Classification of Corporate Taxpayers

A corporation, for tax purposes, is classified as “resident” or “non-resident”. Residency is determined on the basis of place of incorporation. A corporation is therefore considered “resident” if incorporated in Indonesia and non-resident if otherwise.
Resident corporations are taxed on their worldwide income. Tax credits are allowed for income that was taxed outside the country. Non-residents are taxed only on income derived from Indonesian sources, subject to any relief available under double taxation
agreements.
A non-resident entity with a permanent establishment (PE) in Indonesia, such as a branch office, is taxed on
(1) the PE’s income from its business or activities, and from the assets it owns and controls
(2) the income of the head office arising from business activities, or sales of goods or services in Indonesia of the same type as those sold by the permanent establishment in Indonesia
(3) all other income, either received or accrued by the head office such as dividends, interest, royalties, rent and other income connected with the use of property, fees for services, etc, provided that the property or activities producing the income is effectively connected with the PE in Indonesia.

In Indonesia a PE is generally defined as an operation in which a non-resident establishes a fixed place of business in Indonesia. This would include a management location, a branch office, an office building, etc. A PE can also be established as a result of the non-resident entity’s employees providing services in Indonesia for more than 60 days in any 12-months period. For companies from those countries with which Indonesia has concluded a Double Tax Agreement (DTA), the relevant definition can be somewhat modified.

Income Subject to Tax

Taxable income is defined as any increase in economic prosperity received or accrued by a taxpayer, whether originating from within or outside Indonesia, that may be used for consumption or to increase the recipient’s wealth in whatever name and form. It includes any remuneration in connection with work or services, business profits (with no distinction between operating and capital income), dividends, interest, rent, royalties and other income related to the use of property. Certain income is exempt from tax, such as dividends earned by a domestic corporation from another domestic corporation, provided that the dividend is from the retained earnings, the shareholding of therecipient is at least 25%, and the recipient maintains other active businesses.

Allowable Tax Deductions

Taxable income is determined by subtracting allowable deductions from revenue. Certain expenses, such as employee benefits in kind and donations, are generally not tax deductible. In addition, interest incurred to finance the acquisition of shares is not deductible unless dividends from the shares purchased are taxable. The following are major allowable deductible expenses:

Business Expenses

As a general rule, taxpayers may deduct from gross income all expenses related to earning, securing and collecting taxable income. Items that are not deductible include those incurred for the personal benefit of shareholders; benefits in kind (e.g. housing and vehicles) provided to employees, except for the provision of food and beverages for all employees and for certain benefits in kind provided to employees in certain remote areas; gifts; donations and support; “excessive” payments for goods or services where a special relationship is deemed to exist between the buyer and seller; and expenses incurred in the course of producing income that is exempt from tax or subject to final tax. Formation of a reserve or allowance is generally not tax deductible, with the exception of bad debt allowances for banks or finance leasing companies, reserves in insurance companies, and reserves for reclamation costs in the mining industry.

Research and Development

Expenses such as those for research and development carried out in Indonesia and eligible employee training qualify as regular allowable deductions. Indonesia has no special income tax deductions/relief for research and development and eligible employee training. The deductibility of research and development performed offshore remains unclear.

Depreciation and Amortization

Investors can adopt either the straight line or the double declining balance method for depreciation of tangible assets (except buildings). The taxpayer should apply the depreciation method chosen consistently. The Tax Office must approve any change inmethod. The same depreciation method and percentages are allowed for intangible assets with a benefit of more than one year.

Loss Carryovers

Losses may in general be carried forward for five years. However, to encourage investment in certain business sectors and in certain areas of the country, a ten-year loss carry forward period is available.

Debt Restructuring

Tax facilities on debt restructuring are granted in the form of:

Reduction as well as installment payments of the tax due on debt forgiveness.
Income tax exemption on the transfer of assets to settle debts, provided that the asset is transferred at book value. Income tax exemption on debt-to-equity conversion, provided that the equity value is fully equivalent to the debt value. These facilities are only provided for debt restructuring under the Jakarta Initiative plan and only applicable to the years 2000, 2001 and 2002.

TAX RATES

Corporate Tax Rates

The corporate tax rates are as follows:

10% for taxable income up to Rp. 50 million.
15% for taxable income between Rp. 50 and 100 million.
30% for taxable income in excess of Rp. 100 million.

Partnership Tax
Partnership income is taxed in the same manner as corporations. Profits shared by individual partners are not taxable.

Individual Tax

Tax Year

In most cases, the tax year is the calendar year ending December 31.

Classification of Individual Taxpayers

For taxation purposes, an individual is classified as “resident” or “non-resident”. An individual is considered a resident taxpayer if he stays in Indonesia for more than 183 days in any 12-month period or if he intends to reside in Indonesia. Naturally, if the individual comes from a treaty country, the determination of tax residency shall be based on the provisions of the relevant tax treaty.

Both resident and non-resident taxpayers are subject to national income tax (Indonesia has neither federal nor state income tax). Residents are taxed on their worldwide income and are generally allowed a credit for taxes paid abroad, whereas non-residents are taxed only on their Indonesian-source income.

Tax Payments and Rates

Employees are subject to withholding tax from their remuneration. Those who are self-employed or who have other income, pay monthly estimated taxes as well. Previously, employees with only one source of employment income need not file a tax return. However, under the new laws effective 1 January 2001, an individual whose income exceeds the non-taxable threshold is required to file an annual personal tax return.

5 % for taxable income up to Rp. 25 million.
10% for taxable income up to Rp. 25-50 million.
15% for taxable income up to Rp. 50 - 100 million.
25% for taxable income up to Rp.100-200 million.
35 % for taxable income up to Rp. 200 million.

Non-residents are subject to a flat rate of 20% of gross income, subject to treaty protection.

Deductions and Exemptions

Individuals are allowed to deduct from their employment income occupational costs of 5% of gross income (up to a maximum of Rp. 1,296,000 (about US$150)) a year and contributions to an approved pension fund. No other deductions from employment income are allowed.

If an individual’s source of income is a personal business, the same general deduction rules as those for a corporation apply, provided that the individual maintains adequate bookkeeping.

Taxable Income

Any increase in economic prosperity received or accrued by a resident taxpayer, whether originating from within or outside Indonesia, that may be used for consumption or to increase the recipient’s wealth in whatever name and form is taxable. This includes wages, salary, commission, bonuses, lottery prizes, interest, dividends, etc.

Special tax treatment applies to the following income:

Benefits in kind are not taxable unless provided by a body that is not an Indonesian taxpayer (e.g. a representative office).
Interest income from Indonesian banks is generally subject to final withholding tax of 20%.
Certain other income is also subject to final tax. These include rental of land or buildings (10% final tax from the gross proceeds), capital gains from the sale of shares listed on an Indonesian stock exchange (0.1% final tax from the gross proceeds plus an additional 0.5 % for founder shares), and income from the sale of land or buildings (5% final tax from the gross proceeds).
Lottery prizes are taxable in Indonesia at 25%.
Expatriate Tax Rules

Withholding Tax
To facilitate higher tax collection and greater compliance, Indonesia has an extensive withholding tax system. There are two types of withholding tax, ‘prepayment’ and ‘final tax’. Expenses incurred in deriving income subject to final tax are not deductible.

Payments made to resident taxpayers and permanent establishments by resident corporate taxpayers, government bodies, activity organizers, permanent establishments, representative offices and certain appointed individuals are subject to withholding tax .e following payments made by a government body, resident taxpayer, activity organizer, permanent establishment and representative office to a non-resident taxpayer are subject to 20% (or applicable reduced treaty rate) of the gross amount:

Value Added Tax (VAT) and Sales Tax
VAT is imposed on most goods and services at a rate of 10%. Government regulations can adjust the rate to as low as 5% and as high as 15%. The tax is generally collected by “VAT-able firms” (entities which deliver taxable goods or services). These firms arerequired to submit VAT returns monthly. There are goods and services, however, that are exempt from VAT.

The following is a list of certain industries currently exempt from VAT according to the new tax amendment effective January 1, 2001:

Mining and drilling products taken directly from source, e.g. crude oil
Basic commodities e.g. rice
Food and beverages served at a hotel, restaurant, food stall and the like
Money, gold bars and commercial paper
Entertainment and art services subject to theater tax
Healthcare services
Societal services
Stamped mail delivery services
Banking, insurance and financial leasing
Religion services
Education services
Broadcasting (non-advertising in nature) services
Public transportation services
Manpower services
Hotels
Governmental service
Aside from the above, primary production companies and small businesses (corporations or individuals) with annual sales of less than Rp. 180 million for services and Rp. 360 million for goods have the option to be exempted from imposing VAT.

Exported goods are not subject to VAT; exporters can claim a refund of the input tax (VAT incurred in producing goods for export).

The local purchaser of imported goods and services, including intangible goods, is responsible for all payments of VAT on goods and services and customs duty on goods. VAT and customs duty are collected at the port of entry for imported goods.

A self- assessedVAT payment mechanism is applied in connection with the following:

a. The utilization of intangible VAT-able goods obtained from outside the Indonesian
customs area and utilized within the Indonesian customs area; and

b. The utilization of VAT-able services obtained from outside the Indonesian customs area and utilized within the Indonesian customs area.

VAT Relief

The importation of cattle and poultry feed as well as raw materials for cattle and poultry feed is exempt from VAT. In addition, the BKPM is given authority to approve deferral of VAT on the importation of equipment used by companies incorporated under the domestic or foreign investment law (PMA and PMDN).

VAT Collectors

The Government appoints VAT collectors, who self -collect the VAT due from the goods purchased or services received and forward the payments to the State Treasury. They include Production Sharing Contractors (PSCs), Government Treasurer companies or
Government institutions appointed by the Minister of Finance.

Sales Tax on Luxury Goods

Government Regulation No. 145/2000 dated 22 December 2000 details various goods subject to Sales Tax at rates ranging from 10% to 75%.

Housing with floorspace over 400m2 or electricity usage of more
than 6,600 Watts, Apartments, condominiums and town houses
are now subject to 20% (previously 10%).

Perfume is subject to 20% (previously 10%).

Helicopters and aircraft are now subject to 50% (previously 35%).
The maximum rate of Sales Tax has increased to 75%. Examples of goods subject to this maximum rate are:

Sedans/ station wagons/ vans with spark or compression ignition internal combustion reciprocating piston engines exceeding 3,500 cc with seating capacity of less than ten persons

Certain types of liquor and wine

Luxury yachts

Jewelry and anything made from precious stones or pearls
Indonesia has no rules for insubstantial (minor) imports of goods and services. VAT and customs duty will be imposed on all goods irrespective of their value. Likewise VAT will be imposed on the importation of services irrespective of value. No changes are foreseen in this area despite the fact that the availability of E-Commerce transactions will lead to an increase in low value cross-border trade. Furthermore we wish to note that in the new amended
tax law effective January 1, 2001, mergers are now subject to VAT which in certain cases may significantly impact non-VAT-able firms such as financial lease companies.

Indirect Taxes
Tax on Land and Buildings

Tax is imposed on individuals, companies or organizations that have certain rights to or obtain benefits from land, or possess, control or obtain benefits from ownership of land and buildings. The tax is based on the sales value of the land and buildings as determined by

the Ministry of Finance. Land value is reassessed every three years in most areas and every year in rapidly developing areas. The current effective tax rate on land and buildings is 0.1% of the sales value. One exception is individual housing worth more than Rp. 1 billion, which incurs a rate of 0.2%. Buildings whose assessed sales value is not more than Rp. 8 million are tax exempt.

Exit Tax

This is commonly known as “Fiscal Tax” and is paid by Indonesian residents and foreign nationals residing in Indonesia whenever they leave the country. Minister of Finance Decree No. 30/KMK.04/98, sets the rates at Rp. 1,000,000 for departure by air, Rp.500, 000 by
sea, and Rp. 250,000 by land. If an employer pays the tax in the course of an employee’s business travel, it can be used as a credit in the employer’s annual income tax return. If an individual pays the tax in a personal capacity, it can be claimed as a tax credit on his/
her personal income tax.

Foreign nationals working for a representative office of a foreign company are exempt from fiscal tax if certain criteria are met. Indonesians and nationals of ASEAN Sub-regional Cooperation Areas (SCA), who reside in the Indonesian-designated SCA and departing through Indonesian SCA ports for a corresponding ASEAN SCA territory within its grouping are exempted from paying Fiscal Tax. As an example, under the Indonesia-Malaysia-Thailand Growth Triangle Cooperation Area, nationals from Indonesia,
Malaysia, and Thailand residing in the Aceh special region, North/ West Sumatera and Riau are exempted from paying fiscal exit tax.

Customs Duty

Most duties are in the 5% to 40% range. The minimum rate is 0% and the maximum rate is 200%.

Source : US-Asean Business Council