Taxing on Endorsement Income

Author: Yolanda Ferida

Instagram seems to have become a widely used outlet for the latest advertising models. Internet users have proven the long-time suspicion that humans are generally attracted more to the looks than anything else, reflected from the typical interest and preference in feeds in the form of visual to text. Consequently, business strategy has changed. It is noticeable that a small number of commercial entities tend to seek endorsement services through influencers, i.e., personas who gained fame on the said media, known as celebgrams (literally a made-up word for “Instagram celebrities”).

And now, what is a celebgram? A celebgram is an individual who has regularly posted creative content on his/her Instagram account and successfully attracted a great number of followers, therefore, he/she is considered to have been perceived as influential based on his/her significant viability appeal.

Commercial entities, in modern times, view a celebrity or person of a certain degree of fame as a tool for marketing potential. Along with the on-growing trend that seems unstoppable, in this era of information technology 4.0, digital advertising services have effectively morphed into its answer, a sort of replacement, to the traditional ones, in promoting products or services in an unthinkable way before: it is a short, grabbing, fast motion picture with charismatic air of spontaneity and relatability making it an attractive and appealing model of marketing. In this way, an endorsement through the service of a celebgram is seen as highly beneficial to attract market targets, i.e. Instagram users, and to build brand awareness.

Social media make it possible and accessible for anyone, with just a smartphone, to be or create a persona or alter ego on the internet, create and upload video content, gain exposure, garner engagements, and monetize it. Because of this phenomenon, the Directorate General Taxation (DGT) noticed the potential of new state revenue stemming from the engagements of social media and technology-based applications.

DGT has developed a tax monitoring application called Social Networks Analytics (SONETA). SONETA is a monitoring system that gathers data from social media, such as Instagram, Youtube, TikTok, Facebook, and Twitter, and analysed them from the amount of followers/subscribers, amount of endorsement, the lifestyle, and then, these data will be compared with Income Tax and Value Added Tax data reported from influencers. The main objective of SONETA is to identify potential cases of tax non-compliance. If there is a discrepancy between the luxurious lifestyle and the income reported, the DGT can initiate a clarification process or even conduct a tax audit. Now SONETA has gone through a transformation by using the name Smartweb, which can connect many indicators and data related to taxpayers who are under the watch of the tax authority.

The Minister of Finance regulation PMK-66/PMK.03/2023 (“PMK-66”) regarding Income Tax treatment of Benefits In-Kinds (“BIKs”) dated 27 June 2023 reveals the tax system for the social-media sector and stipulates the referral income tax for professional artists, celebrities, and influential persons. PMK-66, article 3, paragraph 3, said, “Replacement or compensation in connection with work or services received or obtained in kind and/or enjoyment is income that becomes the object of Income Tax.” This provision explains that endorsement products are also a reward and are categorized as tax objects. Consequently, professional artists, celebrities, and influencers as the endorsement actors who receive products for each promotion, will be subject to income tax. Therefore, they must pay and report.

In addition, Article 22 of PMK-66 explains the regulation of the assessment of income which is received or obtained in the form of products as a reward for work or services provided. This assessment is based on the market value for reimbursement or compensation in kind and the amount of costs incurred or should have been issued by the giver for reimbursement or compensation in the form of products. However, there is a lack of clarity for a system of assessing and determining the value of the currency.

Income Tax Law regulates that there are 3 (three) ways on income tax treatment for endorsement activities; main work income tax, service activity income tax, and side jobs income tax known as wages or honoraria. The tax treatment of this endorsement income may be various, reflecting differences in calculation (tax basis), withholding and reporting, and the final or non-final nature of the tax. Other than being subject to Income Tax, the endorsement activities can be subject to Value Added Tax since the endorsement is included in the category of selling/buying of services. However, this is not be specified for the rate. This tax is not contained whether the rate is the same as a VAT rate (based on VAT regulation dated on January 1st, 2025, the rate is 12%).

One of the strategies needs to be considered by business or commercial entities to hire celebgrams to do endorsement services or individuals posting creative content is to state in the contract for all value including the value of products, travelling expense for overseas or domestic trip for launching products, and all the value and fee is subject to tax.

Furthermore, influencers are advised to manage their records properly and to be orderly in reporting income from endorsements, paid partnerships, and foreign platforms; this way, everything can be traceable and cleared up, making the accountability for the tax reports cannot be denied.

Published at https://ikpi.or.id/taxing-on-endorsement-income-instagram-of-all-seems-to-become-a-widely-used-outlet-for-the-latest-models-of-advertising-internet-users-have-proven-the-long-time-suspicion-that-human-in-general-is-at/