Introduction to the Indonesian Tax System
The major taxes in Indonesia are levied at the national level. The exceptions are transfer tax of motor vehicles and development tax.
***AFTER THE MONETARY CRISIS IN 1997, THE COUNTRY HAS EXPERIENCED SIGNIFICANT POLITICAL AND ECONOMIC INSTABILITY. THE SITUATION IS IN A CONSTANT STATE OF FLUX. CONSEQUENTLY, LOCAL BUSINESS CONTACTS, EMBASSIES AND OTHER OFFICIAL BODIES SHOULD BE CONSULTED REGARDING THE CURRENT SITUATION INSOFAR AS TAX LAWS AND ENFORCEMENT OF LAWS ARE CONCERNED. MANY LAWS ARE NEW…VERY NEW….AND HAVE YET TO BE ‘TESTED’***
The official currency is the Indonesian Rupiah and there are no foreign exchange controls place on this currency. Since the economic crisis in 1997, the Rupiah has depreciated more than 70%.
The Indonesian fiscal year ends on 31 March. The tax year in Indonesia is the calendar year. Company financial years generally end on 31 December. Subsidiaries of foreign companies usually follow the financial year of the overseas parent.
Married persons are taxed separately on employment income and jointly on all other income. Employee taxes are withheld by the employer. An employer must file a tax return based on the calendar year for all employees no later than the following 31 March. The employer must also file a monthly return by the 20th day of the following month.
Employees with only one source of income have not been required to file annual tax returns. However, resident individuals with more than one source of income must file individual tax returns disclosing all sources of worldwide income, and, effective from 1 January 2001, it appears that most individuals will be required to file individual income tax returns. The return is due on 31 March following the end of the tax year.
Withholding tax is levied on a variety of payments to residents. A self-employed professional, including an accountant, attorney, architect or consultant, has tax withheld at source on the settlement of invoices. The rates of withholding tax vary from 6% to 9% of the gross amount. Withholding tax is an advance payment of income tax.
Self-employed individuals must make monthly advance tax payments. The monthly payment amount is based on the previous year’s tax liability, reduced by tax withheld at source during the preceding year. The payment is due on the 15th day of the month following the income month.
Primary types of taxation
Corporation Income Tax
Resident companies are subject to taxation on their worldwide income. Foreign direct investment companies must pay corporate income tax based upon Indonesian source revenues.
Corporation income tax is calculated on the basis of income less certain deductions. Any foreign tax paid by the company may be used to credit the amount of income tax to be paid to Indonesia. Non-resident companies are only liable for taxes withheld.
Tax losses may be carried forward for 5 years as an offset against profits in those years. Some types of industries are allowed to carry forward such losses as an offset to profits for up to 8 years.
A company is domiciled in Indonesia if it is managed, controlled or has its head office in Indonesia. Branches of foreign companies are taxed only on those profits derived from activities carried out in Indonesia. However, income accruing from an Indonesian branch to a foreign parent is taxed as income of the branch if the business is of a similar nature to the business of the branch.
The tax rate for corporate income exceeding 100,000,000 Rupiah is 30%. This is the maximum corporation tax rate.
Special tax rates apply to specific types of corporations:
Petroleum companies are subject to tax at a flat rate of 30% - 45%.
General mining companies are taxed at rates ranging from 30% to 45%, depending on the generation of their contracts with the Indonesian government. Most recent mining contracts, though, provide for taxation on the basis of current tax rates with no tax rate escalation provisions.
Geothermal companies are subject to income tax at a rate of 34%.
Construction companies are subject to a final tax at a rate of 2% of gross turnover.
Construction design or supervision or consultancy companies in this category, other than legal and tax consultancy are subject to tax at a rate of 4% of gross turnover.
Foreign drilling companies are subject to a rate of 5.6% of their gross turnover.
Non-resident international shipping companies and airlines are subject to tax at a rate of 2.64% of gross turnover.
TYPES OF BUSINESS ORGANIZATIONS IN INDONESIA
PERSEROAN TERBATAS (PT)
Limited Liability Companies (PT) can include, and are classified as private and public companies. They are governed by the 1996 Corporation Law. PTs are managed by a Board of Directors. Non-Indonesian citizens may not be directors or foreign investment commissioners in a PT.
Foreign representative offices are typically formed to facilitate transactions between local and foreign buyers and suppliers. A Representative Office facilitates making such transactions easier but a Representative Office cannot perform operating activities characterized by a PT.
Foreign direct investment companies may be in the form of Joint Ventures between foreign and domestic capital owned by Indonesian citizens or organizations, or through straight investment.
BADAN USAHA MILIK NEGARA (BUMN) These are companies owned by the government
PERUSAHAAN DAGANG (PD) These entities are known as private trading companies, most of which are sole proprietorships.
LIMITED LIABILITY PARTNERSHIPS (CV) This legal designation only applies to the silent partners in a given partnership.
FIRMA These are unlimited liability partnerships, more commonly known as disclosed partnerships.
Individual Income Tax
Indonesian resident taxpayers are subject to tax on worldwide income. Nonresidents are subject to tax on Indonesian-source income, only. Individuals are considered resident if they reside in Indonesia; if they are present in Indonesia for more than 183 days within a 12 month period; if, within the calendar tax year, they reside in Indonesia with the intent to stay or meet the time requirements of applicable tax treaty.
Fringe benefits such as employer-provided housing and automobiles are not included within the employee’s taxable income. Yet they are allowable deductions for the employer if the employee works in remote areas. Benefits received in the form of cash allowances are taxable.
Self-employment income, directors fees and business income is combined with other income and taxed at published Rates.
Dividends paid to individuals, interest, rents and royalties are subject to 15% withholding tax.
Employer-provided stock options are not taxed at the time of grant or exercise. Income tax at a rate of 30% is imposed at the time of sale on the difference between the sale price of the shares and the ‘strike’ price.
Capital gains (note: the same tax rate exists for corporations and individuals for capital gains): A 0.1% final withholding tax is imposed on proceeds of sales of publicly listed shares through the Indonesian Stock Exchange. An additional tax at the rate of 0.5% of the share value is levied on sales of founder shares associated with public offerings. Founder shareholders must pay the 0.5% tax within one month after the shares are listed. Founder shareholders that do not pay the tax by the due date are subject to income tax on the gains at the ordinary income tax rates. Other capital gains derived by residents are included in taxable income and are subject to tax at the normal progressive income tax rates. Other capital gains derived by nonresidents are subject to tax at a rate of 20% The law provides that the 20% tax is implosed on an amount of deemed income.
Deductible expenses: To determine the taxable income of regular employees, gross income is reduced by the following amounts:
STANDARD DEDUCTION at a rate of 5% of gross income, up to a maximum of 1,296,000 Rupiah for the year.
PENSION FUND CONTRIBUTIONS for approved pensions – up to 432,000 Rupiah for the year.
PERSONAL ALLOWANCES of 2,880,000, with additional allowance for married persons, family members – these are varying amounts.
BUSINESS DEDUCTIONS for self-employed individuals. A spouses business losses may be offset against the business profits of the other spouse.
OTHER DEDUCTIONS such as premiums for certain life and health insurance, gifts and donations.
RATES: A graduated scale of tax rates exists. Income above 100,000,000 Rupiah and below 200,000,000 Rupiah is taxed at a 25% tax rate. Income over 200,000,000 Rupiah is taxed at the maximum rate of 35%. Nonresident taxpayers are subject to tax at a flat rate of 20% on all Indonesian-source income.
Value-Added Tax (VAT), on delivery of taxable goods, on imports of goods and on services (including services furnished by foreign taxpayers outside Indonesia if the services have a benefit in Indonesia). Unless specifically exempt, the VAT is 10%.
Sales tax on luxury goods, imposed in addition to the VAT on the delivery of luxury goods manufactured in or imported into Indonesia. Rates depend on the nature of the goods and the range is from 10% to 75%.
Tax on land and buildings, based upon sales value. This rate is 0.5%.
Road Tax. This tax applies to all motor vehicles and is charged based upon the value of the vehicle. It is charged annually.
Provident Fund (JAMSOSTEK) is compulsory only for companies with more than 10 employees or a payroll exceeding 1,000,000 Rupiah per month. Contributions are not mandatory for expatriates.
Transfer Tax. This applies to the purchase and transfer of ownership on all vehicles.
Excise Duties. This applies to all cigarettes and alcohol imported or manufactured in Indonesia.
Stamp Duties. This is applicable to certain types of documents, contracts and deeds at a nominal rate of 1,000 – 2,000 Rupiah.
Tax incentives will be granted to newly established resident companies investing in certain types of businesses or regions. A government regulation will specify the types of industries and regions qualifying for the incentives. These tax incentives are:
Accelerated depreciation and amortization
Tax-loss carryforwarad period of 10 years
A reduced dividend withholding tax rate of 10% unless the rate provided in a relevant tax treaty is lower, and
An investment allowance of 5% per year for a period of six years.
Companies restructuring debts through entities appointed by the government, such as Jakarta Initiative, qualify for the following tax incentives from 2000 through 2002:
A partial tax exemption for income resulting from the debt forgivements and the option to pay the tax on such income in installments
Income tax exemption for the transfer of assets to creditors for debt settlement, if all assets are transferred at book value, and
Income tax exemption for debt to equity swaps, if the value of the equity transferred is equal to the amount of the debt
Indonesia and the United States have a double tax elimination treaty. Indonesia has concluded double tax treaties with 48 countries.