing the supply or when there is a payment from PT. Aroma. Finally, VAT that has been collected must be filed using periodic VAT return no later than the end of the following month.