Law firm interviewed: GHP Law Firm

TikTok has been engulfed in regulatory whirlwinds across the world, which have put a dent in its global ambitions.

In the United States, the popular social media app owned by ByteDance faces a ban unless its Beijing-based parent company divests its U.S. operations, and in Indonesia, TikTok had to temporarily quit its e-commerce business as its shopping arm ran into a slew of obstacles.

In September last year, Indonesia announced it would ban direct commercial transactions on all social media platforms in a bid to ensure “fair and just” competition, protect user data, and ensure the survivals of small and medium-sized mortar-and-brick vendors and traditional wholesale markets in the ASEAN economic powerhouse.

Following that, TikTok Shop has to shut down last October. However, following a $1.5 billion investment into GoTo's e-commerce unit, Tokopedia, the social media platform looks set to restart its online shopping business in Southeast Asia's largest economy.

WHAT DID THE NEW RULES MEAN FOR TIKTOK SHOP?

The September order came as part of the Ministry of Trade Regulation No. 31 of 2023 on the Business Licensing, Advertising, Development, and Supervision of Business Actors in Trade through Electronic Systems (MOT Reg 31/2023). It forced TikTok Shop, the e-commerce arm of the Chinese-owned video-sharing app, to shut down temporarily in October.

Naufal Fileindi, a data protection and TMT partner at Indonesian firm GHP, believes that the government views these commercial transactions on social media platforms as being “too disruptive” towards micro, small and medium enterprises.

He further clarifies that while there were no clear prohibitions for TikTok Shop to conduct e-commerce activities directly within its platform, the shopping arm fell under the newly introduced category of “Social-Commerce” platforms. These platforms include social media organizers that provide features, menus, and/or facilities enabling merchants to offer goods and services.

According to the regulations, Social-Commerce platforms are regulated as a form of business model for an Organizer of Trade Through Electronic Systems (PPMSE). PPMSEs are business actors that provide electronic communication facilities used for trading transactions. However, this type of business actor is prohibited from facilitating payment transactions on their electronic systems.

“TikTok Shop’s Social-Commerce feature encompasses not only the offering of goods and/or services, but also encompasses the transactional aspects which include the (i) purchase of said goods and/or services, (ii) facilitation of payment, and (iii) delivery of purchased goods and/or services,” explains Fileindi. “Social-Commerce PPMSEs may only display an offer of goods and/or services, but the transaction must be conducted in a separate platform (i.e. redirected to an e-commerce platform, or a merchant’s landing page),” he adds.

IS THE TIKTOK-TOKOPEDIA MERGER THE SOLUTION?

In order to stay compliant with the trade regulations, TikTok would need to establish a new entity, obtain an e-commerce license from the Ministry of Trade, and create a standalone TikTok Shop app independent from the social media platform.

To hold onto the lucrative Indonesian e-commerce market, TikTok opted to take a controlling 75 per cent stake in Tokopedia, an e-commerce unit of Jakarta-based technology group GoTo. As part of the transaction, Tokopedia will acquire TikTok Shop’s Indonesia business for $340 million, enlarging its e-commerce platform.

“TikTok’s acquisition of Tokopedia was, from the naked eye, conducted mainly to address the concern involving MOT Reg 31/2023, by facilitating transactions through Tokopedia,” says Fileindi.

But he doesn’t see the acquisition of Tokopedia by TikTok as an attempt to circumvent regulations in Indonesia. Instead, it should be seen as efforts to exercise compliance with the relevant regulations to continue its business operations in the country, he says.

In December last year, transactions through TikTok Shop resumed after its acquisition of Tokopedia, with some notable changes in post-deal transactions.

“The main difference between the transactions pre- and post-Tokopedia acquisition is the use of Tokopedia’s system in facilitating these transactions (i.e. transactions through TikTok Shop now contain a ‘Service provided and managed by PT Tokopedia’ statement),” he explains.

But, the merger appeared to have failed to shield TikTok from ministerial scrutiny. In February, Indonesia’s minister of cooperatives and SMEs Teten Masduki alleged that TikTok Shop continues to violate local regulations because the platform still allows direct transactions on social media. And Trade Minister Zulkifli Hasan has said he would monitor the partnership between TikTok Shop and Tokopedia to see if any violations still occur.

“The MOT is still of the view that this workaround remains non-compliant towards MOT Reg 31/2023, as the transaction is not redirected to Tokopedia and is still conducted through TikTok Shop. MOT’s insistence on noncompliance arising out of TikTok Shop still facilitating the transactions may be due to the facilitation of the transactions in the app from a front-end perspective, regardless of the statement that transactions are managed by PT Tokopedia in the back end,” Fileindi says.

HOW CAN THE GOVERNMENT FINETUNE ITS REGULATORY APPROACH?

Lawyers believe the case has demonstrated the necessity for the Indonesian government to establish and implement provisions that clearly define what may or may not be done by business actors, as the new provisions does not provide clear definitions on what “facilitating payment transactions.”

“Without the implementation of clearly defined restrictions and limitations, other companies may see this as an opportunity to explore plausible workarounds and establish new business activities, which may ultimately lead to a one-stop all-in-one application that is somewhat compliant with the established regulations,” says Fileindi.

“The government’s commitment in upholding and enforcing the regulation will need to be scrutinized by relevant parties, especially business players, to ensure that the enactment of MOT Reg 31/2023 is not some sort of knee-jerk reaction to other agendas,” he adds.