Nowadays, economic and business development, both digital and conventional based, cannot be separated from the existence of information technology and its development.
Although not selling digital products, conventional business activities require technology to remain competitive. The difference is, the technology they use may not be as sophisticated as digital companies.
Meanwhile, the development of information technology is largely dependent on innovation in making a variety of hardware and software.
This requires many companies to develop their software and hardware on a regular basis.
Various ways are used by corporations in upgrading their software and hardware. One of them is by buying from a manufacturing company.
In the context of taxes, software purchases often cause disputes. The purchase of software is different from the purchase of hardware, which is in the form of physical goods such as spare parts that must be imported from the producing countries.
The right to use software, generally in the form of a license whose purchase or delivery can be done via digital transfer, by downloading, at any time. So, there is no need for direct shipments through export-import activities.
Thus, confusion arises in defining the type of transaction and its tax treatment. Should the purchase of a software license be considered as a submission of royalties or an ordinary sale and purchase transaction.
For example, a company in Indonesia as a license buyer or licensee pays a fee to a company in the United States as a licensor, to multiply the production of software made or custom software licensed in Indonesia.
With this license, companies in Indonesia as programmers or developers will receive security guarantees and property rights to their own work so as not to be misused by others.
From the software license purchase transaction mentioned, there are three possible tax treatments that must be ensured.
First, can the purchase of a software license be interpreted as royalty which is an object of Income Tax Article (ITA) 26 at a rate of 20%?
Second, does it have to refer to the applicable rate in the Tax Treaty between Indonesia and America, which is 10%?
Third, is the license payment mentioned not subject to tax in Indonesia since it is classified as business profit?
To answer those questions, we first need to clarify the definition of royalty.
According to the Indonesian-American Tax Treaty Article 13, the definition of royalty is any form of payment made in connection with the use of, or the right to use any copy right) on:
- Literary works
- Art works
- Scientific works (including motion pictures, films, tapes)
- Other means of reproduction of radio or television broadcasting
- Formula or secret process
- Trademark, or information concerning industrial, commercial or scientific experience.
The excerpt from Article 13 of the Indonesian-American Tax Treaty is as follows:
The term "royalties" as used in this Article means payments of any kind made as consideration for the use of, or the right to use, copyrights of literary, artistic, or scientific works (including copyrights or motion pictures and films, tapes or other means of reproduction used for radio or television broadcasting), patents, designs, models, plans, secret processes or formula, trademarks, or for information concerning industrial, commercial or scientific experience. It also includes gains derived from the sale, exchange, or other dispositions of any such property or rights to the extent that the amounts realized on such sale, exchange or other disposition for consideration are contingent on the productivity, use, or disposition of such property or rights.
From the definition, it can be stated that licensed software is actually not included in the royalty list according to the Indonesian-American Tax Treaty. However, it can be included in the sense of "use of, right to use any copy right".
So it must be ascertained, whether the means of software transfer, such as downloading, include media that classifies the granting of licenses as a copyright on the object of royalty tax imposition or not.
Read: Indonesia-Singapore Effectively Apply the Latest Tax Treaty on 1 January 2022
Related to that, Law Number 28 of 2014 on Copyright states that Copyright holders can grant Licenses to other parties, for various activities, based on written agreements and meet the conditions required.
Activities related to the use of copyright include:
- Publication of Works;
- Reproduction of Works in all its forms;
- Translation of Works;
- Adaptation, arrangement or transformation of Works;
- Distribution of Works or copies thereof;
- Display of Works;
- Announcement of Works;
- Communication of Works;
- Rental of Works.
This explanation is in line with the definition of copyright contained in paragraph 13.1 of the OECD Commentary on article 12.
“Payment made for the acquisition of partial right in the copyright (without the transferor fully alienating the copyright) will represent a royalty where the consideration is for granting of rights to use the program in a manner that would without such license, constitute an infringement of copyright"
Based on the description above, the license referred to in the Indonesian-American tax treaty is a license in accordance with the Copyright Law.That is, permission granted by the copyright holder to another party to announce or reproduce its related rights product under certain conditions.
Thus, if the software license is solely for their own benefit, it cannot be classified as a royalty and is considered an ordinary buying and selling transaction. On the other hand, if the purchase of a software license is used to be reproduced and utilized by other parties, as in the case above, it can be categorized as royalties.
However, the problems didn't stop there.The licensee must also ensure whether the license agreement made separates the right to reproduce the software by purchasing the software or not? If the contents of the contract or license agreement separate the right to reproduce software from the purchase of software, Income Tax Article (ITA) 26 on Royalty is only imposed on the value of the license.
Meanwhile, if the contract or agreement does not separate the license from the software purchase, ITA 26 will be imposed on the entire value of the contract/agreement or invoice (including the purchase of the software).
The ITA 26 rate based on the Indonesia-America Tax Treaty is 10%, lower than the generally accepted ITA 26 rate, which is 20%. Keep in mind, to be able to use the Tax Treaty rate, companies in Indonesia are required to prepare a DGT 1 Form document or a Certificate of Domicile (SKD) from a company in America in electronic form or e-SKD.
E-SKD must be submitted simultaneously with the submission of ITA 23 or ITA 26 Returns. If not, then the withholding/collection of the tax is ITA 26 which is 20%.
Furthermore, for the use of licenses within the Indonesian Customs Territory, including the delivery of Taxable Services (JKN) within the Customs Territory, so that VAT for JKN is payable by 11%.
For the record, if the sale of licensed software products includes maintenance service, then this service is included in the meaning of technical service.