Reviewing the Tax Aspects of Listing Fees in the Retail Business

Indonesia's modern retail industry is currently dominated by two minimarket franchise brands, which control around 87% of the market share. The remainder is split among hypermarkets, supermarkets, and department stores.

Consumer shopping behavior has also shifted. Whereas people used to shop more frequently at supermarkets and hypermarkets, they are now turning to minimarkets. This change is evident in the declining sales of supermarkets and hypermarkets, while minimarket sales have instead grown by 12.1%.

Minimarkets now account for approximately 21% of total modern retail sales and recorded an 8% growth in 2018. Around 75% of consumers shop at minimarkets, with the average customer visiting twice a week.

Several factors drive this behavioral shift, one of which is the increasingly dynamic and fast-paced lifestyle of Indonesian society. The demand for practical and quick (on-the-go) services has also risen.

READ: Distributor's Dilemma on Compensation Tax for Purchase

Minimarkets meet this need by offering locations close to residential areas, making it easier for consumers to shop without spending time traveling to larger stores, especially in densely populated major cities.

With 43,826 outlets, Indonesia has the highest number of minimarkets in Southeast Asia. More than 1,000 new minimarket outlets are established almost every year, with an annual growth rate of 3.2%.

By comparison, the Philippines recorded the highest growth in the past year at 8.7%, followed by Vietnam (5.2%) and Myanmar (4.7%). Globally, the growth of the modern retail market is only around 3.4% per year.

Retail Revenue Not Solely from Product Sales

Revenue in the modern market does not solely come from the margin between the selling price to consumers and the purchase price from suppliers. They also earn income from various forms of trading terms, which in some cases may even exceed the profit margin on the goods themselves.

These trading terms are provisions within cooperation agreements between modern retailers and suppliers, concerning the distribution and placement of products in retail stores.

However, the practice of applying trading terms has sparked controversy. The absence of clear limitations has often led modern retailers to impose high fees on suppliers. This has made it difficult for small and medium enterprises (SMEs) to get their products into modern stores, with many suffering losses due to being unable to bear the costs.

In response, the government issued Ministry of Trade Regulation (Permendag) No. 70 of 2013 to clarify the cost limits of trading terms. Article 9 stipulates that the fees charged to suppliers may not exceed 15% of the purchase price of goods, excluding regular discounts, and must relate directly to sales-related activities. These fees are also separate from regular discounts.

Chairman of the Indonesian Modern Market Supplier Association (AP3MI), Susanto, welcomed this regulation. According to him, the cap on trading term costs will provide certainty and is expected to increase supplier deliveries to modern markets by up to 50% in the coming years.

Before the regulation, listing fees could reach billions of rupiah for a single new product. Now, suppliers only need to pay around IDR 40 million to market their products within modern retail networks.

Listing Fee Scheme as a Trading Term

One of the most common forms of trading terms is the listing fee. This was previously regulated under Article 9 paragraph (2) of the Ministry of Trade Regulation (Permendag) No. 53 of 2008 concerning the regulation of listing fees.

A listing fee is a fee paid by a supplier to a modern retailer in order for their product to be registered and sold in the retailer’s stores. In practice, listing fees may be applied through various schemes, depending on the policies of each modern retailer.

Generally, a listing fee is a fixed, one-time charge for each new product. However, fees can also be applied per variation of the product supplied. Additionally, there may be extra fees if the supplier’s products are distributed to more than one store branch.

Tax Aspects of Listing Fees

With the increasing supply of products from suppliers to modern retailers, various questions have arisen regarding the tax treatment of listing fees. Many taxpayers assume that these fees are not subject to tax withholding.

Indeed, the provisions regarding listing fees are not explicitly regulated under tax laws or Minister of Finance Regulations (PMK). However, as a reference, taxpayers can refer to the Directorate General of Taxes Circular Letter No. SE-24/PJ/2018.

This circular outlines the tax treatment of listing fees under two scenarios:

1. Compensation as a Reward

If the customer (modern retailer) receives compensation from the supplier in the form of money, goods, or reduction of obligations, such compensation is categorized as a reward or gift.

• If the recipient is an individual resident taxpayer, it falls under Income Tax Article 21.
• If the recipient is a domestic corporate taxpayer or a permanent establishment (BUT), it is subject to withholding under Income Tax Article 23.
• If the recipient is a foreign taxpayer without a permanent establishment in Indonesia, it is subject to Income Tax Article 26.

2. Compensation as a Management Service

If there is a cooperation contract and service activity involved, then the remuneration is considered a payment for management services. The tax treatment is the same as in the first scenario, depending on the taxpayer's status. However, the difference lies in the applicable tax rate based on the nature of the income.

On the other hand, from the perspective of the supplier or distributor, listing fees are categorized as administrative expenses directly related to efforts to obtain, collect, and maintain income. Therefore, these costs are deductible from gross income in the corporate income tax calculation, as regulated in the Directorate General of Taxes Letter No. S-47/PJ.42/2006.

Understanding the tax aspects of listing fees and other trading terms is not only important for compliance but also has a direct impact on cost efficiency and business sustainability, especially for businesses aiming to expand product distribution in modern retail markets.

With proper understanding, businesses can develop wiser strategies, minimize tax risks, and remain competitive in an increasingly dynamic retail landscape. It is time for business actors to not only focus on sales but also be prudent in managing their tax obligations. (ASP/KEN)

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.