Taxation

Tax system

New laws
The current framework of Indonesia’s tax laws dates from 1983 with subsequent revisions, most recently in 2007. There are separate laws covering income tax, value added tax (VAT) and sales tax on luxury goods. Other tax laws include the law on the taxing of land and buildings and the law on stamp duty. Individual articles contained in the laws may be supported by implementing regulations and decrees, government regulations and decrees of the Directorate General of Taxation. The government is committed to a greater intensification of tax collection including increasing the number of registered taxpayers.

Income tax
Income tax is applied to resident corporations and individuals on most sources of increase in economic wealth. A company is treated as a resident of Indonesia for tax by virtue of its establishment or its place of management in Indonesia. A foreign company carrying out business activities through a permanent establishment (PE) in Indonesia will generally have to assume the same tax obligations as a resident taxpayer Resident taxpayers and Indonesian PEs of foreign companies have to settle their tax liabilities either by direct payments, by withholding by third parties, or a combination of both. Foreign companies that do not have a PE in Indonesia are to settle their tax liabilities in respect of their Indonesian‐sourced income by way of the Indonesian party paying the income withholding the tax.

Withholding taxes
The rates of withholding tax vary according to the nature of the income source. Rates for domestic payments extend up to 15%. Payments made overseas on certain sources of income may be liable to withholding tax of up to 20%. Applicable tax treaties may reduce the rate of withholding tax.

Tax rates
Progressive rates of income tax for individuals rise up to a top rate of 35% applicable to annual taxable incomes in excess of IDR 200 million (Approximately USD 20,000). The top rate of corporate income tax is 30% applicable to taxable incomes of more than IDR 100 million (USD 10,000).

Residents are liable to tax on their worldwide income from all sources. A recent stipulation is the requirement for most individuals, including resident expatriates, to file individual tax returns.

The rates of withholding tax vary according to the nature of the income source. Rates for domestic payments extend up to 15%. Payments made overseas on certain sources of income may be liable to withholding tax of up to 20%. Applicable tax treaties may reduce the rate of withholding tax.

Calculation of Taxable Income
Taxable income is calculated after allowable deductions. For individuals there are income tax exclusions which are set at relatively low income levels. Individuals are broadly liable to income tax on cash income. Benefits in kind provided by employers to employees are not taxable to individuals but are non‐deductible against corporate taxable income. Employers are required to withhold income tax from employees and deposit each month with the State Treasury.

Employers prepare a consolidated annual tax return detailing each employee’s individual tax calculation. The employee should then file a separate personal return. Tax returns should be filed by 31 March of the year following the year of assessment.

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.

Corporate taxable income is calculated after the deduction of most normal business expenses. Rates of depreciation are regulated, although taxpayers may elect either the straight line or double declining method. Provisions that are not deductible 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 English based on the tax office approval. Foreign currency, i.e. US dollars, may be used as the reporting currency if appropriate approval is obtained. Annual filings should be lodged within three months of the financial year, though an extension may be obtained.

Payment of Taxes
Taxes are paid by monthly instalments on a current year basis. The regular instalment amount is based on the previous year’s filings after taking credit for withholdings at source. Any shortfall should be settled by the 25th day of the third month following the end of the financial year. Overpayments of tax may be recovered, but only after a tax audit has been completed. The self‐assessment principle, however, underpins Indonesian income tax law. A substantial part of individual income is collected by way of withholding by third parties.

Value Added Tax
VAT applies to the import and delivery of most goods and service. However, insurance and banking are not subject to VAT. VAT is collected at a standard rate of 10%. The export of goods is zero‐rated. Taxpayers are required to file a return in the month following, showing details of all output and input VAT. The net output VAT is then payable by the 20th of the following month. 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 direct to the State Treasury. Such suppliers may be in a constant overpayment situation and may be forced to seek regular refunds. VAT has become a major source of revenue for the government.

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 50%.

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 specialist rules. Rates of tax vary according to the generation of each respective contract.

Tax Treaties
There are currently 59 tax treaties in force with other countries. Provisions typically include reduced withholding tax rates on interest, dividends and royalties and a broader definition of the concept of permanent establishment compared with domestic law.

Sunset Policy

Following the enactment of the 2007 tax administration law, taxpayers are allowed to revise their annual corporate income tax returns (CITR) for years before 2007 without facing any interest penalties on the underpaid tax amounts. In the normal situation, an underpaid tax amount would trigger interest penalties at 2% per month. Apart from the interest exemption, there are other concessions:

  • Any data declared in the revised CITR cannot be used as a basis to issue assessments on any other taxes.
  • The revised CITR will not be audited unless it claims an overpaid tax refund or proves to be incorrect.
  • Filing a revised CITR which calls for an additional tax payment may stop an on‐going tax audit. This includes not only the audit of corporate income tax for which the revised CITR has been filed but also the audit of other taxes as long as the relevant tax returns do not claim tax overpayments.

The Director General of Taxes (DGT) however, at his own discretion, may decide to continue the audit irrespective of the absence of overpaid tax returns. The concession is available only up to the end of 2008. Hence, to enjoy the concession, the revised CITR must be filed before 1 January 2009.

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