Directorate General of Taxation
Briefly about Indonesian Taxation System
1. Corporate Tax
Tax Year
In most cases Indonesian companies adopt the calendar year as their financial and tax year, however under special circumstances substituted accounting periods are available.
Classification of Corporate 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 otherwise.
Resident corporations are taxed on their worldwide income. Tax credits are allowed for income that was 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 (1) the PE’s income from its business or activities, and from the assets it owns and controls; (2) the 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 (3) 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 resident of a treaty
country should refer 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-months period. For companies from those countries with which Indonesia has concluded a Double Tax Agreement (DTA), the relevant definition can be somewhat modified.
Income Subject to Tax
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, the shareholding of the recipient is at least 25%, and the
recipient maintains other active businesses.
Allowable Tax Deductions
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:
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 table below shows the allowable useful life of the assets as categorized and the annual depreciation rates:
|
|
Useful Life |
Straight line |
Declining Balance |
|
|
|||
|
A. Tangible Asset |
|
|
|
|
|
|
|
|
|
Building |
|
|
|
|
- Permanent |
20 |
5 |
|
|
- Non permanent |
10 |
10 |
|
|
|
|
|
|
|
Non-Building |
|
|
|
|
Group 1 |
4 |
2.5 |
50 |
|
2 |
8 |
12.5 |
25 |
|
3 |
16 |
6.25 |
12.5 |
|
4 |
20 |
5 |
10 |
|
|
|
|
|
|
B. Intangible Asset |
|
|
|
|
|
|
|
|
|
Group 1 |
4 |
25 |
50 |
|
2 |
8 |
12.5 |
25 |
|
3 |
16 |
6.25 |
12.5 |
|
4 |
20 |
5 |
10 |
Loss Carryovers
Losses may in general be carried forward for five years. However, to encourage investment in certain business sectors and in certain areas of the country, a ten-year loss carry forward period is available.
Debt Restructuring
Tax facilities on debt restructuring are granted in the form of:
- Reduction as well as installment payments of the tax due on debt forgiveness.
- Income tax exemption on the transfer of assets to settle debts, provided that the asset is transferred at book value.
- Income tax exemption on debt-to-equity conversion, provided that the equity value is fully equivalent to the debt value.
These facilities are only provided for debt restructuring under the Jakarta Initiative plan and only applicable to the years 2000, 2001 and 2002.
Corporate Tax Rates
The corporate tax rates are as follows:
- 10% for taxable income up to Rp. 50 million.
- 15% for taxable income between Rp. 50 and 100 million.
- 30% for taxable income in excess of Rp. 100 million.
2. Partnership Tax
Partnership income is taxed in the same manner as corporations. Profits shared by individual partners are not taxable.
3. Individual Tax
Tax Year
In most cases, the tax year is the calendar year ending December 31.
Classification of Individual Taxpayers
For taxation purposes, an individual is classified as “resident” or “non-resident”. An individual is considered a resident taxpayer if he stays in Indonesia for more than 183 days in any 12-month period or if he intends 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.
Tax Payments and 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 need not 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 Millions) |
Tax Rate (%) |
|
|
|
||
|
up to 25 |
|
5 |
|
25 – 50 |
|
10 |
|
50 – 100 |
|
15 |
|
100 – 200 |
|
25 |
|
more than 200 |
|
35 |
Non-residents are subject to a flat rate of 20% of gross income, subject to treaty protection.
Deductions and Exemptions
Individuals are allowed to deduct from their employment income occupational costs of 5% of gross income (up to a maximum of Rp. 1,296,000 (about US$150)) 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 as those for a corporation apply, 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 |
Appropriate |
|
|
||
|
Single |
2,880,000 |
300 |
|
Married |
4,320,000 |
455 |
|
Additional dependents (max. of 3) |
1,440,000 |
150 |
|
With self-employed or working spouse |
2,880,000 |
300 |
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. These include rental of land or buildings (10% final tax from the gross proceeds), capital gains from the sale of shares listed on an Indonesian stock exchange (0.1% final tax from the gross
proceeds plus an additional 0.5 % for founder shares), and income from the sale of land or buildings (5% final tax from the gross proceeds). - Lottery prizes are taxable in Indonesia at 25%.
Expatriate Tax Rules
Circular No. SE- 13/PJ.43/2000, dated May 30, 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.
4. Withholding Tax
To facilitate higher tax collection and greater compliance, Indonesia has an extensive withholding tax system. There are two types of withholding tax, ‘prepayment’ and ‘final tax’. Expenses incurred in deriving income subject to final tax are not deductible.
Payments made to resident taxpayers and permanent establishments by resident corporate taxpayers, government bodies, activity organizers, permanent establishments, representative offices and certain appointed individuals are subject to withholding tax at the rates specified in the following table:
|
Rate (%) |
Transaction |
|
|
|
|
6 |
|
|
|
|
|
|
|
|
7.5 |
|
|
10 |
|
|
15 |
|
|
|
|
|
|
|
On the other hand, the following payments made by a government body, resident taxpayer, activity organizer, permanent establishment and representative office to a non-resident taxpayer are subject to 20% (or applicable reduced treaty rate) of the gross amount:
- After-tax profits of permanent establishments.
- Compensation for technical, management and other services.
- Income derived from the disposal of assets (withholding on estimated net income).
- Insurance premiums (withholding on estimated net income).
- Interest including premiums, discounts, guarantee fees and interest rate swap premiums.
- Royalties, rent and other income with respect to the use of property.
Payment to non-residents of the countries with which Indonesia has concluded a Double Tax Agreement (DTA) may be subjected 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 and present it to the Indonesian payer in order to enjoy a reduced withholding rate or exemption.
Individuals and organizations that derive income from construction contracting services and consulting services will be subject to income tax at the general rates for individuals and corporations. However a withholding tax of 15% of estimated net income withheld by the
payer will apply and then be credited against the income tax liability.
Individuals and organizations resident in Indonesia that derive income from the following business lines are subject to final tax at the rates listed below if they satisfy the definition of small business:
|
1. Planning construction services |
4% |
|
2. Supervisory construction services |
4% |
|
3. Construction services |
2% |
In order to satisfy the definition of small business, one will have to meet certain income requirements and obtain a certificate issued by the authorized government agency.
5. Value Added Tax (VAT) and Sales Tax
VAT is imposed on most goods and services at a rate of 10%. Government regulations can adjust the rate to as low as 5% and as high as 15%. The tax is generally collected by “VAT-able firms” (entities which deliver taxable goods or services). These firms are
required to submit VAT returns monthly. There are goods and services, however, that are exempt from VAT. The following is a list of certain industries currently exempt from VAT according to the new tax amendment effective January 1, 2001:
- Mining and drilling products taken directly from source, e.g. crude oil
- Basic commodities e.g. rice
- Food and beverages served at a hotel, restaurant, food stall and the like
- Money, gold bars and commercial paper
- Entertainment and art services subject to theater tax
- Healthcare services
- Societal services
- Stamped mail delivery services
- Banking, insurance and financial leasing
- Religion services
- Education services
- Broadcasting (non-advertising in nature) services
- Public transportation services
- Manpower services
- Hotels
- Governmental service
Aside from the above, primary production companies and small businesses (corporations or individuals) with annual sales of less than Rp. 180 million for services and Rp. 360 million for goods have the option to be exempted from imposing VAT.
Exported goods are not subject to VAT; exporters can claim a refund of the input tax (VAT incurred in producing goods for export).
The local purchaser of imported goods and services, including intangible goods, is responsible for all payments of VAT on goods and services and customs duty on goods. VAT and customs duty are collected at the port of entry for imported goods. A self- assessed
VAT payment mechanism is applied in connection with the following:
a. The utilization of intangible VAT-able goods obtained from outside the Indonesian
customs area and utilized within the Indonesian customs area; and
b. The utilization of VAT-able services obtained from outside the Indonesian customs area and utilized within the Indonesian customs area.
VAT Relief
The importation of cattle and poultry feed as well as raw materials for cattle and poultry feed is exempt from VAT. In addition, the BKPM is given authority to approve deferral of VAT on the importation of equipment used by companies incorporated under the domestic or foreign investment law (PMA and PMDN).
VAT Collectors
The Government appoints VAT collectors, who self -collect the VAT due from the goods purchased or services received and forward the payments to the State Treasury. They include Production Sharing Contractors (PSCs), Government Treasurer companies or
Government institutions appointed by the Minister of Finance.
Sales Tax on Luxury Goods
Government Regulation No. 145/2000 dated 22 December 2000 details 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 floorspace 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 3,500 cc with seating capacity of less than ten persons
- Certain types of liquor and wine
- Luxury yachts
- Jewelry and anything made from precious stones or pearls
Indonesia has no rules for insubstantial (minor) imports of goods and services. VAT and customs duty will be imposed on all goods irrespective of their value. Likewise VAT will be imposed on the importation of services irrespective of 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. Furthermore we wish to note that in the new amended
tax law effective January 1, 2001, mergers are now subject to VAT which in certain cases may significantly impact non-VAT-able firms such as financial lease companies.
6. Indirect Taxes
Tax on Land and Buildings
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 sales 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 0.1% of the sales value. One exception is individual housing worth more than Rp. 1 billion, which incurs a rate of 0.2%. Buildings whose assessed sales value is not more than Rp. 8 million are tax exempt.
Exit Tax
This is commonly known as “Fiscal Tax” and is paid by Indonesian residents and foreign nationals residing in Indonesia whenever they leave the country. Minister of Finance Decree No. 30/KMK.04/98, sets the rates at Rp. 1,000,000 for departure by air, Rp.500, 000 by
sea, and Rp. 250,000 by land. If an employer pays the tax in the course of an employee’s business travel, it can be used as a credit in the employer’s annual income tax return. If an individual pays the tax in a personal capacity, it can be claimed as a tax credit on his/
her personal income tax.
Foreign nationals working for a representative office of a foreign company are exempt from fiscal tax if certain criteria are met. Indonesians and nationals of ASEAN Sub-regional Cooperation Areas (SCA), who reside in the Indonesian-designated SCA and departing through Indonesian SCA ports for a corresponding ASEAN SCA territory within its grouping are exempted from paying Fiscal Tax. As an example, under the Indonesia-Malaysia-Thailand Growth Triangle Cooperation Area, nationals from Indonesia,
Malaysia, and Thailand residing in the Aceh special region, North/ West Sumatera and Riau are exempted from paying fiscal exit tax.
Customs Duty
Most duties are in the 5% to 40% range. The minimum rate is 0% and the maximum rate is 200%.
7. Tax Administration
Tax Year, Tax Filing and Payment
As mentioned at the beginning of this chapter, most Indonesian companies adopt the calendar year as their financial and tax year. They have to file monthly and annual tax returns. Monthly returns have to be filed no later than the 20th day of the month following
the month of payment or accrual of the related expenses. The deadline for filing annual income tax returns is three months from the end of the company’s financial year, typically March 31.
the month of payment or accrual of the related expenses. The deadline for filing annual income tax returns is three months from the end of the company’s financial year, typically March 31.
Companies are required to make monthly payments of estimated income tax due based on their taxable income of the preceding year. The installments are due every 15th day of the month. Any balance of annual tax due at the year-end has to be paid by the 25th day of the 3rd month after year-end. For example, payment would be due March 25 if the tax year ends December 31. If there is an income tax overpayment, a refund may be obtained following the
completion of a tax audit.
Under the new tax laws, if a taxpayer requests an investigation and meets the particular criteria for a refund of a tax overpayment, the Director General of Taxes is to issue an initial overpayment refund within three months of the request for an income tax refund and within one month of the request for a VAT refund. However, it should be noted that after the initial overpayment refund has been issued, the Director of Taxes could still conduct an extensive audit. Should it be determined as a result of the audit that tax is due and payable, an administrative sanction of up to 100% could be added to the tax due.
Individual and corporate taxpayers facing severe cash-flow
problems will be allowed to defer their tax payments for one year.
Tax Audits
Tax audits are a significant and frequent feature of the Indonesian tax system. For example, requests for refunds of tax overpayment that do not fulfill certain criteria will only be granted upon completion of an audit.
The Tax Office may conduct audits for various reasons, e.g. if a company reports a large financial loss. Penalties for underpayment or evasion are quite severe.
Penalties
Penalties and interest are the typical approaches used by the Director General of Taxes to sanction taxpayers that negligently or fraudulently fail to comply with the Indonesian tax laws. These sanctions are legislated in the tax law and can range from 2% to 400%. In addition, tax crimes are subject to imprisonment for a maximum of six years. The criminal penalties can be doubled if an individual repeats the tax crime within one year of completion of the previous prison sentence.
