Nowadays, technology-based financial service or financial technology (fintech) grows rapidly and makes the national and global financial industries even merrier. However, fintech service is actually not a new thing, but a response to technology that is always actively developing. In this case, internet technology becomes the main factor supporting the transformation of financial service provider system, making fintech service limitless.
The variations of financial service offered by fintech are considered similar to those of conventional financial service, starting from banking, insurance, investment, to payment system services. The difference lies on the fact that fintech enables the customer to access all of the financial services only with the help of a gadget. Now the customer can even get an advice on finance automatically without the need to interact with other human.
Financial Service Authority (Otoritas Jasa Keuangan/OJK) defines fintech as the renewal activity of business process, business model, and financial instrument that gives new additional value in financial service sector by involving digital ecosystem. There are four categories of online-based financial services according to OJK. First, fintech with main businesses in payment, clearing, and settlement services.
Second, fintech with the characteristic of collecting various information about financial service choices—in the form of comparison, starting from price, feature, to benefit of financial products—to be then offered to prospective customers (market aggregator).
Third, fintech that focuses on risk and investment management by developing financial planning system software through the mapping of financial situation and condition based on basic information inputted by user.
Fourth, fintech that collects fund or financing through application that facilitates interaction between individuals acting as debtor and creditor. This kind of fintech is known as crowd funding and Peer-to-Peer (P2P) Lending.
The last fintech, namely P2P lending service, is a fintech with transaction value that is quite significant in Indonesia. OJK recorded that the amount of P2P credit distribution per August 2018 reached IDR11.86 trillion. The Authority has predicted that the financing distribution amount of the P2P lending industry will have reached IDR20 trillion by the end of 2018. (Bisnis Indonesia, October 2018)
Source of Problem
It should be admitted that fintech provides many benefits, such as the duration of financial service access that is more effective, as well as the convenience that is adjustable to the customer’s mobility, so that the cost incurred by the customer and the financial service provider becomes more efficient. Nevertheless, it does not mean that fintech is risk-free.
Up to 8 November 2018, Legal Aid Institute Jakarta received complaints from 283 debtors of online loan related to various forms of violation of law by P2P Lending fintech service provider. The violation varies, from unpleasant collection method to individual data misuse. The source of the problem is the high interest, which makes the customers seem to be trapped by “digital moneylenders” disguised as P2P Lending. (CNBC Indonesia, November 2018)
Fintech business model that is different from conventional financial service provider makes it hard for the regulator to identify the rights and obligations borne by the service provider and its customer. The limited face-to-face contact between customer and fintech provider makes the decision taken by the customer more vulnerable to dispute due to information asymmetry. Besides, fintech is also vulnerable to disruption, not to mention individual data and information misuse since it is online technology-based.
OJK has set out rules for fintech industrial players, such as POJK Number 77/POJK.01/2016 (POJK 77/2016) on Information Technology-based Money Loan Service and POJK Number 13/POJK.02/2018 (POJK 13/2018) on Digital Financial Innovation in Financial Service Sector. The objective is to create a conducive ecosystem in digital financial industry as well as to protect the transacting parties.
Under such regulation package, OJK sets detailed profile of operator and user. Notably for the operator, OJK still limits the legal entity status to only limited liability company or cooperative confirmed as other financial service institutions. In addition to legal entity, from ownership side, OJK obliges that the institution must be established or owned by foreign citizen and/or legal entity, with maximum ownership of 85%.
Besides, the operator must also meet Regulatory Sandbox or system and service trial program within a period of 6-12 months before the business is fully operated. Thus, OJK can assess the transaction risk and reliability of business process, business model, financial instrument, and governance of the operator.
In regards to user—in this case debtor and creditor—OJK allows foreign citizen and/or legal entity including international institution to be a creditor. However, the debtor is only for the citizen and/or legal entity from or domiciled in Indonesia.
Also Read: Mutual Trust and Data Integration as the Main Investment of Tax Reform
Speaking of Tax
Considering the massive growth of fintech industry, the transaction amount of technology-based financial service is very significant. The concerning tax potential should also be the same.
For P2P Lending, for instance, the potential of loan amount that can be distributed can reach IDR2 billion for each debtor. If we calculate the interest on loan, imagine how big the potential is for the tax that can go to the state cash from this business.
Principally, each additional income or property is subject to tax. DGT in a series of discussion with digital industrial players frequently elaborates the tax aspects on financial service, fintech is no exception. The tax approach is adjusted to the financial industrial classification, in which based on DGT study there are five types of fintech activity.
First, fintech for payment service such as crowd funding or P2P Lending. Based on taxation provisions, the benefit obtained by the business player should be subject to Income Tax Article 23 at 2% of total income and 10% Value Added Tax (VAT) upon the service provision.
Second, fintech for financial software trading. The tax imposed in this type of fintech is 10% VAT upon intangible goods transfer.
Third, fintech for credit assessment research service. Similar to the above types, this fintech is also subject to 10% VAT upon credit assessment service provision.
Fourth, fintech for investment management. This type of fintech is imposed with Income Tax Article 23 at 2% of total income and 10% VAT upon service provision.
Fifth, fintech engaged in financial and insurance service—including saving, loan, and capital—is generally subject to Income Tax Article 23 of 15% upon the income derived from loan interest, dividend, or other profits.
Whereas, Indonesia basically adopts self-assessment tax system. In other words, the Taxpayers are trusted to calculate, pay, and report the tax that should be payable themselves. Accordingly, “compliance” of the Taxpayer is the keyword and, thus, persuasion is not enough.
Unfortunately, special regulation on taxing mechanism upon the profit or income from fintech business—esp. P2P Lending—is yet to issue. Hence, it is normal that DGT finds it hard to determine the tax subject and identify the income from online loan business in Indonesia.
There are several issues that become challenges for DGT to tax fintech business. Among others, the mechanism to determine the tax subject and object, set the proportional tax rate, and impose the tax. Besides, the availability of transaction data that are limited and the method to track the location of fintech players also become a task for the Tax Authority.
Not to mention the method to map fund transfer media in fintech transaction, as well as to determine the just taxing method. Those have not been included in international taxation, in which Indonesia’s taxing right is bound to Double Taxation Avoidance Agreement (tax treaty).
So far, the government expects awareness and compliance of fintech players to fulfill their tax obligations well and accurately. The regulations used as a sweet complement to attract the Taxpayers are only Government Regulation Number 23 Year 2018, which gives low tax facility for Taxpayers with certain revenue (MSME) and Minister of Finance Regulation Number 197 Year 2013 on limitation of small enterprise subject to VAT.
Whilst Indonesian Tax Authority is still staggering in responding the fintech business dynamic, several countries in the world have run fast with their dynamic taxation technology and policy. British government, for example, through Financial Conduct Authority (FCA) attempts to accommodate this industry through regulation on P2P Lending, including the taxation issue. Referring to the Introduction of the Innovative Finance ISA in April 2016, P2P Lending interest and profit are exempted from tax. It is by adding the interest income earned by the creditors to their taxable income.
P2P Lending with loan amount of EUR10,000 will acquire 10% annual interest income or EUR1,000 per year. Thus, the basic rate to be paid by the Taxpayer is 20% of EUR1,000, or EUR200. Higher rate will make the Taxpayer pay higher tax (40%). Further, Taxpayers with additional rate shall pay the tax at 45%. However, Personal Saving Allowance in April 2016 allows the Taxpayers with lower rate to obtain EUR1,000 as tax-free interest.
Such tax mechanism is, principally, similar to individual tax mechanism in Indonesia. Income from P2P Lending is classified as other income that automatically increases the Taxpayer’s gross income. However, in P2P Lending case, Indonesia has not had any legal basis to impose tax on such income. As a result, P2P Lending still becomes a task to be completed by Indonesian Tax Authority.
