Introduction: The Growing Complexity of International Tax on Imports

As globalization continues to shape international trade, royalties and licensing fees have become standard in cross-border transactions. However, Indonesia’s current regulatory framework—especially concerning tax on imported goods tied to royalty payments—has triggered concern among businesses and tax professionals alike. This issue highlights the urgency of policy reform to prevent over-taxation and promote a more investor-friendly environment.

The Legal Basis for Taxing Royalties in Imports

Under Article 15(1) of Indonesia’s Customs Law, royalties paid by local importers to foreign licensors must be included in the customs value of imported goods if they’re deemed a condition of sale and not already reflected in the transaction price. This is consistent with the WTO Customs Valuation Agreement, aiming to maintain a fair customs valuation globally.

However, once royalties are added to the customs value, importers face higher import duties and multiple layers of taxes. In Indonesia, failure to include royalties appropriately can result in penalties reaching up to 1,000%, creating significant legal and financial risks.

The Problem: Overlapping Tax Treatments

From a compliance perspective, the inclusion of royalties in customs value might make sense. However, in practice, this leads to overlapping tax liabilities. A single royalty payment could be subjected to:

• PPh Article 26 (withholding tax on royalties paid abroad)

• Self-assessed VAT (on the use of offshore intangible goods)

• Import duty (based on the adjusted customs value)

• Import VAT and PPh Article 22 (also based on the customs value including royalties)

As a result, a single royalty could be taxed five different times—substantially increasing the cost of imports and deterring potential foreign investment or licensing agreements.

Why It Matters: Economic and Legal Implications

Such multi-layered tax treatment not only drives up costs for importers but also creates legal uncertainty. Businesses are often left confused about whether a royalty should be included in the customs value, how it’s defined, and how to avoid double or even triple taxation.

This confusion discourages knowledge transfer, technology licensing, and can ultimately limit Indonesia’s ability to attract high-value industries.

Suggested Policy Review: Toward a Harmonized Tax System

Given these complexities, a more coherent approach to tax policy is urgently needed. Policymakers should explore strategies to reduce unnecessary burdens without compromising government revenue. Some possible measures include:

1. Clarity on Definitions and Applications: Provide clear, consistent definitions of when royalties should be included in customs values, and when they should not.

2. Tax Relief Coordination: Exclude royalties already subject to PPh Article 26 or self-assessed VAT from inclusion in the customs value—or alternatively, exempt royalties already added to customs value from further withholding tax or VAT.

3. Adoption of International Best Practices: Align with countries that apply streamlined taxation on royalties, avoiding multiple levies on the same payment and ensuring transparency in valuation.

4. Cross-Ministerial Collaboration: Encourage collaboration between the Ministry of Finance, Customs Authority, and Tax Directorate to synchronize guidelines and prevent regulatory overlaps.

The Bigger Picture: Protecting Revenue Without Over-Taxing

While protecting state revenue is a valid priority, excessive and overlapping taxation reduces competitiveness and deters foreign direct investment. A balanced tax policy will not only ensure compliance but also promote business growth, innovation, and economic stability.

Conclusion: Time to Rethink Tax on Royalties

The taxation of royalties in Indonesia—particularly in relation to imports—needs urgent reevaluation. A well-coordinated, business-friendly tax policy can boost investor confidence, simplify compliance, and reduce disputes. As international trade grows more complex, Indonesia must position itself as a forward-thinking economy by embracing modern, streamlined taxation principles.