Indonesian companies are required to register at the relevant DGT’s office for their location/status on or shortly after establishment. Companies must file annual returns to support the computed income tax payable. The income to be reported includes all overseas income as Indonesian tax law adopts the worldwide income basis. Tax paid offshore in relation to foreign source income can be credited in the same year subject to certain limitations.
Any joint business enterprise is treated for tax purposes as a body corporate. Hence, a “company” as defined for income tax purposes includes a limited liability corporation, a limited partnership, a state-owned or regional government-owned enterprise in whatever name or form, a partnership, a body of persons or other association, a firm, a kongsi, a cooperative, a foundation or similar organization, an institution, a pension fund and other form of business entity and a permanent establishment (PE).
An unincorporated joint venture between companies (e.g. Joint Operations, Consortium, etc.) is however treated as transparent for corporate income tax purposes and each member should report their share of income in their own tax returns.
The law distinguishes between resident tax subjects and non-resident tax subjects. A corporate resident tax subject is any corporate organization incorporated in Indonesia. Corporate organizations include limited liability companies, other companies, partnerships, cooperatives, foundations, pension funds and associations.
Non-resident tax subjects are individuals residing outside Indonesia and present for less than 183 days and corporate organizations incorporated overseas, but which receive or accrue income from Indonesia. These tax subjects are obliged to register for tax purposes if they have a PE in Indonesia. Certain types of income payable to nonresidents by resident taxpayers are subject to withholding tax.
Resident organizations and PEs are required to register as taxpayers, pay tax on their own income, withhold tax on payments to employees and third parties, and lodge relevant tax returns.
Representative offices of foreign companies are also required to register as taxpayers, even though they may not be a PE. This is necessary as the representative office will have to withhold tax on payments to employees and third parties and lodge relevant tax returns.
VAT registration is available only to registered taxpayers.
The object of tax is income, which is defined as any economic benefit received or accrued by a taxpayer, whether originating from within or outside of Indonesia, which is used for consumption, or which increases the wealth of the taxpayer, in whatever name or form.
For a company, income for tax purposes may include, inter alia:
- Gross profits from business
- Gains upon the sale or transfer of property (realized capital gains), including gains from business reorganizations and participation in mineral rights
- Interest, dividends, and royalties (subject to certain exceptions)
- Income from debt forgiveness
- Surplus gains on revaluation of assets (favorable tax rate may apply)
- Additional net wealth from income which has not been taxed
- Income from Sharia business.
Exchange gains or losses resulting from normal movements in currency exchange rates are, in most cases, included in taxable income in the current fiscal year irrespective of whether they are realized or unrealized. Gains or losses arising from a change in currency rates resulting from a government regulation or decree (revaluation or devaluation) may be subject to special concessions.
Capital gains, regardless of the reason for the disposal of the asset, are taxable. The taxable gain is defined as net proceeds less adjusted tax basis at the time of disposal. Losses from the sale or transfer of property or rights used in a business to earn income are deductible.
Capital gains on the sale of shares listed on the Indonesian stock market are subject to a final tax rate of 0.1 percent of gross proceeds (plus an additional 0.5 percent for founder shares). However, certain types of venture capital companies are not required to pay tax on capital gains under particular circumstances. There is also a final tax, being five percent of gross proceeds, on the sale of unlisted shares held by a foreign shareholder in an Indonesian company, unless protected by a Double Tax Agreement (DTA).
Effective from January 1, 2009, interest and/or discounts on bonds are subject to final withholding tax of 15 percent for resident taxpayers (other than banks, pension funds and listed investment fund companies) and 20 percent for non-resident taxpayers (subject to double tax treaty provisions) respectively.
Interest and/or discounts on bonds received or earned by a listed investment fund company are subject to final withholding tax at the following rates
- 0 percent for the year 2009 up to 2010
- 5 percent for the year 2011 up to 2013
- 15 percent from the year 2014
Dividends and other shares of profit derived by resident limited liability companies, cooperatives, state-owned enterprises, or regional government-owned enterprises from participation in the capital of an enterprise established in Indonesia, may not be included in taxable income in certain situations . Companies, which do not meet these conditions, will be subject to tax on such income. Dividends and shares of profits from other sources must be included in taxable income. A foreign tax credit is allowed for any tax withheld on foreign-source dividends. A credit is however not available for foreign tax on underlying profits.
Excluded from the definition of taxable income are, inter alia:
●Receipts of Aid payments or donations that are not related to the business or profession of the parties involved including “Zakat” or compulsory religious donations by the followers of religions recognized in Indonesia
Zakat may be deductible by the provider and non taxable by the recipient if such Zakat is paid to an approved party.
- Non business grants
- Certain remuneration in kind
- ●Dividends received by a resident company from another resident company, provided that both of the following conditions apply:
– The dividend is sourced from retained earnings
– The recipient owns at least 25 percent of paid up capital
- Income received by venture capital companies in the form of profits or dividends, as long as the investee companies meet certain requirements and the companies are not listed on the stock exchange in Indonesia.
- Surpluses of non-profit educational or research and development institutions, if reinvested
For most activities, taxable income is determined after deducting from gross income:
- The costs of deriving, recovering and conserving such income including, the costs of materials, wages, salaries of employees, employee bonuses, honoraria, cash allowances, interest, rent, royalties, travel expenses, waste treatment costs, insurance premiums, promotion and selling expenses (subject to conditions), administrative costs, and taxes other than income tax;
- Bad debts, provided certain conditions are fulfilled
- Depreciation of the acquisition cost of property and amortization of costs incurred in obtaining rights and other costs that have a useful life of more than one year
- “Zakat” donations if paid to an approved body by a Moslem individual or Moslemowned business
- Losses from the sale or transfer of assets
- Foreign exchange losses
- Costs of research and development performed in Indonesia
- Donations with respect to national disasters
- Cost of development of social infrastructure, educational and sports facilities
- Scholarships, apprenticeships and training costs
- Donations for research and development, social infrastructure, education facilities and sports development (subject to conditions)
- Prior year losses
- Contributions to a pension fund approved by the MOF.
Entertainment costs are an allowable deduction where they relate to securing, acquiring and collecting income, but substantiation requirements exist. Full details of each expense are required to be lodged with the annual tax return.
The following are not allowed as deductions from gross income in determining taxable income:
- Dividend payments or other profit distributions to shareholders
- Formation of or additions to reserves (e.g. doubtful debts). There are certain exceptions permitted for:
– Insurance companies
– Companies providing finance leases and/or consumer financing
– Reclamation costs for mining companies
– Reinvestment costs for forestry business
– Reserve costs for closure and maintenance of industrial waste disposal facility for waste treatment industry
– Guarantee reserve for deposit underwriting institutions
- Life, accident, health and scholarship insurance premiums, unless paid by the employer and providing such premiums are treated as income in the hands of the employees
- Costs of benefits-in-kind (i.e. fringe benefits) provided by a taxpayer for the needs of its employees, including vacation costs, motor vehicles, recreation, children’s education, housing (except for housing in certain isolated areas), and income tax paid by the employer
- Amounts exceeding fair value paid to shareholders or parties having special relationships as recompense for work performed
- Grants, donations or inheritances, except as specifically stated as deductible
- Income tax
- Expenses for personal benefit of shareholders, taxpayers or dependents
- Administrative sanctions
Inventory must be valued at cost using the average cost or first-in-first out (FIFO) basis for the purpose of calculating net profits from business. The last-in-first-out (LIFO) basis is not an acceptable method of stock valuation for tax purposes.
The carry forward of losses is limited to five years, commencing the first year after the loss was incurred. This period may be extended for up to 10 years under the special facilities available for certain regions and/or industries. There is no provision for the carry-back of losses. Changes of shareholders do not affect the validity of the carried forward losses.
Capital losses are treated the same as operating losses provided that the losses are reasonable based on sound market practice. No foreign losses can be included in the tax computation.
No provision exists for grouping or consolidation under Indonesian law.
Tax Depreciation/Capital Allowances
Depreciation is an allowable deduction in determining taxable income. Depreciable property is defined as tangible property owned and used in the business or owned for the production, recovery and securing of income, which has a useful life of more than one year. Land is not depreciable, except for certain industries.
Depreciable assets other than buildings and construction are classified by tax regulations into one of four asset categories according to the type of asset. Buildings and construction are divided into permanent and non-permanent structures. In practice, the regulation defines the useful life, irrespective of the taxpayer’s own assessment of the asset’s life. If, however, the category of assets is not specified in the regulations then it may be depreciated based on the useful life. Buildings and other immovable property are depreciated only using the straight-line method.
For all assets other than buildings and other immovable property, depreciation is calculated using either the declining balance or the straight-line method at the company’s option.
Depreciation rates under the Income Tax Law are normally:
Once applied, taxpayers are not allowed to change the method of depreciation without the DGT’s approval. Additions are depreciated from the month of acquisition. With approval from the DGT, depreciation can be deferred to commence from the year of first use of the asset.
Businesses operating in economic development zones (KAPET) and companies, which make a new investment or expand an existing investment in certain business sectors and/or certain remote areas are entitled to accelerated depreciation and amortization at double the normal rates. Special rules apply in the oil and gas, and mining sectors.
Amortization of Expenditure
The acquisition price of intangible property with a useful life of more than one year must be amortized consistently using either the straight-line or declining balance method over the useful life of the asset, following the rates of depreciation for tangible assets. For mining industries, forestry and other natural resources businesses, the taxpayer should use the unit of production method with a maximum of 20 percent per year.
Expenditure incurred during the construction or pre-commercial period should be capitalized and amortized after the commencement of commercial operations. However, operating costs (general and administration) cannot be capitalized and should be expensed in the year they are incurred. The costs of incorporation and expansion of capital can be expensed in the year incurred or amortized. Special rules apply in the oil and gas, and mining sectors.
Interest on funds borrowed by a company for the purposes of obtaining, collecting and maintaining income is deductible from gross income. However, where funds are used to derive income subject to final tax (such as interest on domestic bank deposits) no deduction is available.
The DGT is given the authority to re-determine the amount of interest income and/or interest expense and to reclassify debt as equity in determining taxable income if a taxpayer has a “special relationship” with another taxpayer. The objective of these provisions is to prevent the taxpayer reducing tax payable by means of charging excessive interest costs between related parties.
Interest may also be disallowed as a deductible item where such charges might be considered excessive, such as interest rates in excess of commercial rates. Interest-free loans from shareholders may in certain cases create the risk of the imposition of deemed interest and withholding tax obligations for the borrower.
The tax rates applicable to companies and organizations are as follows:
Prior to 2009 a progressive banded system applied with a top rate of 30 percent. Listed companies which meet certain conditions are eligible for a 5 percent reduction in the corporate tax rate.
A company with gross turnover less than IDR50 billion (approximately USD5.5 million as at November 30, 2011) is eligible for a 50 percent reduction of the corporate tax rate on the proportion of taxable income which results when IDR4.8 billion is divided by the gross annual turnover. Where gross turnover is below IDR4.8 billion, the reduction applies on all taxable income. Article 31E Law Number 36/2008.
A PE is subject to tax on taxable income at the above rates plus branch profits tax at 20 percent of the net income after tax, subject to reduction under an applicable DTA.