Indonesia Tax 101
August 10, 2020Information purposes only, August 2020
| Self-assessment regime but rigorous tax audit process | The tax system in Indonesia operates on a self-assessment basis, however a rigorous and often punitive tax audit and verification process is followed. The main tax laws are supplemented by a complex and ever-changing raft of implementing regulations. |
| Worldwide income, no grouping. Note CFC Provisions | Corporate entities are deemed to be resident if established in Indonesia and are then subject to tax on worldwide income on a standalone basis (no tax grouping). Losses may be carried forward and utilized over five years. Overseas losses in subsidiaries may not be offset but profits may be deemed to have been received, under CFC type provisions. Overseas withholding taxes suffered may be offset against Indonesian taxes due. Elections and incentives are limited, although since 2018 there has been some expansion in this respect. |
| Withholding tax on income of non-residents, Extensive DTA network. Branches generally not allowed | Except for payments in relation to the supply of goods, non-residents receiving income from Indonesia are likely to suffer withholding tax of 20% although this may be reduced if the recipient is a tax resident of one of more than 65 countries with which Indonesia has signed a double tax agreement (“DTA”)*. Non-residents must also be wary of breaching the fairly restrictive criteria for the creation of a permanent establishment (“PE”). A branch profits tax (also 20%) applies on the after tax profits of a PE, again unless reduced by treaty. With the exception of certain specific industries, branches are not generally an allowable form of business for foreign entities and so the creation of a PE may also indicate other regulatory breaches. |
| No specific Capital Gains Tax but note deemed gains | The main taxes which apply to tax residents and PEs are income tax, Value Added Tax (“VAT”), withholding taxes and Luxury Goods Sales Tax (“LGST”). Capital Gains are taxed as income, although certain transactions are subject to a tax on proceeds – amounting to an effective deemed capital gain, including on real property and sale of shareholdings. |
| Corporate Income Tax 25%. Small company reductions. Alternative tax treatments | The Corporate Income Tax rate is 22% in 2020/21 and 20% thereafter (previously 25%). Lower rates apply to small companies (determined by revenue) or listed companies satisfying certain criteria. Certain business sectors and streams of income are subject to alternative tax regimes. Principal amongst these are Oil and Gas PSCs, Construction Companies, Shipping, Airlines and Property Rentals. |
| Extensive use of withholding and prepayments. Monthly reporting | Indonesia operates a prepayment and withholding regime and tax residents are obligated to report and make payments in relation to these, and VAT transactions, on a monthly basis. Employers are obligated to withhold tax on income from employment. |
| Transfer pricing focus | The authorities have powers to adjust transactions on which the pricing or arrangements are deemed not to be at arm’s length. The need for transfer pricing documentation to justify the pricing of transactions between related parties is regulated and strictly enforced. Generally, the approach to transfer pricing is OECD based but certain specific local nuances need to be considered. The authorities may seek to adjust pricing if a special relationship has influenced the transaction, even where the parties to the transaction are not related. |
| Individual income tax – worldwide income | Individuals are deemed resident if present for more than 183 days, or there are indications of an intention to reside. Individuals are obligated to report and pay tax on worldwide income. The top rate of individual income tax is 30% and this applies on taxable income in excess of approximately USD34,000 (exchange rates at August 2020). |
| VAT & Luxury Goods Sales Tax | VAT applies at 10% on most goods and services. LGST applies at rates up to 75% on certain goods. Rates of up to 200% are possible under the regulations. |
| Dispute resolution options | Assessments raised after verification or audit may be challenged and subsequently appealed to tax court. It can often take two years or longer to resolve a disputed assessment. Mutual Agreement Procedure (“MAP”) and Advance Pricing Agreement (“APA”) options are available. |
*Note that strict administrative requirements apply before utilising the benefits of a DTA
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