Taxation of profit
Taxable income for corporation is taxed at the rate of 28%.
Some expenses not related to normal business expenses are not allowed for tax purposes and such expenses must be taken out in order to arrive at the amount of taxable income. Rates of depreciation are regulated, although taxpayers may elect either the straight line or double declining method. 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 English based on the tax office approval.
Taxable business profits are computed on the basis of normal accounting principles as modified by certain tax adjustments. Generally, a deduction is allowed for all expenditure incurred to obtain, collect, and maintain taxable business profits. A timing difference may arise in respect of when an expenditure recorded as an expense for accounting can be claimed as a deduction for tax.
Dividends received from Indonesian companies are subject to a 15% withholding tax. Payments to nonresident individuals or companies in the form of dividend are subject to a 20% withholding tax, subject to any reduces rates under an applicable tax treaty.
Under Indonesian tax law, withholding tax of 20% is imposed on the gross amount of interest including guarantee fees paid or payable to non-resident tax subjects. This is a final tax and no further assessment of Indonesian tax occurs in relation to interest derived by non-residents from an Indonesia source where withholding tax applies.
Repatriation of Profits and Transfer Pricing
Repatriation of profits includes interest, dividends, royalties, branch profits, management fees, technical services fees. Some of the repatriations profits as mentioned above must be justified for tax purposes in order to be recognized as tax deductions. Most of these repatriation profits are subject to withholding tax, subject to protection under the Double Tax Agreement.
Withholding taxes on royalties are 15% on domestic payments and 20% on remittances abroad, unless the latter rate is reduced under a tax treaty and the recipient submits a tax residence certificate from the tax authorities of its country of residence. The term Royalties is defined differently in each of Deferred Tax Asset and where applicable, its definition takes precedence over the domestic law. The definition usually en compasses both royalties for the use of property, and for information concerning industrial, commercial and scientific experience.
Taxation of permanent establishment (PE)
A permanent establishment is any establishment that is regularly used to carry on business in Indonesia by an organization not set up to domiciled in Indonesia. A Permanent establishment is taxed on Income from business activities of the Permanent Establishment and from property controlled or owned by the PE, Income of the parent company where the income is from business activity or sales of goods and provision of services in Indonesia of the same type as those carried out by the permanent establishment in Indonesia, and Income in the form of dividends, royalties, interest payments and fees for services received by the parent company. A Permanent Establishment is therefore taxed on income from its own business activities, and on any income received by the parent company from the sale of products and services in Indonesia of the same type. It is also taxed on income received by its parent company in the form of dividends, royalties, interest payments and fees and services if an effective relationship exists between the PE and the property or separations producing the income. A Permanent Establishment is also required to pay additional tax at the rate of 20% on its after-tax taxable income in Indonesia.
Taxation of capital gains
Capital gains are taxable as ordinary income, and capital losses are tax-deductible. The taxable gain is defined as net proceeds less book value at the time of disposal. Capital gains from the sale of Indonesian assets held by foreigner are taxable at 5% of gross proceeds (but the only assets now taxable are shares held by foreign entities). Applicable tax treaties usually override this provision of domestic tax law. Sales of shares listed on the Indonesian Stock Exchange are subject to a tax of 0.1% of the transaction value. Founder shares are also subject to a final tax 0.1% of the transaction value. Founder shares are also subject to a final tax 0.5% on the share value at the time of an initial public offering.
Interaction with international tax regime
Indonesia has agreements for the avoidance of double taxation signed. There are currently 59 tax treaties in force with other countries. Indonesia has a reasonably broad tax treaty network to establish eligibility for the treaty rates, the non residence payee should provide the payer with a certificate of domicile from the tax authority in the payee’s country of residence. A copy of this statement is filed with the Directorate-General of Taxation. In general, these agreements follow the principles of the OECD Model Taxation Convention on Income and Capital.
The basic principle is that the country of source has the prior right to tax and the other country provides either a tax exemption. In a tax regulation issued by the Indonesian Tax Office, that in order that a non-resident may enjoy the benefits of treaty protection including reduced withholding tax rate, for an application form to be lodged with the Indonesian tax Office seeking confirmation of the non-resident’s right to take treaty relief. Until such time that the Indonesian Tax Office approves applications, full withholding tax rates apply.