Taxation

Corporate taxes and social charges

Taxpayers

A corporation, for tax purposes, is classified as ‘resident’ or ‘non-resident’. Residency is determined on the basis of place of incorporation. A corporation is therefore considered ‘resident’ if incorporated in Indonesia and non-resident if incorporated elsewhere. Resident corporations are taxed on their worldwide income. Tax credits are allowed for income that has been taxed outside the country. Non-residents are taxed only on income derived from Indonesian sources, subject to any relief available under double taxation agreements. However, a non-resident entity with a permanent establishment (PE) in Indonesia, such as a branch office, is taxed on:

  • PE’s income from its business or activities, and from the assets it owns and controls;
  • Income of the head office arising from business activities, or sales of goods or services in Indonesia of the same type as those sold by the permanent establishment in Indonesia; and
  • All other income, either received or accrued by the head office such as dividends, interest, royalties, rent and other income connected with the use of property, fees for services, etc, provided that the property or activities producing the income is effectively connected with the PE in Indonesia.

Income attributable to a PE of a company that is a resident of a treatycountry should bereferred to the relevant treaty. In Indonesia, a PE is generally defined as an operation in which a non-resident establishes a fixed place of business in Indonesia. This would include a management location, a branch office, an office building etc. A PE can also be established as a result of the non-resident entity’s employees providing services in Indonesia for more than 60 days in any 12-month period. For companies from those countries with which Indonesia has concluded a Double Tax Agreement (DTA), the relevant definition may be somewhat modified.

Taxable income

Taxable income is defined as any increase in economic prosperity received or accrued by a taxpayer, whether originating from within or outside Indonesia that may be used for consumption or to increase the recipient’s wealth in whatever name and form. It includes any remuneration in connection with work or services, business profits (with no distinction between operating and capital income), dividends, interest, rent, royalties and other income related to the use of property. Certain income is exempt from tax, such as dividends earned by a domestic corporation from another domestic corporation, provided that the dividend is from the retained earnings and the recipient holds at least a 25% shareholding.

Calculation of taxable income

Taxable income is calculated after the deduction of allowable deductible expenses (DE). For individuals there are income tax exclusions (PTKP), but these are set at relatively low income levels. Individuals are broadly liable to income tax on cash income. Benefits-in-kind (BIK) provided by employers are not deemed to be taxable income of the employee, but are a non-deductible expense (NDE) against corporate taxable income. For a representative office however, which is not considered as a corporate taxpayer, the BIK provided are deemed to be taxable income of the employee. Employers are required to withhold income tax from employees and deposit it each month with the State Treasury (Kas Negara). Employers prepare a consolidated annual tax return detailing each employee’s individual tax calculation. The employee should then file a separate personal return. Normally, tax returns should be filed by 31 March of the year following the calendar year; corporate tax returns however, can be filed up to four (4) months after the closing of the book year. Corporate taxable income is calculated after deduction of most normal business expenses. Rates of depreciation are regulated though taxpayers may elect either the straight-line or double-declining method. Provisions are not deductible, nor are employee benefits-in-kind as mentioned above. Companies may choose to be taxed on the basis of a financial year other than the calendar year. Books of account may be kept in the English language based on approval from the Director General of Taxation. Foreign currency, e.g. U.S. dollars may also be used as the reporting currency if appropriate approval is obtained. Annual filings should be lodged within 4 months of the end of the financial year. In certain cases, however, the company can apply for an extension.

Exemption from income for capital increase

Taxable income is determined by subtracting allowable deductions from revenue. Certain expenses, such as employee benefits-in-kind and donations, are generally not tax deductible. In addition, interest incurred to finance the acquisition of shares is not deductible unless dividends from the shares purchased are taxable. The following are major allowable deductible expenses:

  1. Business expenses

As a general rule, taxpayers may deduct from gross income all expenses related to earning, securing and collecting taxable income. Items that are not deductible include those incurred for the personal benefit of shareholders; benefits-in-kind (e.g. housing and vehicles) provided to employees, except for the provision of food and beverages for all employees and for certain benefits-in-kind provided to employees in certain remote areas; gifts; donations and support; “excessive” payments for goods or services where a special relationship is deemed to exist between the buyer and seller; and expenses incurred in the course of producing income that is exempt from tax or subject to final tax. Formation of a reserve or allowance is generally not tax deductible, with the exception of bad debt allowances for banks or finance leasing companies, reserves in insurance companies, and reserves for reclamation costs in the mining industry.

  • Research and development

Expenses such as those for research and development carried out in Indonesia and eligible employee training qualify as regular allowable deductions. Indonesia has no special income tax deductions/relief for research and development and eligible employee training. The deductibility of research and development performed offshore remains unclear.

  • Depreciation and amortization

Investors can adopt either the straight-line or the double-declining balance method for depreciation of tangible assets (except buildings). The taxpayer should apply the depreciation method chosen consistently. The Tax Office must approve any change in method. The same depreciation method and percentages are allowed for intangible assets with a benefit of more than one year. The following table lists the allowable useful life of the assets as categorized and annual depreciation rates:  

  Useful Life (Years) Straight Line (%) Declining Balance (%)
A. Tangible Asset Building –            permanent –            non-permanent Non-building Group 1 Group 2 Group 3 Group 4     20 10   4 8 16 20     5 10   2.5 12.5 6.25 5           50 25 12.5 10
B. Intangible Asset Group 1 Group 2 Group 3 Group 4   4 8 16 20   25 12.5 6.25 5   50 25 12.5 10

Tax base

The tax base on a corporate is any income from:

  • the business or activities, and from the assets owned or controlled,
  • any income of the head office from the business or activities, sales of goods, or services rendered in Indonesia, and
  • Any income received or accrued by the head office, as long as there is an effective relationship between the permanent establishment and the assets or activities that provide such income.

The costs related to the income may be deducted from the income of the corporate.

Tax rates

The corporate tax rate commencing fiscal year 2010 is 25%. Micro, small and medium business (MSMEs/UMKM) with a turnover of less than Rp 50 billion a year are entitled to a tax discount of 50% off the normal rate for turnover of up to Rp 4.8 billion. Companies that list at least 40% of their shares on the Indonesia Stock Exchange will have a tax cut of 5% from the top rate, providing them with an effective tax rate of 20% commencing fiscal year 2010. Other than corporate income tax, for a permanent establishment (PE), there is also a branch profit tax at 20%, or referring to the Double Tax Treaty rate, which is calculated from net Income after tax. At the end of the year, deductions shall be made from the tax liability for the relevant fiscal year’s tax credits, in the form of:

  • Withholding tax on income from any work.
  • Tax collection on income from any activity in the import sector or any other business.
  • Withholding tax in the form of dividend, interest, royalty, rent, prize, and award, and compensation for service.
  • Tax paid or due on income from abroad that may be credited.
  • Payment made by the taxpayer.

Inter-company pricing

Article 18 of the Income Tax Law and article 2 of the Value Added Tax Law provide rules relating to transfer pricing that can be summarized as follows:

  • The Director General of Taxation is authorized to re-stipulate amounts of income and deductions for taxpayers that have special relationships
  • The Director General of Taxation is authorized to make agreements with taxpayers and cooperate with tax authorities of other countries to determine transaction prices between parties having special relationships

While Indonesia adopts a self-assessment system, taxpayers are, however, required to include any transfer price information in their tax returns. Commencing 2007, a mandatory requirement for taxpayers to maintain and retain the formal documentation for transfer pricing was put in place by Government Regulation. From fiscal year 2009, a new form for corporate income tax return was introduced that requires taxpayers to provide more detailed information for transfer pricing. This enables the tax authorities to obtain the transfer price information from the tax return. Taxpayers are also required to prepare the transfer pricing documentation. Furthermore, as the tax audit provides the authorities with an important means of assessing compliance under the self-assessment system, there is always a strong likelihood that explanations and details of related party transactions will be demanded during tax audits. While there is currently no separate tax audit or audit teams in Indonesia to review only transfer pricing, in practice the tax authorities are increasingly focusing on transfer pricing issues in tax audits, with large tax corrections related to these issues being proposed in many cases. Transfer pricing is included as one of the review items in the general tax audit (covering overall corporate and value added tax etc). Examples of transfer pricing issues that have commonly arisen in past general tax audits include:

  •  
    • Processing fee of toll manufacturer/selling price of contract manufacturer
    • Third party domestic selling price vs. related party export price
    • Various service fees (e.g. management fee, technical assistance fee to parent company)
    • Royalty
    • Free/low interest parent loan

The processing fee in (a) and various payments under (c) and (d) are also subject to value added tax, thus the tax authorities will scrutinize these types of transfer prices for both corporate tax and value added tax purposes. Besides the transfer price risk, activities of toll manufacturing subsidiaries have been deemed to create permanent establishments (PE) of parent companies in recent tax audit cases. Thus a PE risk also needs to be considered in adopting a toll manufacturing structure. To minimize the PE risk, it may be advisable to consider a contract manufacturing structure rather than a toll one, although the transfer price risk still exists with either structure.

Returns and payment

If the tax liability in a fiscal year appears to be less than the amount of tax credit, after audit, the tax overpayment will be refunded after being calculated with the other tax liabilities and their sanctions. If the tax liability in a fiscal year appears to be larger than the tax credit, the underpayment of tax liability must be paid before the annual tax return is filed, for which the deadline is four months after the closing of the book year.

Personal taxation

Scope of taxation

For taxation purposes, an individual is classified as ‘resident’ or ‘non-resident’. An individual is considered a resident taxpayer if staying in Indonesia for more than 183 days in any 12-month period, or if intending to reside in Indonesia. Naturally, if the individual comes from a treaty country, the determination of tax residency shall be based on the provisions of the relevant tax treaty. Both resident and non-resident taxpayers are subject to national income tax (Indonesia has neither federal nor state income tax). Residents are taxed on their worldwide income and are generally allowed a credit for taxes paid abroad, whereas non-residents are taxed only on their Indonesian-source income. Taxable Income Any increase in economic prosperity received or accrued by a resident taxpayer, whether originating from within or outside Indonesia, that may be used for consumption or to increase the recipient’s wealth in whatever name and form is taxable. This includes wages, salary, commission, bonuses, lottery prizes, interest, dividends, etc. Special tax treatment applies to the following income:

  • Benefits-in-kind are not taxable unless provided by a body that is not an Indonesian taxpayer (e.g. a representative office).
  • Interest income from Indonesian banks is generally subject to final withholding tax of 20%.
  • Certain other income is also subject to final tax. This includes rental of land or buildings (10% final tax on the gross proceeds), capital gains from the sale of shares listed on an Indonesian stock exchange (0.1% final tax on the gross proceeds, plus an additional 0.5 % for founder shares), and income from the sale of land or buildings (5% final tax on the gross proceeds), and dividendsare subject to a 10% final tax.
  • Lottery prizes are taxable in Indonesia at 25%.

Tax rates

Employees are subject to withholding tax from their remuneration. Those who are self-employed or who have other income, pay monthly estimated taxes as well. Previously, employees with only one source of employment income did not need to file a tax return. However, under the new laws effective 1 January 2001, an individual whose income exceeds the non-taxable threshold is required to file an annual personal tax return. Below are the applicable individual tax rates:

Income Range (Rupiah) Tax Rate (%) For Individual With Tax ID Number Tax Rate (%) For Individual Without Tax ID Number
Up to 50 million 50 million-250 million 250 million-500 million more than 500 million 5 15 25 30 6 18 30 36  

Deductions from income

Individuals are allowed to deduct from their employment income occupational costs of 5% of gross income (up to a maximum of Rp. 6,000,000 {about US$600}) a year and contributions to an approved pension fund. No other deductions from employment income are allowed. If an individual’s source of income is a personal business, the same general deduction rules apply as for a corporation, provided that the individual maintains adequate bookkeeping. An individual is also entitled to an exemption for dependents. The exemption varies based on the number of dependents, as shown in the following table:

Status Exemption (Rupiah)
Single Married Additional dependents (max. of 3) With self-employed or working spouse 24,300,000 Plus 2,025,000 Plus 2,025,000 each Plus 24,300,000

Tax benefit for foreigners

Payment to non-residents of the countries with which Indonesia has concluded a Double Tax Agreement (DTA) may be subject to a tax rate reduction or possible exemption. To take advantage of treaty relief, the non-resident has to obtain from its own competent authority a Certificate of Domicile/Certificate of Residence (COD/COR)and present it to the Indonesian taxpayer in order to enjoy a reduced withholding rate or exemption. In addition, foreign taxpayers are also obligated to complete the DGT forms in order to be able to enjoy the tax treaty benefit. Circular No. SE-13/PJ.43/2000, dated 30 May 2000, requires foreign nationals residing in Indonesia to register and file income tax returns with the BADORA tax office and tax offices having jurisdiction over their domicile, respectively. It should be noted that under the new tax law, expatriates would effectively be required to register for tax and file individual income tax returns. The tax office will enforce the tax registration and filing of tax returns by individuals.

Tax registration

Each taxpayer needs a tax identification number (NPWP), which is a number issued by the tax office to identify taxpayers and enable them to fulfil their tax obligations. The taxpayer is obligated to register at the tax office in the district in which they resides (article 2- paragraph (1) law No. 28 Year 2007) by submitting the following documents:

  •  
    • Registration and change of data form
    • Copy of passport
    • Copy of limited stay permit card (KITAS)
    • Copy of work permit (for a taxpayer who is an employee)
    • Copy of tax identification number of the employer (for a taxpayer who is an employee)
    • Power of attorney (if his/her registration process is carried out by another party)
    • Copy of business permit (for a taxpayer who is conducting business or is an independent professional)

An individual taxpayer who is an entrepreneur as defined in the Decision of Director General of Taxation No. KEP-171/PJ/2002, is an individual who has several places of business activity, excluding selling of vehicles, and restaurants. Such a person is obligated to register their place of business activities as follows:

  • A taxpayer who has several places of business activities in one operational area of the tax office must register each place of business with said tax office.
  • Taxpayers who have several places of business activities located in the districts of several tax offices must register each place of business with each related tax office.

Social security

BPJS is a compulsory provision in respect of employees of a company with a minimum of 10 employees, or for employees receiving a monthly salary of Rp. 1,000,000 net or more. This covers the following (compulsory) per cent deduction per month:

  • Work accident insurance: 0.24% to 1.74 % (five different tariffs depending on work safety conditions)
  • Death insurance: 0.30 %
  • Old age insurance: 3.70% paid by company and 2.00% paid by the employee (deducted from net salary).
  • A BPJS Health compulsory 4.5% insurance contribution is divided between a 4% contribution from the employer and a 0.5% contribution of the employee.

The above scheme is not compulsory for expatriates provided that they have equal or better coverage in Indonesia or their home country.

Double taxation agreements

Indonesia has Double Tax Treaties with a number of countries. All funds are included in the definitions of persons to which treaty protection applies. However, restrictions on funds assets mean that treaties only affect funds to the extent that the fund participants and shareholders may benefit. Indonesia currently has 65 tax treaties in operation.

Sales and use taxes

Value added tax

Value added tax applies to the import and delivery of most goods and services. Insurance and banking services are not subject to VAT. VAT is collected at a standard rate of 10%. This may increase to 15% or decreased to 5% based on the relevant Government regulation. VAT on the export of taxable goods is fixed at 0%. Export services are also subject to 0% VAT with certain limitations applied. Taxpayers are required to file returns with details of all output and input VAT in the month following its occurrence. The net output VAT should be settled before the VAT report is submitted to the tax office by the end of the month following. An excess of input VAT may be carried forward. Refunds may be applied for in the case of chronic overpayments. Suppliers who trade with so-called ‘VAT collectors’ will not collect VAT from their customers or clients. The VAT is then paid directly to the State Treasury. Such suppliers may be in a constant overpayment situation and have to seek regular refunds. VAT has become a major source of revenue for the government.

1) General transactions

On general transactions, the tax rate of 10% shall be imposed on supply of goodsor services under the following circumstances:

  •  
    • The tangible or intangible goods supplied are taxable goods.
    • Import of taxable goods.
    • Delivery of taxable services.
    • Utilization of intangible goods from outside the customs area within the customs area.
    •  Supply is carried out within the customs area.
    • Supply is conducted in the course of business or work of the firm concerned.

2) Zero-rated transactions

VAT on the export of taxable goods is fixed at 0%. Export services are also subject to 0% VAT with certain limitations applied.

3) Exempt transactions

Types of goods that are not subject to value added tax are based on the following categories:

  •  
    • Products of mining and drilling, taken directly from the source.
    • Daily necessities needed by the public.
    • Food and beverages served in hotels, restaurants and other such places including food and beverages take-away and delivery by the catering provider
    • Money, gold and valuable documents.

The determination of types of services that are not subject to value added tax are based on the following fields of activity:

  1. Health care
  2. Social welfare
  3. Postal delivery
  4. Financial services
  5. Insurance services
  6. Religion
  7. Education
  8. Culture and entertainment that has been subject to entertainment tax
  9. Broadcasting, not including advertising
  10. Shipping and inland public transportation
  11. Manpower
  12. Hotels
  13. Rendering of services by the government in efforts to undertake governance in general
  14. Parking
  15. Public coin-operated telephones
  16. Money delivery via giro
  17. Catering

Customs tax

Most duties are in the 5% to 40% range, the minimum rate being 0% and the maximum 150%. Indonesia has no rules for minorimports of goods and services, VAT and customs duty being imposed on all goods irrespective of their value. Likewise VAT will be imposed on the import of services irrespective of their value. No changes are foreseen in this area despite the fact that the availability of e-commerce transactions will lead to an increase in low value cross-border trade.

Transfer of title

Transfer of title tax is payable on the acquisition of rights to property (land and buildings), and the tax tariff is stipulated at 5%.

Property and land tax

Tax is imposed on individuals, companies or organizations that have certain rights to or obtain benefits from land, or possess, control or obtain benefits from ownership of land and buildings. The tax is based on the sale value of the land and buildings as determined by the Ministry of Finance. Land value is reassessed every three years in most areas and every year in rapidly developing areas. The current effective tax rate on land and buildings is 0.5% of the taxable sale value.

Sales tax on luxury goods

Sales taxes also include sales tax on luxury goods (PPnBM). This tax applies at the point of import or manufacture and is additional to VAT. It is a non-creditable, one-off tax and applies to a wide range of goods. Rates range from 10% to 75%. Government Regulation No. 145/2000 dated 22 December 2000as last amended by Government Regulation No. 12/2006 dated 15April 2006details various goods subject to sales tax at rates ranging from 10% to 75%. It is apparent that the sales tax base has been broadened. In addition, the rate applicable to many types of goods has been increased. For example:

  • Housing with floor space over 400m2 or electricity usage of more than 6,600 watts, apartments, condominiums and town houses are now subject to 20% (previously 10%).
  • Perfume is subject to 20% (previously 10%).
  • Helicopters and aircraft are now subject to 50% (previously 35%).

The maximum rate of sales tax has increased to 75%. Examples of goods subject to this maximum rate are:

  • Sedans/station wagons/vans with spark or compression ignition internal combustion reciprocating piston engines exceeding 3,000 cc with seating capacity of less than 10 persons
  • Certain types of liquor and wine
  • Luxury yachts
  • Jewelry and anything made from precious stones or pearls

Special industry rules

Certain industries, in particular production sharing contractors, mining companies under contracts of work and geothermal projects are subject to income tax in accordance with special ‘lex specialist’ rules. Rates of tax vary according to the generation of each respective contract.

Portfolio investment for foreigners

Expatriates living in Indonesia are fully taxable on their portfolio investments derived from whatever sources. This includes: Dividends                                A 10% final rate is applicable to foreigners if they are resident tax payers. Interest                                    15%

Capital gains

Income Range (Rupiah) Tax Rate (%) Individual With Tax ID Number Tax Rate (%) Individual Without Tax ID Number
Up to 50 million 50 million-250 million 250 million-500 million more than 500 million 5 15 25 30 6 18 30 36  

  Rental Income (real estate)            10% Expatriates non-resident in Indonesia for tax purposes are subject to withholding tax on their portfolio investments, which include: Dividends                                         20% or treaty rate Interest                                            20% or treaty rate Capital gains                                    20% or treaty rate Rental income (real estate)            20% or tax treaty

Trusts

There is no concept of indirect or beneficial ownership in Indonesia. Indonesia will only look at the direct ownership in determining tax. Foreign trusts would be treated as a separate legal entity for local tax purposes. Nevertheless, Indonesia does have a separate law dealing with foundations, or what are commonly called Yayasans. Recent changes in legislation require these to be for certain charitable, educational, religious or other not-for-profit purposes. In selected cases, some forms of income are non-taxable.

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