Non-Resident Tax subject
Under the provisions of the Income Tax Law, a non-resident tax subject is an individual not residing in Indonesia, an individual present in Indonesia for not more than 183 days in a period of 12 (consecutive) months, or an organization not established or domiciled in Indonesia who:
·is carrying out business or operating through a permanent establishment in Indonesia ; or
·may receive or earn income from Indonesia not from carrying out business or operating through a permanent establishment in Indonesia .
Indonesian Source Jurisdiction
General. If income is received or earned through a permanent establishment, the individual or organization is subject to tax through that permanent establishment and the status of the individual or organization remains that of a non-resident tax subject. In this way, the permanent establishment replaces the individual or organization as the non-resident tax subject in fulfilling tax obligations in Indonesia. If income is received or earned through other than a permanent establishment, tax is imposed directly on the non-resident tax subject.
If there is a double-taxation treaty, in determining whether such non-resident tax subject has a permanent establishment in Indonesia, the provisions of the treaty must be applied as a test under the double-taxation treaty. If the provisions of permanent establishment under the relevant double-taxation treaties are not fulfilled, then no income tax may be levied in Indonesia, or (to the extent applicable to income under the double-taxation treaty), the source rule will apply, and a tax must be levied through deduction by a third party (i .e . withholding tax).
Individuals. In regard to individuals, where the income is not a business profit, then an investigation must be made as to whether such income forms individual income originating from independent personal service.
If the answer is positive, it also must be investigated whether such work had been performed in Indonesia, or whether the performing individual was in Indonesia within the minimum period stipulated by the double-taxation treaty or has a fixed base already available on a regular arrangement in Indonesia. If these conditions have been fulfilled, in a way similar to those for a permanent establishment, the tax will be levied in Indonesia in accordance with the Income Tax Law.
Interest, Dividends, and Royalties. For income in the form of interest, dividends, and royalties, the tax must be withheld by the payer of the interest, dividend or royalty .
Interest income derived from deposits (in whatever name and form, including time deposits, certificates of deposit, and deposits on call), savings (in whatever name and form), and discounted Bank Indonesia certificates (SBIJ are subject to a final withholding tax .
Exempted from the imposition of this withholding tax are:
· Banks established in Indonesia ;
· Foreign banks’ branches in Indonesia ; and
· Pension funds approved by the Minister of Finance.
Dividend income (in whatever name and form, including dividends paid by or due from insurance company to policy holders) received by or payable to a tax subject is taxable income and is taxed pursuant to the provisions of the law.
Income derived from royalties is subject to tax. Therefore, there will be a withholding tax at the rate of 15% of the gross amount if the income is received by, or payable to, an Indonesian-resident tax subject or withholding tax at the rate of 20%, or the reduced rate based on the applicable tax treaty, on the gross amount if the income is received by or payable to a non-Indonesian-resident tax subject. Basically, compensation in the form of royalties comprises three groups, these being payments for the use of:
- Rights to intangible property, such as authors’ rights, patents, trademarks, formulas, or corporate secrets ;
- Rights to tangible property, such as the right to industrial equipment, commercial means, and scientific instruments ; and
- Information, such as that which is not yet in the public domain, although it may not yet be patented.
Immovable Property. For income originating from immovable property situated in Indonesia and not owned by an Indonesian national, tax will be levied in Indonesia. The method of assessing the tax will be done on the basis of the stipulations under the Income tax Law. [See text below.]
Other Types of Income. For other types of income, such as that earned by athletes and artists, income from directors’ fees, government service pensions, independent personal services, shipping and air transport services, and capital gains, a tax will be levied in compliance with stipulations under double-taxation treaty provisions.
Income Not Subject to Treaty. For income not covered by double-taxation treaty provisions, a tax will be levied in Indonesia if the beneficiary has a permanent establishment or fixed base regularly available to him in Indonesia . If this does not exist, tax on such income will be levied by the resident country.
Where the recipients are resident in countries which do not have a double-taxation treaty with Indonesia, the withholding tax (on payment to non-residents) under article 26 of the Income Tax Law will apply. Article 26 of the Income Tax Law stipulates that: government organizations, resident tax subjects, organizers of activities, permanent establishments, or other representative offices of overseas companies are required to withhold 20% of the gross amount of the following payments to non-residents:
- Dividends ;
- Interest, including premiums, discounts, interest rate swap premiums and guarantee fees ;
- Rental and payments for the use of assets ;
- Fees for services, works and activities ;
- Prizes and awards;
- Pensions and other periodical payments ; and
- Distribution of after-tax profits of a permanent establishment.
Income from the sale of assets in Indonesia and insurance premiums paid to or received by non-resident tax subjects other than permanent establishments in Indonesia shall be subject to a withholding tax at the rate of 20% of the estimation of the net income stipulated by the Minister of Finance.
Stocks and Shares
Income received by an individual or entity from the sale of shares listed on an Indonesian stock exchange is subject to a final withholding tax at the following rates:
- In respect of all stock sales transactions, 0 .1% on the gross sales transaction amount; and
- In respect of sale of stock by a founding shareholder (except venture capitalist),
0.5% on the share price on the closing of the stock exchange in 1996 or 30 December 1996 for stock traded in 1996 or earlier or on the initial public offering share price for stock traded on the stock exchange on or after 1 January 1997.
Income received by a non-resident taxpayer other than permanent establishment in Indonesia from the sale of shares not listed on an Indonesian stock exchange is subject to a final withholding tax at the rate of 5% of the sale value.
Income generated from bonds is taxed as interest because ‘interest’ is defined in the Income tax law to include premiums (if the bond is sold above its nominal value) and discounts (if the bond is sold below its nominal value, as it is the case with zero coupon bonds). Therefore, there will be a withholding tax at the rate of 15% of the gross amount if the income is received by, or payable to, an Indonesian-resident tax subject or withholding tax at the rate of 20%, or the reduced rate based on the applicable tax treaty, of the gross amount if the income is received by or payable to a non-Indonesian-resident tax subject.
The foregoing withholding tax rate also applies to income in the form of interest or discounts of bonds sold at the stock exchange ; however, while the income tax withheld on payment of interest is final, the tax withheld on discount received at the time a zero coupon bond is issued (‘original issue discount’) is not final . An exception is granted if the recipients are:
- Banks established in Indonesia or foreign bank branches in Indonesia;
- Pension funds approved by the Minister of Finance;
- Mutual funds; and
- Representative agencies of foreign countries, officials of diplomatic missions and consulates, or other officials of foreign countries and international organizations.
Income received or obtained by an individual or entity (other than resident banks, pension funds approved by the Minister of Finance, and mutual funds up to five years since its establishment or since the issuance of its license) from the sale of bonds listed on an Indonesian stock exchange is subject to a final withholding tax at the rate of 0 .03% of the transaction value.
Business profits are computed on the basis of normal accounting principles as modified by certain tax adjustments, i .e. by first adding together all proceeds or value derived from capital utilized within the business as from capital utilized outside the business (such as dividend received from shares or interest received form bonds) (`gross income’) less allowable deductions (for the purpose of calculating `taxable income’). The taxable income is subject to the following gradual tax rates:
For resident individual :
·5% for the first Rp 25 million ;
·10% for income above Rp 25 million to Rp 50 million ;
·15% for income above Rp 50 million to Rp 100 million ;
·25% for income above Rp 100 million to Rp 200 million ; and
·30% for income above Rp 200 million.
For resident entity and permanent establishment :
· 10% for the first Rp 50 million ;
· 15% for income above Rp 50 million to Rp 100 million; and
· 30% for income above Rp 100 million.
If such computation results in a loss, this loss may be offset from income (i .e. be carried forward) over five years, beginning with the first of those years. Allowable deductions are in general all outgoings and expenses incurred in obtaining, collecting, and maintaining such business profits, including:
- Depreciation of cost to obtain tangible business property (except land);
- Amortization of cost to obtain rights with a useful life of more than one year;
- Contribution to a pension fund approved by the Minister of Finance; and
- Cost for research and development undertaken in Indonesia.