The Indonesian tax system is based on three primary laws: the General Tax Provisions and Procedures ( Ketentuan Umum dan Tata Cara Perpajakan, KUP) Law, the Income Tax Law, and the Value-Added Tax (VAT) and Luxury Sales Tax (LST) Law. These laws are routinely amended in order to accommodate the country’s rapidly changing business environment, as well as to support the government’s objectives of improving the investment climate while increasing tax revenues. The government is currently considering the inclusion of a tax amnesty facility in amendments to the KUP Law.
Incentives to Invest
The Negative List of Investment issued in 2014 provides more flexibility on investment in certain businesses, such as power plants and ports operated under a public-private partnership scheme, which are offered a higher level of foreign ownership level. To enhance the investment climate, the government has updated the package of income tax facilities available for companies investing in certain designated business sectors and/or regions. Changes include an expansion of the definition of eligible investment and the elimination of some requirements perceived as difficult for investors to demonstrate.
In an effort to reshape and improve Indonesia’s tax environment, tax officers are receiving more and better training, not only in local laws but also in the rules and practices of other jurisdictions. Supporting electronic infrastructure and systems are also being developed extensively to be more practical for taxpayers with the launch of the new electronic VAT invoices, as well as the new online systems for tax and Customs.
Indonesia is largely a self-assessment tax environment, and enforcement remains a priority of the tax authorities. The director-general of tax (DGT) has continued to improve compliance by targeting tax audits on transfer pricing, certain industries – particularly those in oil and gas and coal mining – and individuals with certain levels of income. As well as tax audits, the DGT has made efforts to collect information from various sources and is issuing monitoring guidelines in several areas to assist in achieving the tax revenue targets. The key attributes of the Indonesian tax system and main areas of tax developments are summarised below.
Indonesian companies are tax residents by virtue of having their incorporation or place of management in Indonesia. The primary type of company foreign investors use is an Indonesian limited liability company, referred to as a PT company. Only some categories of foreign businesses such as banking and public works can establish an Indonesian branch operation (a permanent establishment, PE).
The general corporate income tax rate is 25%. This tax applies to net taxable profits, which are determined by taking the accounting profits (in line with Indonesian accounting standards, which largely reflect international accounting standards) and making fiscal adjustments where different treatments apply for tax and accounting. Capital assets can also be depreciated differently for tax and accounting purposes. Some categories of companies such as certain labour-intensive industries may, depending on their legal status or type of business, be subject to different corporate tax rates and/or assessment mechanisms.
If a company suffers a loss in a particular year, it may generally be offset against profits for the next five years, although there are cases where this can be extended. Carrying back tax losses is not permitted, and tax consolidation or group relief among entities is not available. Tax resident firms are taxed on worldwide income under a self-assessment system. Foreign firms creating a taxable PE in Indonesia are taxed in a similar manner but only on income attributable to the PE. A PE is also subject to branch profits tax of 20%, which is calculated on the net figure after income tax. The branch profits tax may be reduced under an applicable double tax treaty. Specific tax rates, referred to as final income tax, apply to certain types of income. Land and building rentals, for instance, are subject to 10% tax on gross rental amounts. Final income tax also applies to construction service fees at a rate of 2-6%. Transfers of land and building rights have a final tax at 5% of the gross proceeds.
Withholding Tax (WHT)
A large proportion of income tax is collected through a WHT system, which applies to resident taxpayers and non-resident taxpayers. For resident taxpayers, WHT mainly applies to payments or accruals for services rendered. The WHT rate of 2% applies to fees for many such services, and the tax represents a pre-payment against the service provider’s annual income tax liability. The WHT rate for interest and royalty income received by a domestic taxpayer from an Indonesian firm is 15%.
In principle, dividend income received by a resident taxpayer from a PT company is taxable as ordinary income for the taxpayer receiving the dividend. However, if the dividend recipient is a PT company with a shareholding of at least 25% in the firm paying the dividend and the dividend is paid out of profits, the income is tax exempt. Dividends received by individual resident taxpayers are final-taxed at 10%.
The import of goods into Indonesia is subject to WHT at 2.5% (if an import licence is held) or in other cases 7.5%. This WHT also represents a pre-payment of the taxpayer’s annual income tax. Dividends, interest, royalties and fees payable to non-residents are generally subject to a final WHT of 20%.
For payments to non-residents, a WHT exemption or a WHT rate reduction may be available under an applicable tax treaty. Treaties typically reduce rates on interest, dividends and royalties to 10% or 15%, although some select treaties have more favourable rates. Indonesia has entered into 65 tax treaties. To enjoy benefits the income recipient must provide a Certificate of Domicile (CoD) by filling out the form prescribed by the DGT (i.e., a Form DGT-1 or DGT-2, as the case may be), which must be certified by the tax authority of the home country of the recipient. CoDs that are appropriately certified but in a non-prescribed format are accepted only under specific circumstances. The first tax treaty protocol and memorandum of understanding with China was signed in March 2015. Indonesia has also expanded its international tax agreements via a Tax Information Exchange Agreement (TIEA) with the Isle of Man. Other TIEAs with Bermuda, Guernsey, Jersey and San Marino are still in the ratification process and not yet effective.
Exchange of Information
Indonesia has ratified its commitment to the multilateral Convention on Mutual Administrative Assistance in Tax Matters that deals with cooperation between member states in the form of exchange of information (EOI), assistance in the recovering of foreign tax claims, and service of documents. At a national level, a Minister of Finance (MoF) regulation on EOI implementation procedure has been established. This sets out the procedures of tax examination abroad and simultaneous tax examinations relevant to EOI. This domestic EOI regulation is applicable for double tax treaties, the TIEA and international tax agreements relating to the Convention.
In the case of dividends, interest and royalties, the recipient must be the beneficial owner of that income. As such, the entity that receives the income and benefits from a tax treaty cannot be a pass-through entity. To support the beneficial ownership position, the CoD form requires a number of declarations to be made by the recipient to prove the “substance” of the use of treaty jurisdiction.
In most situations beneficial ownership is determined by a series of tests that require the recipient entity to be the economic owner of the income and not merely a pass-through entity. Where a treaty does not have a beneficial ownership requirement, the relevant test requires that the recipient entity was not established and that the transactions were not undertaken primarily to take advantage of the tax treaty.
WHT on Sale of Shares
The sale of shares in a nonlisted Indonesian company by a non-resident is subject to a final 5% WHT based on the transaction value (or if higher, the market value for a related party transaction). Where the seller and buyer are non-residents, the WHT must be accounted for by the Indonesian company whose shares are being sold. This tax may be exempted under most of Indonesia’s tax treaties. If the buyer is Indonesian, then the buyer is responsible for the payment of the tax. Gains on the sale of non-listed shares sold by an Indonesian company are taxed under normal principles.
The 5% WHT also applies to the sale of shares in a conduit company domiciled in a tax haven country and used to escape Indonesian tax. In this respect, the sale of shares in the conduit company interposed between the actual shareholder and the Indonesian PT company (or foreign company with an Indonesian PE) is treated as a direct sale of the PT company shares (or the Indonesian PE). Sales of shares in an Indonesian listed company are subject to a 0.1% final tax based on sale proceeds (see further comment below).
Payroll Tax & Personal Income
Individual tax residents are liable for tax on global income. An individual is regarded as an Indonesian tax resident if they stay in Indonesia for more than 183 days in any 12-month period or intend to stay permanently in Indonesia. Individual tax rates are progressive. The highest marginal tax rate is 30% and applies to income over Rp500m ($41,330) per year. Employment income is taxed through a monthly withholding system.
Social Security System
A new comprehensive social security programme covering all Indonesian citizens is administered by two bodies:
• The Social Security Agency for Health Insurance, known as BPJS Kesehatan, covers health insurance;
• The Social Security Agency for Social Security, known as BPJS Ketenagakerjaan, covers accidents, insurance, old age savings, death insurance and pensions.
VAT & LST Rates
VAT is due on all transactions that involve transfers of taxable goods or the provision of taxable services in Indonesia. Most goods- and business-related services are categorised as taxable goods or services. Those categorised as non-taxable include unprocessed mining or drilling products, natural gas, gold bars, securities, banking, insurance and finance leasing services. The standard VAT rate is 10% and is calculated by applying the rate to a relevant tax base. In most cases, the tax base is the transaction value agreed between the parties concerned.
The rate applicable to exported goods is 0%. Certain exported services, such as toll manufacturing, repair and maintenance, and construction services are also subject to 0% VAT. The VAT must be collected at the time of delivery when risk and ownership of goods have been transferred or when income from a service delivery can be reliably estimated or measured.
The VAT system operates on an input-output model. In most cases the supplier of goods or services is responsible for collecting VAT from the buyer. The tax collected constitutes output VAT for the vendor and input VAT for the buyer. Firms liable for VAT are required to account for VAT on a monthly basis.
The MoF has introduced an electronic VAT (e-FP) invoice system to make it easier for VAT-able taxpayers to collect VAT. Certain VAT-able taxpayers are required to prepare e-FP. This requirement will gradually be applicable to all VAT-able taxpayers by July 1, 2016. Non-compliance will result in the affected taxpayers being deemed not to have issued a VAT invoice, while an administrative sanction of 2% from the VAT imposition base will also be imposed on the taxpayer. A paper-based VAT invoice is still applicable for export-oriented transactions.
A payment must be made to the extent that output tax exceeds input tax, and the taxpayer is entitled to a refund of the excess where the input tax exceeds the output tax. Refund applications can be made at the end of a book year. It can take up to 12 months or longer for companies to receive VAT refunds after going through a VAT audit. Taxpayers meeting certain compliance criteria may obtain pre-audit refunds. Monthly refunds are possible for certain taxpayers, including exporters of goods or services, suppliers to VAT collectors and firms that are in the pre-production stage. In addition to VAT, deliveries or imports of goods categorised as luxuries are also subject to LST, with rates currently ranging from 10% to 75%. These goods include certain alcoholic beverages, household appliances and sporting equipment. In regard to very luxurious motor vehicles, the LST rate is increased from 75% to 125%. Very luxurious “green cars” are still eligible for the existing incentive in the form of a reduced LST base that will effectively lower the applied LST.
Stamp duty is nominal, and is generally Rp6000 ($0.50) for each document stamped. Land and property tax is due every year. The effective property tax is either 0.1% or 0.2% of the official value of the land and buildings (a predetermined proportion of a deemed sales value determined by the government). The government updates the value every one to three years to reflect market values. The transfer of land and building rights is subject to a 5% duty based on the official value or the transaction value, whichever is higher. The duty is payable by the purchaser.
Tax Payment & Reporting
Corporate income tax returns must be submitted to the DGT on an annual basis. Monthly instalments of corporate income tax must be made based on the firm’s prior year tax liability. Any tax payable after taking monthly instalments into account and tax withheld by third parties must be settled before filing the annual corporate income tax return. The annual filing must occur within four months of the book year-end. The time may be extended up to two months by notifying the DGT in writing together with a provisional tax calculation. The final settlement of the tax payable must be made before the end of the fourth month.
For extension requests, the tax payable per the provisional calculation must be settled before submission of the extension notification. Payments of tax beyond the deadline will trigger an interest penalty of 2% per month, with a maximum of 48%.
VAT, LST and WHT must be accounted for on a monthly basis. A VAT return for a particular month must be filed by the end of the following month, whereas a WHT return for a particular month must be filed by the 20th of the following month. VAT and LST payment deadlines are before the reporting date, but WHT taxes must be settled by the 10th of the following month.
Accounting for Tax
PT companies must maintain their books in rupiah and in Indonesian, and all records must be kept in Indonesia. The tax year must coincide with the book year, which may either be the calendar year or any 12-month period ending on a specified date, but consistency must be maintained.
Based on specific DGT approval, foreign-owned Indonesian companies, PEs and taxpayers presenting their financial statements in their functional currency of US dollars in accordance with financial accounting standards applicable in Indonesia, can maintain their books in dollars and in English. An approval application must be filed with the DGT no less than three months before the commencement of the dollar accounting year. The DGT must issue a decision on the application within a month. If no decision is made within a month, the application is considered to have been approved.
Tax Audit Strategy
In line with the increase of the 2015 tax revenue target, the DGT has tripled the 2015 tax audit revenue target from 2014, to Rp73.5trn ($6.08bn). With regard to tax audits on preliminary evidence of a tax crime taking place, the MoF has issued a new procedure that essentially opens up the possibility of a formal tax investigation.
Tax Audits & Assessments
The DGT may perform a tax audit on a particular taxpayer. A request for a tax refund will trigger a tax audit. The following factors may also trigger a tax audit:
• Declaring continual tax losses in the tax returns;
• Failure to file a return after a DGT reminder;
• Change in fiscal year;
• Change in book-keeping method;
• Performed fixed-asset revaluation; and
• Business restructuring, including acquisitions, mergers and liquidations.
The DGT may also select a taxpayer to be audited based on risk-based selection criteria. Tax audit timelines are split into examination and discussion phases. Field audits should be done within six to eight months and office audits within four to six months. The subsequent discussion phase should be done within two months. Further extensions are allowed in limited circumstances. Based on these findings, the DGT will issue a tax assessment letter. Under the KUP Law, a tax assessment letter for a particular period may only be issued within five years of the end of the tax period in question.
Tax audits in Indonesia can be a difficult and protracted process. As a result, all taxpayers are advised to be prepared in advance, by having all relevant documentation ready for delivery to the tax auditors within a month of request. Under the one-month rule, any documents delivered beyond a month from the request date can be ignored by the DGT.
An e-audit technique has been developed by the DGT to support the tax audit process, and is conducted by specially trained e-auditors, as one of the e-audit processes involves allowing the DGT limited access to taxpayer’s IT systems to read and download data. A coordinated approach may also be taken for concurrent tax audits of group companies which may be conducted between the relevant regional tax offices and tax service offices.
Tax Dispute Resolution
A taxpayer who does not agree with a tax assessment letter can file an objection with the DGT within three months of the issue of the assessment letter. The DGT has to issue an objection decision within 12 months of the objection being filed. If no decision is issued within this period, the objection is deemed to have been accepted.
Under the KUP Law, taxpayers can elect to pay the amount of tax they consider due and contest the balance in the objection. However, if the objection decision is unsuccessful, a penalty of 50% applies on the unpaid tax. This amount increases to 100% if the objection decision is appealed in the Tax Court and the court’s decision is unfavourable.
A taxpayer who does not accept an objection decision can file an appeal with the Tax Court within three months of the receipt of the objection decision. To the extent that the objection decision calls for a payment of tax due, according to the Tax Court Law, at least 50% of the tax due must be settled before filing the appeal.
As set out in the KUP Law, the taxpayer is only required to pay an amount agreed in the tax audit closing conference. This creates a mismatch and taxpayers are generally advised to pay the 50% amount to ensure the Tax Court accepts the case. However, the Tax Courts have recently stated that the tax due refers to the amount agreed by the taxpayer as stated in the objection or appeal, which was already paid in full, and hence no additional tax in dispute needs to be paid. The Tax Court should decide on an appeal within 12 months.
In certain circumstances its decisions can be submitted for a judicial review to the Supreme Court. Supreme Court decisions are closed hearings with no representations made apart from the submission of a written review request. Previously, there was only one Tax Court in Jakarta to hear cases from taxpayers across the country. However, from 2013, taxpayers registered in Surabaya, Medan or Yogyakarta can have their cases heard in courts situated in those cities.
Payment of Tax Arrears
The MoF has provided a new incentive for the payment of tax arrears in the form of eliminating the interest penalty that occurs if a tax payable arising from a tax assessment, objection, appeal or judicial review decision is not paid by the stipulated deadline. This facility can be obtained by submitting an application letter to the DGT through the tax office where the taxpayer is registered and is subject to the fulfilment of certain requirements.
By law, transactions between related parties must be conducted at arm’s length; otherwise the DGT has the right to re-determine the transactions. Under the KUP Law, taxpayers are required to maintain specific transfer pricing documentation in order to prove adherence to the arm’s length principle. The number of tax audits with transfer pricing as the key focus has increased following the issue of regulations related to transfer pricing audit. The DGT has issued detailed guidelines which typically follow OECD principles. Transactions under particularly close scrutiny include the payments of royalties and technical or management services fees, intercompany services, financing transactions and exports to related parties.
Where a taxpayer has no documentation available to substantiate these transactions, there is a high risk that deductions for the payments will be denied in full. In this regard, the one-month-rule time limit within which a taxpayer must produce any documentation requested by the DGT during an audit is being enforced.
Transfer pricing disputes may be resolved through the domestic objection and appeal process or, where the dispute involves a transaction with a party in one of Indonesia’s tax treaty partners, the parties may request double tax relief under the Mutual Agreement Procedures (MAP) article of the relevant tax treaty.
The domestic dispute resolution includes applying for a tax objection, appealing to the Tax Court, and requesting a reduction or cancellation of administrative sanctions. A MAP application cannot be lodged when the Tax Court has declared an end to the court hearing process and an existing MAP will cease when the Tax Court announces its decision. However, if a MAP agreement has been reached prior to the finalisation of the tax objection process, the result will be taken into consideration. Moreover, if a party is not satisfied with the Tax Court decision, a judicial review by the Supreme Court may take place.
The tax law authorises the DGT to enter into advance pricing agreements (APAs) with taxpayers and/or another tax country’s tax authority only on the future application of the arm’s length principle to transactions between related parties, and therefore taxpayers should not expect an APA to be “rolled back” to address any transfer pricing matters in open years in relation to the same/similar transactions. Any transfer pricing matters in open past years could be resolved through invoking mutual agreement procedures. Once agreed, an APA will typically be valid for a maximum of three tax years (for unilateral APA) and four tax years (for bilateral APA) effective from the tax year when the APA is agreed.
The MoF can grant bonded zone (Kawasan Berikat, KB) status to qualifying companies that are export-oriented, with the domestic sales quota of 50% of the previous year’s export realisation value or sales value to other bonded zones. The facility exempts imported capital equipment and raw materials from import duty and other import taxes (i.e., VAT, LST and Article 22 Income Tax). The traffic of goods between KB companies, as well as between a KB company and its supporting contractors, is also facilitated through the same tax facility.
Capital Market-Related Incentives
A gain from the sale of shares traded on the Indonesian Stock Exchange is not taxable in the normal fashion, and nor is any loss claimable as a deduction.
The sale of listed shares is subject to final WHT of 0.1%, which is based on the transaction value. Founder shareholders are required to pay 0.5% tax at the time of listing based on the listing price. If this tax is not paid, those shareholders are taxed on any subsequent gains based on normal principles. Interest income on Indonesian bonds is subject to final WHT of 15%. A corporate tax cut of 5% is granted to public companies that satisfy these conditions: a minimum public listing of 40% and the use of collective custody with a custody and settlement institution; a minimum number of 300 public shareholders, each holding no more than 5% of the company’s shares. These two conditions must be maintained for at least 183 days in the relevant year.
Tax-Free Merger & Acquisition
The transfer of assets in a business merger, consolidation or expansion must be accounted for at market value. However, the transfer of assets at book value may be allowed for certain qualifying mergers, consolidations or expansions. Certain criteria such as the business purpose test must be met and specific approval must be obtained from the DGT. If the merging companies are VAT entrepreneurs (i.e., taxpayers subject to VAT), the transfer of taxable goods between the merging firms is VAT exempt. Merging companies can apply for a 50% reduction of duty on the acquisition of land/building rights.
PEs may be exempted from the imposition of branch profit tax (BPT) if they reinvest after-tax profits in Indonesia in one of the following forms: capital participation in a newly established Indonesian company as a founder or participant founder; capital participation in an established Indonesian company as a shareholder; or acquisition of a fixed asset or investment of intangible asset used by the PE to conduct its activities in Indonesia. The above forms of reinvestment must be executed no later than at the end of the tax year following the year when the income subject to BPT is earned by the PE.
Income Tax Concessions
A package of concessions is available for firms that invest in certain qualifying sectors or regions. The major concession is a 30% allowance based on the amount of the investment, claimable over six years at a rate of 5% per year. Others include accelerated depreciation of fixed assets or amortisation of intangible assets (twice as fast as the normal rate), a longer tax loss carry-forward period (extended from five years up to 10 years depending on certain criteria), and a reduction of WHT on dividends paid to foreign shareholders (from 20% to 10%). There are currently 143 qualifying types of investment.
The government provides income tax reductions to certain pioneer industries. Five sectors benefit from this: base metals, oil refineries and/or base organic chemicals sourced from oil and gas, renewable energy, machinery and telecommunications.
The government has extended the application period for the Minister of Industry (MoI) or head of the Investment Coordinating Board (Badan Koordinasi Penanaman Modal, BKPM) to submit the tax holiday proposals to the MoF until August 15, 2015 (previously expired on August 14, 2014). The proposal submissions made by the MoI or the head of BKPM are based on the applications submitted by eligible taxpayers.