An employer is obligated to withhold, remit and report tax on income received by an employee in connection with employment. Individuals who are resident in Indonesia for tax purposes are required to obtain a personal tax registration number (NPWP) and file an individual return, unless he or she receives net income below the non-taxable income threshold (discussed below).
The tax law distinguishes between resident tax subjects and non-resident tax subjects. A resident tax subject is defined as any individual present in Indonesia for more than 183 days in any consecutive 12-month period, or any individual present in Indonesia and intending to reside in Indonesia. Resident individuals are taxed at the normal rates on taxable income, i.e. worldwide gross income less allowable deductions and non-taxable income.
Gross income is broadly defined as any economic benefit received or accrued by a taxpayer, whether originating from within or outside Indonesia. Gross income includes wages, salary, bonuses and other compensation for work performed, honoraria, lottery prizes and awards, gross profits from business, gains from the sale or transfer of property, dividends, interest, royalties, rent and income from the cancellation of indebtedness.
Items excluded from gross income include inheritances and life insurance proceeds, compensation received in kind (fringe benefits) in relation to work or services performed, and interest received on time deposits. In certain circumstances, benefits-in-kind are taxed in the hands of employees.
Interest income earned by individuals from time deposits held in Indonesia is subject to a 20 percent final withholding tax, accounted for by the paying bank. This income is not subject to further taxation in the hands of the recipient.
Income from the rental of land and buildings is subject to 10 percent final withholding tax. Corporate tenants should deduct the 10 percent tax from amounts payable to the lessor.
Capital Gains Tax
Similar to companies, capital gains derived by individuals are taxable as normal income
Dividends are taxable to individuals. Dividends received from domestic taxpayers are subject to a final withholding tax of 10 percent. A foreign tax credit may be available for any foreign taxes paid on dividends received from overseas.
Employment Income/Employee Benefits
Companies paying amounts to resident individuals in excess of a small daily sum are required to withhold tax at standard rates, except for rental and certain professional services where lower rates of withholding may apply.
It is common practice for salaries and certain other amounts payable to individuals to be expressed on a “net of tax” basis.
By special concession, Indonesian nationals are allowed the full benefit of non-taxable income allowances and the lower bands of tax rates against part-year employment income. In all cases, the occupational support deduction is limited to the lower of 5 percent of gross income, or Rp 500,000 per month, (maximum Rp 6,000,000/year).
Generally, the full cost of benefits-in-kind is excluded from the taxable income of an employee and is not an allowable deduction from gross income in determining the taxable income of the employer.
Benefits-in-kind are considered to be any benefits received by the employee or his or her family from an employer not in the form of cash. For example, the medical expenses of an employee paid directly by the employer to a hospital are excluded from taxable income because the benefit was not received as cash and was paid directly to a third party. Such benefits also include housing (except in isolated areas), home leave, motor vehicles, children’s education expenses and tax borne by an employer on behalf of an employee.
Exceptions to this general rule are:
- Employees of parties to Production Sharing Contracts and Contracts of Work in existence at December 31, 1983
- Employees of Representative Offices (those which are performing promotional activities only) and other non-tax subjects
- Various international organizations, embassies
- Employers who are taxed on a “deemed profit” basis
- Employers who are subject to final tax.
In each of these instances, the full cash value (being the cost) of the benefits-in-kind provided represents taxable income in the hands of employees and is subject to employee income tax. For oil and gas and mining contractors, the cost of benefits-in-kind may be deducted from taxable income.
The following kinds of income received by individuals are exempt from tax:
- After-tax profits from a partnership or similar association
- Certain gifts, donations and inheritances
- Proceeds of certain life and health insurance policies
- Compensation for work or services received in kind subject to certain exceptions (provided the employer may not claim a tax deduction)
- Social security benefits (death and accident) are exempt from individual income tax, except for old age pensions received.
A self-employed individual taxpayer is allowed to deduct from income any expense related to the collecting, obtaining and maintaining of income, as well as costs related to private business. The taxpayer must register individually with the DGT and file an annual personal income tax return in order to be able to claim other deductions.
No deductions are available for non-residents.
Resident individual taxpayers can also deduct the following in determining taxable income:
- For the individual taxpayer – Rp 15,840,000/year
- For a married taxpayer who is the principal earner – an additional Rp 1,320,000/year
- For each lineal family member by blood or marriage who is a full dependent (up to a maximum of three dependants) – an additional Rp 1,320,000/year per dependant.
- Resident individual taxpayers are also allowed the following tax deductions:
- For occupational support, an additional allowance of five percent of gross income up to a maximum of Rp 6,000,000/year
- Contributions to registered pension funds and the Jamsostek pension scheme.
The following are the rates of tax applied to the annual taxable income of resident individuals:
Rate (%) Taxable income
5 < Rp 50 million
15 Rp 50 million – Rp 250 million
25 Rp 250 million – Rp 500 million
30 > Rp 500 million
An employee who does not have a tax identification number (NPWP) will be subject to a surcharge of 20 percent on the tax rate, such that the maximum rate will be 36 percent.
Subject to relevant DTAs, income received or earned by a non-resident for any work or services performed in Indonesia and paid by, or charged to an Indonesian entity, is subject to a final withholding tax of 20 percent applied to the gross amount of the income. The payer of the income is responsible for the withholding tax due on the income paid to the non-resident.
Payments to non-residents in the form of dividends, interest, royalties, rent for property, compensation for services, prizes and awards, pensions and other periodic payments, rentals, insurance premiums or the deemed gain from the disposal of shares in unlisted Indonesian companies in Indonesia are also subject to a 20 percent withholding tax, unless reduced or exempted by an applicable DTA. This 20 percent withholding tax can be treated as a prepayment of tax if a non-resident becomes a resident taxpayer.
Payment of Tax
Income tax withheld by employers from payments of wages, salaries, honoraria and other payments to individuals subject to tax, must be remitted on a monthly basis by the 10th day of the following month.
Employers must file a monthly tax return by the 20th day of the following month outlining total compensation and taxes withheld. As from 2009 there is no obligation to file an annual employee tax return. However, the December tax return to be lodged on the 20th of January, should detail, by individual, all taxes paid and income earned during the year by employees and other individuals subject to withholding. Any income tax payable as shown in such December tax return should be remitted before the filing date of January 20. Individuals must pay monthly installments based on regular non-employment income declared in the previous year’s tax return.
Individual tax returns may be subject to tax audit as a result of which the DGT may assess tax by issuing:
- A tax assessment
- A tax collection notice
- An additional tax assessment.
Payment of these assessments is due within one month of issuance by the DGT. Otherwise the return is accepted as final by the DGT once the five-year statute of limitations has passed.
Under the tax law, resident individuals including expatriates are taxed on worldwide income. The DGT has issued a schedule of salary guidelines, the most recent version of which was issued in April 2002. The guidelines address the industry of employment, nationality, and job title. They are used by the DGT in circumstances that indicate that salaries are not being properly declared for employee income tax purposes.
For expatriates commencing or terminating employment during the year, annualization of income is required for calculating the tax payable on the part-year income. This effectively pro-rates the non-taxable income allowances and the lower bands of tax rates. As such, the timing of arrival in or departure from Indonesia of expatriates is of no significance for tax purposes.
The law contains no provisions to exempt or relieve earnings relating to services or employment paid overseas or performed overseas by resident individuals.
Expatriate employees of drilling companies are taxed on a deemed salary basis, for which separate regulations exist.