The Digital Tax Dilemma: Inconsistencies Between the PMSE VAT and VAT Offshore Mechanisms

Value Added Tax (VAT) on Electronic Commerce (PMSE) emerged out of an urgent need. As cross-border digital consumption grew rapidly while traditional concepts of physical presence became inadequate, the government needed new instruments to protect tax revenues. In this context, the PMSE VAT is a policy breakthrough that deserves appreciation. 

From a regulatory perspective, PMSE VAT is governed by Minister of Finance Regulation Number 81 of 2024 (PMK 18/2024), particularly the 19th Chapter, Articles 332 to 339, and further elaborated through Director General of Taxes (DGT) Regulation Number 12 of 2025 (PER 12/2025). This framework emphasizes on the mechanism for appointing PMSE business actors as VAT collectors based on specific criteria. 

According to data from the DGT, as of November 2025, this policy has delivered significant fiscal results. A total of 254 PSME companies have been appointed as PMSE VAT collectors, of which 215 of them have collected and paid VAT, with an accumulated total of IDR 34.54 trillion. 

However, behind this progress, lies a more fundamental issue: the alignment between the PMSE VAT mechanism and the long-standing VAT Offshore. This problem does not stem from an absence of regulations, but from inconsistencies in applying the core principles of VAT when two collection schemes are run side by side. These differing approaches have ignited debate over the core principles underlying VAT. 

The Destination Principle Dilemma 

In VAT collection, the destination principle refers to a concept in which VAT is imposed or collected at a place where goods or services are utilized. This principle is explicitly stated in the VAT Offshore provisions in the Minister of Finance Regulation Number 40/PMK.03/2010 (PMK 40/2010). The regulation confirms that the utilization of intangible taxable goods and/or services from overseas within Indonesia’s customs territory remains subject to VAT. 

Under the VAT Offshore scheme, the VAT payable does not depend on the status of a VAT collector of the overseas party, but on the place of goods or service utilization. As long as the utilization takes place in Indonesia, the VAT remains obligated from a legal perspective. 

Accordingly, even if a company’s status as a VAT collector is revoked, VAT on goods or service utilization from outside Indonesia remains applicable through the self-assessed VAT Offshore mechanism. 

However, this approach is not fully reflected in the PMSE VAT framework. PMSE VAT collection depends on administrative designation and the fulfillment of certain thresholds. 

A PMSE business actor is appointed as a PMSE VAT collector only if it meets specific criteria, including goods and service utilization transaction values exceeding IDR 600 million annually or IDR 50 million monthly, and/or traffic exceeding 12,000 users annually or 1,000 users monthly. 

PMSE business actors that do not meet these criteria may still apply to be appointed as VAT collectors through Coretax or other systems integrated with the DGT’s administration. Once appointed, the business actors will receive a formal decision letter from the DGT. 

For foreign business actors, such an appointment is followed by the issuance of a Tax ID Number (NPWP), while domestic business actors obtain official status as PMSE VAT collectors. 

This policy design results in a situation where not all digital consumption occurring in Indonesia falls within the PMSE VAT collection scope, even when it substantively meets the destination principle. Identical digital consumption may be treated differently depending on whether the service provider meets the criteria and has been appointed as a PMSE VAT collector. 

Digital Compliance Gap 

In practice, the VAT Offshore mechanism is relatively effective for business-to-business (B2B) transactions. The government can still supervise and audit compliance through corporate taxpayer audits, so non-compliance risks may be administratively controlled. 

In contrast, VAT Offshore faces structural limitations when applied to business-to-consumer (B2C) transactions. The government lacks adequate instruments to ensure that end consumers independently pay VAT on overseas digital services. In this context, self-assessment obligation at the consumer level is difficult to enforce and minimally monitored. 

These limitations, in fact, gave rise to the PMSE VAT. The scheme was designed as an administrative solution for B2C transactions by shifting the VAT collection obligation from end consumers to digital service providers. 

Conceptually, therefore, PMSE VAT is better positioned as a tool to ensure VAT collection on digital consumption by end consumers, instead of as a complete replacement for the VAT Offshore mechanism. 

However, problems arise when PMSE VAT implementation is constrained by administrative appointment and transaction or traffic thresholds. Unlike VAT Offshore, which does not have minimum transaction thresholds, PMSE VAT applies only to selected business actors that meet specific criteria and are appointed as VAT collectors. 

Eventually, these limitations create a paradox. On one hand, PMSE VAT is aimed at ensuring VAT collection on B2C digital consumption that is difficult to monitor. On the other hand, threshold-based criteria exclude certain domestic digital consumption from VAT collection, despite meeting the destination principle substantively. 

As a result, not all Electronic System Operators (PSE) qualify as PMSE business actors required to collect VAT, even when the transactions and consumption clearly occur in Indonesia. In this context, administrative thresholds may conflict with the destination principle itself as the place of consumption no longer serves as the sole basis for determining VAT obligations. 

Dual Tax Schemes 

This situation highlights that the destination principle within Indonesia’s digital VAT system has not consistently applied. If VAT is applied based on the location of domestic consumption, restrictions based on administrative appointment should be reconsidered. 

From a fiscal effectiveness standpoint, PMSE VAT addresses the limitations on supervision of VAT Offshore, particularly for B2C transactions. However, this policy design implicitly creates different treatment. VAT imposition is no longer determined solely by the place of consumption, but also by the administrative status of the business actor. 

In this context, the coexistence of two schemes—VAT Offshore under PMK 40/2010 and PMSE VAT under Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) 81/2024 and PER 12/2025—creates grey areas in the application of digital VAT. Without a clear formulation of the relationship between the two mechanisms, digital VAT may apply effectively to certain transactions while simultaneously creating compliance gaps and legal uncertainty for others. 

With the absence of clear boundaries between PMSE VAT and VAT Offshore, the destination principle risks being applied selectively. Digital consumption within Indonesia may be treated differently solely due to differences in the administrative status of the business actor. 

To ensure fairness and adherence to the destination principle, the government should reconsider the criteria for appointing PMSE VAT collectors, given that the VAT Offshore mechanism itself does not have transaction value thresholds. Clarifying the relationship between these two mechanisms is essential to ensure that Indonesia’s digital VAT system is consistent, fair, and legally certain. (KEN) 

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