Tax treatment of Fintech activities

Date of Post

May 11, 2022

Written by

lemonadecares

On 30 March 2022, the MoF also issued Regulation No. 69/PMK.03/2022 (“PMK-69”) stipulating the Income Tax treatment of interest income in peer-to-peer (P2P) lending, as well as the VAT treatment of Financial Technology (“Fintech”) activities.

Fintech is an activity using technology in a financial system which generate products, services, technology, and/or new business model, that contributes to the monetary and financial system stability as well as efficiency, continuity, safety and reliability of payment systems.

Income Tax treatment on interest income in P2P lending

There are three parties involved in a P2P lending transaction, namely the lender, the borrower, and the lending service provider (Penyelenggara Layanan Pinjam Meminjam/”Fintech host”) that connects them. In a P2P lending framework, the lender typically receives interest from the borrower through the Fintech host. The interest payments received by the Fintech host do not constitute income for the Fintech host. Consequently, the interest payments passed on to the lender also do not constitute deductible expenses for the Fintech host.

The interest income passed on to the lender must be reported in the lender’s Annual Income Tax Return (AITR) and it is also subject to Article 23 withholding tax (for domestic lender) or Article 26 withholding tax (for foreign lender) of 15% and 20%, respectively. The withholding tax is withheld by the Fintech host (if the host is a Financial Services Authority (Otoritas Jasa Keuangan/OJK)-approved institution) or the borrower (if the host is not an OJK-approved institution).

The Fintech host may prepare only one withholding tax slip for one lender on all of their interest income received within one month.

The Fintech host may receive or earn fees, commissions, ujrah, or any other income from the lender or the borrower in relation to the Fintech activities, including an interest spread in the case where the interest paid by the borrower is higher than the interest passed on to the lender. This income must all be reported in the Fintech host’s AITR. This income of the Fintech host is not subject to any withholding tax by the lender or borrower if the host is an OJK-approved institution. However, normal withholding tax obligation on service fee is applicable if the host is not an OJK-approved institution.

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VAT treatment on Fintech activities

The high-level categories of Fintech services that are subject to VAT are as follows:

  1. Payment;
  2. Investment settlement;
  3. Capital raising;
  4. P2P Lending;
  5. Investment management;
  6. Online insurance product;
  7. Market support;
  8. Digital Finance Support and other financial services.

Regular VAT rate is applicable on the VATable services provided under each of these categories. Below are the VAT treatments on each component that may arise within the services framework:

a) Payment system services

  • VAT is due on compensation in the form of fee, commission, merchant discount rate, or any other fee, including administration cost and card price charged by the issuer of electronic money.
  • The money itself, that is contained in the electronic money or e-wallet, including bonus point, top-up point, reward point, and loyalty point, is not a VAT object.
  • The final settlement value based on the clearing calculation and the fund value that is transferred through the payment system are not included as part of the VAT base.
  • Fund transfer services within the same bank for current account customer, time deposit, certificate of deposit, savings account or other similar product, are exempted from VAT. 

b) Investment settlement

  • VAT is due on compensation in the form of fee, commission, or any other fee, received by the investment settlement provider.

c) Capital raising

  • VAT is due on compensation in the form of fee, commission, or any other fee, received by the capital raising provider. Capital raising provider includes equity crowdfunding provider.
  • Funding or financing services provided by the financier to the stock issuer through an equity crowdfunding service provider, constitute financial services that is exempted from VAT.
  • Stock and other financial instrument that are delivered to the financier through electronic channel provided by the equity crowdfunding provider, constitute securities that are not subject to VAT.
  • Capital raising provider may issue VAT Invoice on the delivery of these services under the Retailer (Pedagang Eceran) regime.
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d) P2P lending

  • VAT is due on compensation in the form of fee, commission, or any other fee, including the interest spread received by the P2P lending provider.
  • Funding, lending or financing services provided by the financier to the debtor through a channel provided by the P2P lending provider, constitute financial services that are exempted from VAT.
  • P2P lending provider may issue VAT Invoice on the delivery of these services under the Retailer (Pedagang Eceran) regime.

e) Investment management

  • VAT is due on compensation in the form of fee, commission, or any other fee, including the interest spread received by the P2P lending provider.
  • Funding, lending or financing services provided by the financier to the debtor through a channel provided by the P2P lending provider, constitute financial services that are exempted from VAT.
  • P2P lending provider may issue VAT Invoice on the delivery of these services under the Retailer (Pedagang Eceran) regime.

f) Online insurance product

  • VAT is due on compensation in the form of fee, commission, or any other fee, received by the online insurance product provider.
  • Online insurance services provided by an insurance company constitute financial services that are exempted from VAT.

g) Market support

  • VAT is due on compensation in the form of fee, commission, or any other fee, received by the market support service provider.
  • This service includes provision of product information and financial service comparison data.

h) Digital finance support and other financial services

  • VAT is due on compensation in the form of fee, commission, or any other fee, received by the service provider.
  • This service includes provision of eco crowdfunding, Islamic digital financing, ewaqf, e-zakat, robo advise, credit scoring, invoice trading, voucher/token, and application based blockchain.
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