Netflix’s complicated relationship with Indonesia

A pioneer in the video-on-demand (VOD) space, Netflix was founded in 1998 as a DVD-by-mail rental service. It started offering on-demand video streaming in America in 2007 and entered the Indonesian market in January 2016. It wasn’t long before regional competitors iFlix and Hooq followed suit the same year.

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Netflix is the global streaming leader with over 167 million paying customers by the fourth quarter of 2019, according to Statista. However, despite its global popularity, Netflix is currently on fragile ground in Indonesia. Over the past year, the firm has been on the finance ministry’s radar as it has not paid any taxes since commencing operations in Indonesia.

Statista estimates that Netflix will earn US$76.6 million in revenue from Indonesia by the end of 2020. If the firm had paid its value-added tax of 10%, Indonesia would have received a tax income of US$3.8 million in 2019 alone. However, since the firm doesn’t have a permanent branch in the country, it doesn’t have a taxpayer number. Therefore, the government cannot collect taxes from it. Netflix’s Asia-Pacific headquarters is located in Singapore and there is no indication that Netflix will open an office in Indonesia anytime soon.

The government feels this can harm the country’s economy in the long run. Therefore, the government plans to use the Nexus Tax approach in pursuing potential tax income from cross-border and digital transactions, including from over-the-top (OTT) service providers. With this tax, companies that make transactions and have a significant economic presence in Indonesia are required to pay taxes, even if they don’t have a physical entity in the country. Details about this new regulation are contained in the tax omnibus law draft that is due for completion in March. According to the draft, if a company fails to fulfill its obligations, it would be subject to administrative sanctions and possible termination of access.

Netflix and the education and culture ministry

Despite problems with the finance ministry, Netflix has a good relationship with the ministry of education and culture under the leadership of former technopreneur Nadiem Makarim. In January, Netflix signed a partnership agreement with the ministry that aims to help boost the domestic film industry.

The partnership will focus on developing creative skills and capabilities, which include creative writing, as well as post-production training. Netflix has committed US$1 million to these collaboration programs, including sending 15 selected Indonesian scriptwriters to Los Angeles to receive training on scriptwriting and film science.

While some people welcome this initiative, others question whether this is a wise move, considering Netflix’s tax problem has yet to be resolved. Heru Sutadi, an executive director with the Indonesia ICT Institute, said that all ministries should have one voice in addressing businesses with unresolved issues in Indonesia.

“The education and culture ministry should discuss or communicate first with the finance ministry as it is currently reviewing Netflix’s taxation. Because when companies face problems with one institution, they might approach another institution that is seen as ‘softer’,” said Sutadi. “Netflix’s tax owings are certainly way much more than its investment value in that partnership, so we have to ensure that they comply with our tax regulation,” he continued.

However, Makarim is anything but a rigid bureaucrat. He didn’t wait for the new taxation regulation since it would take months and slow down his ambition to advance local film talent. Although it has obtained the blessing of the ministry of education and culture, Netflix must comply with new tax regulations so it can operate peacefully in Southeast Asia’s largest market.

Netflix versus Telkom

Another major Netflix issue is that its service is currently blocked by the country’s largest telco Telkom Indonesia and its subsidiaries, including home internet provider IndiHome and mobile carrier Telkomsel. In a recent interview with KrAasia, Telkom Indonesia’s digital business director Faizal Djoemadi said that Netflix doesn’t want to fulfill a requirement by Telkom, namely to retract “problematic content” – which refers to sensitive content like nudity and violence – within 24 hours.

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As a result, Netflix has not been able to leverage on Telkom’s huge user base. According to Djoemadi, IndiHome has 7 million customers and Telkomsel had 170 million subscribers as of the third quarter of 2019, where almost 65% of them are data users.