New regulations are on the way that will impact providers of “over-the-top” (OTT) services targeting Indonesia and Thailand.
Rapid digitalisation of multiple sectors in Asia is marking the dawn of a new era for policy and regulatory frameworks. Due to the availability of wireless broadband and prolific smartphone usage, OTT services such as mobile VoIP mobile applications, mobile instant messaging, online video and TV, and online music services have experienced unprecedented growth. Traditional onshore broadcasters and telecommunications companies have suffered at the hands of the availability of domestic and foreign OTT services which have cannibalised advertising and viewing figures, often whilst increasing strain on bandwidth. A key challenge in this new era is how to regulate the growing number of onshore and offshore OTT services. Examples include online global video services like Netflix and digital TV channels in Thailand that are broadcasting their programmes on OTT platforms, such as Workpoint and channels 3, 7 and 8. Other OTT services include transportation services like Malaysia’s Grab and Indonesia’s GoJek; communication tools like Facebook, LinkedIn, WhatsApp, Snapchat and LINE; as well as e-commerce platforms like Indonesia’s Tokopedia. Historically, OTT services which reach users via telecommunication companies’ networks have not required a licence or been required to pay any licensing fee; and in the case of offshore OTT services, have not been subject to local taxation. Policy-makers in Indonesia and Thailand are the latest to try to tackle this issue. Both have recently announced plans to introduce regulations aimed at OTT services.
In this post, we look at the proposed changes and what they might mean for OTT services in these countries.
What has changed in Indonesia?
Offshore OTT services targeting Indonesia could find themselves subject to the payment of domestic corporate income tax in the country.
The Director General of Tax issued Circular Letter 4/2017, which builds on the guidance set by Circular Letter No. 3/2016. The 2016 Circular states that applications and/or content services delivered over the internet can be provided by a foreign individual or business entity if they have a “permanent establishment” (known in Indonesia as a Badan Usaha Tetap or “BUT”). The primary aim of Circular Letter 4/2017 is to establish criteria to ensure that the owners and operators of foreign OTT services (which make their services available in and generate revenues from Indonesia) will be subject to the payment of domestic corporate income tax set out under Article 17 of Income-Tax Law 2000, equal to a 25% rate of taxable income plus 20% branch profit tax, the latter being a levy payable only by foreign entities.
Why is the shift happening in Indonesia?
The key driver in Indonesia is continued preparation for the full regulation of OTT services, the first draft of which was circulated by the Ministry of Communications and Informatics in April 2016 (the OTT Regulation). It is expected that the OTT Regulation will require offshore OTT services that make their service and/or content available in Indonesia to move onshore (involving incorporation as a local entity) or be deemed a foreign OTT Service with a permanent establishment. In either case, the relevant operators risk being taxed onshore and becoming subject to all applicable laws and regulations in Indonesia.
Information and Technology Minister Rudiantara has said that, “Digital advertising reached US$800 million last year. It is really big. Why should the government tax the locals but let the foreigners eat a free lunch?” Circular Letter 4/2017 takes a step towards setting the criteria and process for the identification and registration of owners and operators of OTT services as foreign corporate taxpayers. This could have major financial and operational considerations for services targeting Indonesia.
Which are the target OTT services in Indonesia?
Circular Letter 4/2017 sets out a formal definition and scope of OTT services for Indonesia:
- “Application services” are those that involve the use of software for the provision of communication services, as well as services involving financial transactions, commercial transactions, data storage and collection, search engines, games and social media activities, including derivative services which utilise internet access provided by telecommunications network operators (“Operators”); and
- “Content services” are those that provide digital information, either in form of text, voice, pictures, animation, music, video, film, games or any combination of these elements, including digital information which may be streamed or downloaded through the use of internet access provided by Operators.
It appears to be drafted purposely broadly to cast a wide regulatory net over virtually anything delivered to a consumer or business in Indonesia using the internet.
How are OTT services being classified and regulated onshore in Indonesia?
The OTT Regulation remains in draft but Circular Letter 04/2017 seeks to stipulate certain criteria to classify foreign OTT services as having a permanent establishment based on whether they have fixed premises for their operational activities in Indonesia and have employees or agents acting for and on behalf of them for more than sixty days in any calendar year. In addition, servers located within Indonesia may also be determined as evidence of a permanent establishment if the foreign OTT service is operating their business or activities through such servers. Considering the recent moves towards control over cross-border transfer of personal data, including the requirements to store such data on servers located in Indonesia, it looks like any offshore OTT service will need to carefully weigh up the potential for becoming subject to regulation and taxation.
What has changed in Thailand?
In Thailand the National Broadcasting and Telecommunications Commission (the NBTC) has committed to finalising by 2018 its governing policy on the classification of owners and operators of OTT services, which to date, have been allowed to operate without any licence in the absence of any regulatory framework. The primary aim of this commitment is to mark a level playing field between OTT services and relevant counterparts from the traditional broadcasting and telecommunications industries. The intention is that owners and operators of onshore and offshore OTT services will be subject to the same or similar regulations as traditional broadcasters and telecommunications companies, including requirements to obtain and pay for operating licences, pay a value-added tax and be subject to stringent checks on illegal content. Clearly, monitoring compliance of offshore OTT services will be more challenging and so is likely to be addressed in the upcoming regulations.
Why is this shift happening in Thailand?
NBTC secretary general Takorn Tantasith has said that the regulator is making the move to reflect the dramatic increase in revenues generated by OTT services and the strain on bandwidth they are causing. A report conducted by the NBTC found that free OTT services had earned combined advertising revenue of 2.16 billion Thai baht in 2016, 70% of which stemmed from YouTube.
Piracy is another issue that these changes are intended to tackle, although this will be far from easy. The local motion picture industry estimate that page views of pirate sites in Thailand are twenty times higher than those of legitimate sites – a much higher ratio than in other Asian markets. A key challenge for legitimate OTT services going forward will be to educate consumers on the availability of their services. Indeed, Patompong Sirachairat, COO & VP of Mono Technology, shared his view at CASBAA 2016 when he asserted that the main threat to the industry in Thailand came from piracy. “In this country, people can get content anywhere and anytime for free,” he said, “and the pirate sites’ ability to provide content quickly is a real obstacle for legitimate OTT service providers.”
Which are the target OTT services in Thailand?
Whilst Thailand is yet to codify a definition of OTT services, an internal study conducted for the NBTC by Time Consulting Co in 2016 found that such services in Thailand are commonly divided into four types: independent OTT operators, pay TV operators that broadcast via OTT platforms, telecom operators that provide OTT and some digital TV channels. Col Natee Sukolrat, chairman of the NBTC has said that planned control measures will affect OTT services with more than 1,000 viewers, thus the aim is certainly ‘catch-all’.
Takorn Tantasith has shared recently that a fee needs to be imposed, most likely by 2018, on the technology behemoths like social network site Facebook, Alibaba, Line, Google, Agoda, and Uber. NBTC will hold an open forum in Bangkok for discussion on the proposals to level the OTT service playing field on 12th September this year. Representatives of all the ASEAN telecom regulators, fifty telecom operators in the region and OTT services will be invited to share their thoughts.
Owners and operators of foreign OTT services that are available in Indonesia should consider the necessity or desirability of setting up and registering a permanent establishment.
The major challenge here is, of course, is in enforcement. Indonesia is further forward than Thailand in terms of codifying into official guidance letters the approach they prefer but until the OTT Regulation is finalised and published, there is still uncertainty over applicable sanctions (such as blocking of OTT services) and fines. It remains unclear how Thailand will ensure that all foreign and local OTT Services obtain an operating licence but it is likely that a system of penalties and the limitation of bandwidth for such services could be used to push for compliance.
Policymakers across the globe are looking at the regulation of OTT services. In certain policy areas, regulators may find it suitable to “level down” the regulatory environment and de-regulate providers of traditional broadcasters and telecommunications services thereby encouraging competition and innovation. It will be critical that new regulations in Indonesia and Thailand do not act as an unnecessary barrier to entry into the market for OTT services. Increasing compliance costs imposed by a strict and unyielding regulatory framework may actually reduce competition.
The good news is that there are opportunities for both onshore and offshore OTT services to partner with traditional broadcasters and telecommunications companies to bring new services to market which satisfy consumer demand, drive data usage and increase revenue, such as Thailand’s AIS exclusive partnership with HBO to offer premium content via an app, AIS Play, on mobile devices. Owners and operators of OTT services in Indonesia and Thailand should perform without delay a full assessment of their business operations in light of the changing regulatory landscape that may initially have far-reaching tax implications and potentially later, other obligations around data privacy, content filtering and censorship as both countries move towards full regulation of the digital ecosystem.