Indonesia is a unitary state consisting of 34 provinces and 514 regencies and municipalities. In addition to national taxes such as income tax2 and value added tax,3 others are taxes imposed by the regional governments, such as taxes on land and buildings (except for areas used for plantation, forestry and mining, which are still maintained as national taxes), motor vehicles, restaurants, entertainment and advertising.4
Under Article 23A of the Indonesian Constitution, every tax and other impositions that are compelling in nature for the needs of the state must be regulated by law. In many cases, the tax laws delegate to lower regulations, such as government regulations or even ministerial regulations, as implementing regulations to further regulate the subject matter. The Director General of Tax also issues many circular letters on certain subjects to subordinates as internal direction or guidelines. While these circular letters are not regulations and are technically non-binding on taxpayers, the tax offices very often follow these. However, problems arise when the provisions in lower regulations or these circular letters of the tax authority conflict with those provided in the tax laws. As a general principle of Indonesian law, a regulation higher in hierarchy will take precedence over a regulation lower in hierarchy (lex superior derogat legi inferiori). It has been more than three decades since Indonesia adopted a self-assessment system to replace the official assessment system in its tax legal system (except for tax on land and buildings, which still uses the official assessment system). Under the self-assessment system, taxpayers must themselves calculate, pay and report their own tax obligations in accordance with the prevailing laws and regulations.
In 2002, Indonesia enacted Law No. 14 of 2002 on the Tax Court (Tax Court Law), and also established a Tax Court (replacing the Board of Tax Dispute Settlement) to examine and decide tax disputes between taxpayers and the tax authorities. Under the Tax Court Law, based on limited grounds, taxpayers and the tax authorities, if not satisfied with a Tax Court decision, also have the right to request a civil review application to the Supreme Court against that Tax Court decision. Many tax disputes have been brought by taxpayers before the Tax Court regarding transfer pricing issues as a result of the price adjustment of or non-recognition by the tax authorities of the expenses in transactions between taxpayers and their foreign shareholders or affiliated companies. Tax disputes can also arise owing to different interpretations of laws and regulations between taxpayers and the tax authorities, or a conflict between laws and regulations affecting the rights and obligations of taxpayers.
To increase business activities in Indonesia, the government has also maintained certain tax incentives and facilities for companies doing business in Indonesia in specific business sectors and regions. There is also a tax incentive for publicly listed companies meeting certain requirements as regards the rate of income tax.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
The types of business entity commonly used in Indonesia take the form of sole proprietorship, general partnership, firm partnership, limited partnership (CV), limited liability company (PT) or cooperative.
A sole proprietorship is carried out by a natural person in his or her personal capacity. This form is typical for small to medium-sized businesses such as stores, restaurants and small repair shops.
A general partnership is the most basic form of partnership under Indonesian law. The general partnership is an association of persons for the carrying out of a joint enterprise. The members of the general partnership are not personally liable for the liabilities of the general partnership, and each member cannot bind the other member unless specifically authorised by the other member or unless the transaction is of benefit to the general partnership. A general partnership is the form of organisation that is typically used by professional experts, such as law firms or accounting firms.
A firm partnership is the form used by commercial partnerships, such as trading or commercial services firms. Each partner in the firm partnership has the right to act in the name of the partnership within the scope of its business. Liability of the partners in the firm partnership with third parties is on a joint and several basis.
A CV differs from a firm partnership; while all partners are active partners in a firm partnership, in a CV there is also a non-active or 'sleeping' partner (limited partner). The liability of the limited partner is only to the extent of the sum he or she has pledged to contribute to the CV.
Major companies in Indonesia mostly take the form of a PT. The main characteristic of a PT is that it owns its assets and holds liabilities separately from its shareholders. Generally speaking, the shareholders of a PT have no liability for acts carried out for and on behalf of the PT. Their liability is limited to the shares they have subscribed. However, under certain circumstances, the court may 'pierce the veil' or disregard the corporate entity, and hold that the shareholders are personally liable for acts carried out in the name of the PT. Those circumstances are:
- where the requirements for the PT to be established as a legal entity have not been made or are not met (e.g., approval of the Minister of Law and Human Rights has not been obtained);
- the shareholders in question, directly or indirectly, in bad faith exploit the PT for their personal interest;
- the shareholders in question are involved in an unlawful act committed by the PT; or
- the shareholders in question, directly or indirectly in an unlawful act, make use of the assets of the PT in such a way that the PT assets become insufficient to settle the PT's debts.
The Indonesian Company Law (Law No. 40 of 2007) also provides that if there is only one shareholder in the PT for a period of not more than six months, the shareholder must transfer a part of its shares to another party. Otherwise, the sole shareholder becomes personally liable for all of the obligations and losses suffered by the PT.
A cooperative is an association of persons, and its objective is the enhancement of the welfare of its members through engagement in a specific business as authorised in its charter. A cooperative has the status of legal entity after it is legalised by the relevant minister.
Generally, the basic tax treatment for all forms of businesses, except for the sole proprietorship, is the same (i.e., a flat tax rate of 25 per cent of the net income). In the sole proprietorship, the person's tax rates are calculated on a progressive basis ranging from 5 per cent up to 30 per cent. To calculate the tax obligation, in addition to the permissible deductible expenses, the natural person must also deduct a non-taxable income threshold for himself or herself, his or her spouse and up to three dependants.
Most large companies adopt a corporate form. Like its predecessor, the 1967 Foreign Investment Law, the Indonesian Investment Law of 2007 requires business entities engaged in almost all business sectors (including manufacturing and trading of goods and services) to take the form of a PT if there is a foreign ownership participation in that entity in the framework of foreign direct investment (a PMA company). The same requirement also applies to the financial sector (except for banking). For the oil and gas sector, a foreign corporation can be used. Banking business can take the form of a branch office of the foreign bank, but the banking authority no longer issues new business licences to a branch office of a foreign bank. Based on the foregoing, the discussion below focuses on the PT corporate form.
Non-corporate entities such as a general partnership, firm partnership and limited partnership are not permissible for foreign-owned equity. Generally, the Indonesian Income Tax Law treats all entities, regardless of whether they are incorporated, in the same manner.
III DIRECT TAXATION OF BUSINESSES
Generally, the flat tax rate of 25 per cent of net income applies for all businesses that take the form of an entity (regardless of whether they are incorporated). There are some exceptions, including:
- a public company that satisfies a minimum listing requirement of 40 per cent and other requirements can obtain a 5 per cent reduction from the standard rate;
- corporate taxpayers with gross revenue up to 50 billion rupiah are entitled to a 50 per cent reduction of the standard tax rate imposed on the taxable income for gross revenue up to 4.8 billion rupiah;
- companies engaged in upstream oil and gas and geothermal industries must calculate their corporate income tax pursuant to the terms of their production-sharing contracts; and
- companies engaged in mining activities that are parties to the contract of work with the government must calculate their corporate income tax pursuant to the terms of the contract of work.
There are also businesses that have deemed profit margins for tax purposes. For such businesses, their respective deemed profit on gross revenue and effective income tax rate are, inter alia, domestic shipping operations (4 per cent; 1.2 per cent) and foreign shipping and airline operations (acting through a permanent establishment (PE) in Indonesia) (6 per cent; 2.64 per cent).
i Tax on profits
Determination of taxable profit
Indonesian tax residents are taxed on their worldwide income,5 and foreign tax credits are available for the foreign income of tax residents subject to certain criteria. The taxable profit is calculated based on the gross income deducted with allowed expenses. Pursuant to the Income Tax Law, deductible expenses are expenses for the purposes of earning, collecting or maintaining income, including:
- expenses that are directly or indirectly related to the business activities, such as material expenses, salaries, wages, allowances, interest, royalties, travelling expenses, waste management expenses, insurance premiums, promotion and selling expenses, administration expenses and taxes (except income tax);
- depreciation and amortisation expenses;
- contributions to the pension fund;
- losses; and
- expenses for research and development conducted in Indonesia.
Non-deductible expenses include:
- distributions of profit in any form, such as dividends;
- expenses for personal interests of shareholders, partners or members;
- establishment of reserves or provisions, with some exceptions, such as provisions for doubtful accounts for banking and financing companies, reclamation provisions for mining companies, forestation provisions for forestry companies, and provisions for closure and maintenance for industrial waste processing businesses;
- benefits in kind; however, meals and drinks provided to all employees, or benefits in kind in certain remote areas, are deductible as regulated by a Minister of Finance regulation;
- income tax payments; and
- tax penalties.
Pursuant to Article 11 of the Income Tax Law, expenditure incurred in relation to tangible assets with a useful life of more than one year (except for land titles) can be depreciated. Depreciation is commenced from the month of the acquisition of the assets by using the straight-line method or the declining method consistently. Buildings can be depreciated by using the straight-line method only.
Pursuant to Article 11A of the Income Tax Law, amortisation for expenditure to acquire intangible assets, including expenses for extension of land titles and goodwill having a useful life of more than one year, can be carried out by the straight-line method or declining method during the useful life by way of applying an amortisation tariff for such expenditure or on the remainder of the book value; provided this is done consistently, it is all amortised at the same time at the end of the useful life. The amortisation is commenced in the month in which the expenditure is incurred, except for in certain business sectors that are regulated further by a Minister of Finance regulation.
Basically, taxable profits are based on accounting profits. However, for the calculation of the tax obligation, some adjustments may be required, since certain expenses are not tax-deductible. Profits are taxed on an accruals or receipts basis, depending upon which book method the taxpayer has adopted. The book method must be conducted consistently by the taxpayer. A change of the book method must obtain the approval of the Director General of Tax.
Capital and income
In practice, there is still a distinction between the taxation of income and capital gain (profit). Currently, the income tax on income arises from the sale of shares in the stock exchange, and is a final tax of 0.1 per cent of the gross amount of the sale of shares. In the case of the sale of shares by founding shareholders in publicly listed companies, there is an additional tax of 0.5 per cent of the sale transaction value.
Tax on capital gains from the sale of shares in closely held companies by a foreign shareholder is 5 per cent of the value of the sale transaction, unless provided otherwise by a relevant tax treaty if the taxing authority is not Indonesia.
Pursuant to Article 6(2) of the Income Tax Law, losses may be carried forward for a maximum of five years. For a limited category of businesses in certain regions, or businesses subject to certain concessions, however, the period can extend up to 10 years. The carry-back of losses is not allowed. Losses can survive a change in shareholders of the PT.
Pursuant to Article 17 of the Income Tax Law, the flat tax rate for tax-resident entities (whether corporate or non-corporate) is generally 25 per cent. For individual tax residents, the tax rates are as follows:
|Up to 50 million rupiah||5 per cent|
|Over 50 million rupiah but not exceeding 250 million rupiah||15 per cent|
|Over 250 million rupiah but not exceeding 500 million rupiah||25 per cent|
|Over 500 million rupiah||30 per cent|
Businesses must pay tax and file tax returns for particular taxes either monthly or annually, depending on the tax obligation in question. For example, for many withholding taxes, the tax payment deadline is the 10th day of the following month, and the tax return filing deadline is the 20th day of the following month. For corporate income tax, the tax payment deadline is at the end of the fourth month after the book year-end before filing the tax return, and the deadline for filing the tax return is the fourth month after the book year-end.
There are two kinds of tax authorities: at the national level (i.e., the Directorate General of Tax and the Directorate General of Customs and Excise, both under the Ministry of Finance: this chapter focuses on the authority of the Directorate General of Tax only) and at the local (regional) level.
The tax authorities may audit businesses from time to time at random to check the compliance of taxpayers. If a business requests a tax refund, this will always trigger a tax audit.
In practice, it is possible to obtain guidance or clearance from the tax authorities where there is uncertainty as to the correct tax treatment or if the tax treatment could apply in a way that would not seem to be intended. Normally, the tax authorities follow the written guidance or clearance they have issued to the taxpayer in treating such taxpayer. Since some of this written guidance and clearance has been made publicly available, taxpayers who believe that such guidance or clearance may also be beneficial to them usually attempt to rely on such documents in convincing the tax authorities that they are eligible for the same tax treatment.
In cases where a taxpayer does not agree with a tax position taken by the tax office as stipulated in the tax assessment letter, the taxpayer has the right to submit an objection application to the Director General of Tax to annul the tax assessment letter within three months as of the sending date of the tax assessment letter. If the taxpayer is not satisfied with the objection decree of the Director General of Tax, the taxpayer can ask for an appeal against such an objection decree to the Tax Court within three months as from the receipt of the objection decree.
Under the Tax Court Law of 2002, Tax Court decisions are final and binding, but are still subject to an extraordinary legal remedy for civil review to the Supreme Court based on limited grounds as provided for in the Tax Court Law.6 Under Article 91 of the Tax Court Law, those grounds are:
- if the Tax Court decision is based on a lie or fraud by the counterparty that is known after the rendering of the decision, or based on evidence that later is declared forged by the criminal judge;
- if there is new written evidence that is important and decisive that, if it is known in the proceedings at the Tax Court, will result in a different decision;
- if something is granted that was not claimed, or that is more than what was claimed by a party;
- if it concerns a part of the claim that has not been decided without considering the causes; or
- if there is a decision that is clearly not in accordance with the provision of the prevailing laws and regulations.
Looking at the Supreme Court level, and from decisions of the Supreme Court on tax disputes on the Supreme Court website,7 the ground in (e) above is always used in civil review applications. Other grounds are very rarely used, and if they are, they are used only as an additional ground.
Pursuant to Article 93 of the Tax Court Law, the Supreme Court examines and renders a decision within six months as from the date the dossier is received by the Supreme Court in the event that the Tax Court has rendered its decision through an ordinary procedure examination; or within one month if the Tax Court has rendered its decision through an expediting procedure examination.
In recent practice, it is often that the Supreme Court renders its decisions within those timelines. However, there are still delays that are caused particularly by the administrative processing and sending of case dossiers by the Tax Court to the Supreme Court.
There are no group tax relief provisions available in Indonesia. As a result, members of a group of companies are taxed individually.
ii Other relevant taxes
Other taxes relevant for businesses are, inter alia, VAT and luxury goods sales tax, land and building tax, income tax on land and building transfers, duty on the acquisition of land and building rights8 and stamp duty.
VAT is imposed on the transfer of taxable goods or the provision of taxable services in the Indonesian customs area. The current VAT rate is 10 per cent, as provided for in the VAT Law. Pursuant to the VAT Law, a government regulation can provide for a VAT rate ranging from 5 to 15 per cent.
In addition to VAT, certain goods regarded as luxury goods are subject to an additional luxury goods sales tax ranging from 10 to 75 per cent. Pursuant to the VAT Law, the rate of the luxury goods sales tax may be increased by the government up to 200 per cent.
Land and building tax (PBB) is divided into two categories,9 as follows:
- PBB on general area: this PBB is imposed annually on property in the form of land or a building based on an official assessment issued by the head of the region. The rate of this PBB is to be determined by the regional regulation, but it should not be more than 0.3 per cent. The tax due is calculated by applying the tax rate on the tax object sale value (NJOP) deducted with non-taxable NJOP, which is set at a minimum of 10 million rupiah. Any change to the non-taxable NJOP must be stipulated in a regional regulation.
- PBB on plantation, forestry and mining areas: this PBB is imposed annually on property in the form of land or a building based on an official assessment issued by the Director General of Tax. The rate of this tax is 0.5 per cent, and the tax due is calculated by applying the tax rate on the taxable sale value (NJKP). The NJKP is a predetermined portion of the NJOP. Currently, the NJKP is 40 per cent of the NJOP. The government can increase the NJKP rate by up to 100 per cent of the NJOP. The NJOP rates are determined by the Director General of Tax on behalf of the Minister of Finance. They may be adjusted every year or every three years, depending on the economic development of the region.
Income tax on land and building transfers is imposed on the seller for the transfer of land and buildings. The rate of this tax is 5 per cent of the gross transfer value unless such value is lower than the NJOP of the object. In the latter case, the tax base is the NJOP. The tax paid is a final tax.
Duty on the acquisition of land and buildings is imposed on the buyer to acquire land and buildings. The rate of this duty is 5 per cent of the acquisition value of the object, unless such value is lower than the NJOP of the object. In the latter case, the tax base is the NJOP.
Stamp duty of 6,000 rupiah is imposed for each of the documents prepared with the purposes of being used as an evidence instrument concerning an act, fact or situation that is civil in nature, such as agreements, notarial deeds and their copies, and every document to be presented as evidence before the courts.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
A company is treated as an Indonesian tax resident if it is established or has its place of management in Indonesia. A foreign corporation can become a tax resident of Indonesia if it has a presence in Indonesia through a PE. Generally, a PE assumes the same tax obligations as a resident taxpayer.
ii Branch or permanent establishment
A foreign company can have a fiscal presence in Indonesia in the form of PE if it has or performs any of the following in Indonesia:
- a place of management;
- a branch office;
- a representative office;
- an office building;
- a factory, workshop or warehouse;
- a site for promotion and sales;
- a mining site;
- a working area of oil and gas;
- fishery, husbandry, agriculture, plantation or forestry activities;
- construction, installation or assembly projects;
- provides services through employees or others for more than 60 days in any 12-month period;
- a dependent agent;
- an insurance company agent or employee receiving premiums or taking risks in Indonesia; or
- computer, electronic or internet devices used in Indonesia for internet (e-commerce) transactions.
The above, however, are subject to the provisions of a relevant tax treaty.
In addition to the standard corporate income tax, a PE is also subject to 20 per cent branch profit tax, which is applied to the net profit after tax of the PE unless the profit is reinvested in Indonesia.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Holding company regimes
Pursuant to Article 23(4)(c) in conjunction with Article 4(3)(f) of the Income Tax Law, withholding tax on the dividend is not applied if that dividend is received by a PT tax resident, provided the dividend derives from the retained earnings and the PT has at least 25 per cent of the paid-up capital in that company.
ii IP regimes
Currently, there are no IP regimes that are subject to special tax treatment in Indonesia.
iii State aid
There may be special tax treatment for the income tax of government projects funded by foreign loans or grants. For such projects, the income tax liability of the main contractors, consultants and suppliers may be borne by the government.
The fiscal incentives of import duty, or import-related tax relief or exemption, are generally applicable to foreign direct investment in manufacturing or processing for imports of capital equipment, spare parts and basic materials during the initial start-up period. The government has also provided income tax incentives and tax holidays.
Income tax incentives
For investments in certain industries and certain regions, income tax incentives are available under Government Regulation No. 18 of 2015 on Income Tax Facilities for Investment in Specific Businesses and/or Regions as amended by Government Regulation No. 9 of 2016 (taking effect from 7 May 2016). These incentives cover the following:
- an investment allowance of 30 per cent, spread over six years at a rate of 5 per cent annually;
- accelerated depreciation and amortisation;
- a reduction in the withholding tax tariff on dividends payable to the foreign investors of up to 10 per cent (subject to a lower rate being made applicable by a tax treaty); and
- a longer tax loss carry-forward period of up to 10 years meeting certain requirements.
The industries to which these incentives are available are listed in the governing Government Regulation. Industries eligible to obtain the incentives as listed in the Government Regulation include geothermal energy (exploration, drilling and conversion to electricity), oil refining, iron steel making, nickel ore mining and non-ferrous metal manufacture and various other industries such as food, textile, chemical substances, pharmacy, computers and electronic and optical goods, electricity equipment, motor vehicles and spare parts and electricity power. Government Regulation No. 18 of 2015 as amended by Government Regulation No. 9 of 2016 is implemented further by Regulation of the Minister of Finance No. 89/PMK.010/2015 (taking effect since 6 May 2015).
Further, in 2019, the Government issued Government Regulation No. 45 of 2019 on Amendment to Government Regulation No. 94 of 2010 on the Calculation of Taxable Income and Settlement of Income Tax in the Current Year (taking effect since 26 June 2019), which provides the following tax incentives:
- allowing corporate taxpayers who open a new business or expand their existing businesses in labour-intensive sectors to offset 60 per cent of their investment against their taxable net income;
- allowing corporate taxpayers that conduct work practices, internships or training for human resources development purposes to offset up to 200 per cent of the cost of their activities against their taxable gross income; and
- allowing corporate taxpayers that conduct research and development (R&D) activities in Indonesia to offset up to 300 per cent of the cost of their activities against their taxable gross income.
The Government also issued another regulation at the end of 2019: Government Regulation No. 78 of 2019 on Income Tax Facilities for Investments in Particular Business Sectors and/or Particular Regions (taking effect since 13 December 2019). Under this Regulation, 183 business sectors are eligible for income tax facilities, which comprise 166 particular business sectors and 17 business sectors located in particular regions. These include certain businesses in a number of industries (e.g., agriculture and forestry industries, the chemical industry, the mining industry and the electronics industry). As a general rule, the income tax facilities available under Government Regulation No. 78 of 2019 are namely: (1) net income deductions; (2) accelerated depreciation of fixed tangible assets and accelerated amortization of intangible assets; (3) 10 per cent income tax (or lower) on dividends paid to foreign taxpayers not operating as permanent establishments within Indonesia; and (4) compensations for losses.
On 27 November 2018, the Minister of Finance issued Regulation No. 150/PMK.010/2018 on Facility on Income Tax Exemptions and Reduction for Business Entities. This Regulation replaced the previous Minister of Finance Regulation No. 35/PMK/010/2018 on the same. Under this Regulation, income tax exemptions can be granted to business entities for a maximum of 20 fiscal years or a minimum of five fiscal years.
The criteria established for business entities that qualify for income tax exemptions and reductions are as follows:
- the business is categorised as a pioneering industry, such as:
- integrated upstream basic metal industry;
- integrated petroleum refinery industry;
- integrated basic petrochemical industry;
- integrated pharmaceutical raw material industry;
- machinery industry;
- ship parts manufacturing industry;
- train parts manufacturing industry;
- agriculture, farming or forestry-based processing industries;
- economic infrastructure; or
- digital economy;
- the business is an Indonesian legal entity;
- the business is a new investment that has not yet been issued a decree on the giving or notice of rejection to corporate income tax reduction;
- the business has a new investment plan with a minimum value of 100 billion rupiah; and
- the business meets the debt-to-equity ratio requirement as referred to in a Minister of Finance regulation.
As an implementing rule of the above-mentioned Minister of Finance Regulation No. 150/PMK.010/2018, the Indonesian Investment Coordinating Board (BKPM) issued Regulation No. 1 of 2019 on Details of the Pioneering Industry Business Sectors and Production Types Eligible for Corporate Income Tax Deduction Facilities and Guidelines and Procedures for the Granting of Corporate Income Tax Deduction Facilities (taking effect since 23 January 2019). Notable changes that are introduced by BKPM Regulation No. 1 of 2019 are, among others: (1) changes to sectors classified as pioneering industries (e.g., the addition of the sectors of digital economy and agriculture, farming or forestry-based processing industries that produce pulp with or without derivatives); and (2) changes to the minimum value of the investment plan eligible to income tax deductions from previously, 500 billion rupiah (pursuant to the previous BKPM Regulation No. 5 of 2018 on the same) to currently, 100 billion rupiah. Later, BKPM Regulation No. 6 of 2019 was issued (taking effect since 13 September 2019) as an amendment to BKPM Regulation No. 1 of 2019. The amendment was only with respect to Letter R of Attachment I of BKPM Regulation No. 1 of 2019 regarding Details of the Pioneering Industry Business Sectors and Production Types Eligible for Corporate Income Tax Deduction Facilities and Guidelines and Procedures for the Granting of Corporate Income Tax Deduction Facilities.
On 1 July 2016, Law No. 11 of 2016 on Tax Amnesty took effect. Income tax, VAT and sales tax on luxury goods are covered by the Law. The objective of the Law is to increase tax revenues, make fairer tax reforms possible because of an expanded tax base and accelerate economic growth. There are several benefits for tax amnesty participants, including a waiver of any taxes due, and of administrative and tax criminal sanctions with respect to assets reported in declaration letters up to tax year 2015, as well as clearance levy rates that are significantly lower than the normal tax rates. Following the end of tax amnesty on 31 March 2017, the government issued several regulations to accelerate any unfinished asset repatriation, to strengthen tax-compliance supervision and to provide another opportunity for taxpayers to disclose or report their assets in the framework of tax amnesty. These regulations, applicable to both participants and non-participants of the tax amnesty, are, among others:
- Government Regulation No. 36 of 2017 on the Imposition of Income Tax upon Certain Income in the Form of Net Assets Treated as or Deemed to Be Earnings (taking effect from 11 September 2017), which regulates the applicable final income tax rates for net assets;
- Minister of Finance Regulation No. 141/PMK.08/2017 on Procedures for the Transfer of Taxpayer Assets to Indonesia and Their Placement in the Financial Market and Non-Financial Market through the Tax-Amnesty Framework (taking effect from 24 October 2017), which regulates asset repatriation; and
- Minister of Finance Regulation No. 165/PMK.03/2017 on the Second Amendment of the Minister of Finance Regulation No. 118/PMK.03/2016 regarding the Implementation of Law No. 11 of 2016 on Tax Amnesty (taking effect from 20 November 2017), which regulates the further implementation of tax amnesty.
The Director General of Tax also issued Circular Letter No. SE-14/PJ/2018 on the Supervision of Taxpayers after the Tax-Amnesty Period (replacing the previous Circular Letter No. SE-20/PJ/2017), which took effect from 19 July 2018 and serves as a set of guidelines for the supervision of taxpayer compliance in the future. Further, the Director General of Tax also issued Regulation No. PER-03/PJ/2017 on the Reporting and Supervision of Additional Assets under the Tax Amnesty Framework (as has also been amended by Regulation No. PER-07/PJ/2018, which amendment took effect on 6 March 2018).
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding on outward-bound payments (domestic law)
Withholding tax at a rate of 15 per cent of the gross amount applies to dividends, interest and royalties paid by a company in Indonesia to Indonesian taxpayers or PEs. As discussed above, there is no withholding tax on the dividends paid out of retained earnings in cases where the company earning dividends has at least 25 per cent of the paid-up capital in the company distributing the dividends.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
As discussed in Section V.iv, for investments in certain industries and certain regions there are income tax incentives that also cover a reduction in the withholding tax tariff on dividends payable to foreign investors to 10 per cent (subject to a lower rate under a relevant tax treaty). Contracts of work entered into by mining companies and the government prior to the 2009 Mining Law may provide such exclusions or exemptions from withholding.
iii Double tax treaties
Pursuant to Article 26 of the Income Tax Law, withholding tax at a rate of 20 per cent of the gross amount applies to distributions such as dividends, interest and royalties paid by resident taxpayers to non-residents, unless a relevant tax treaty provides otherwise. Currently, Indonesia has entered into tax treaties with more than 60 countries.
The tax treaties provide withholding tax exemptions for service fees, and reduced withholding tax rates on dividends, interest, royalties and branch profits received by residents of countries with which Indonesia is a party to such tax treaties. To claim the tax treaty benefits, the foreign taxpayer must present a certificate of domicile to the tax authority.
iv Taxation on receipt
Indonesian tax residents are taxed on their worldwide income. Pursuant to Article 24 of the Income Tax Law, the tax paid for income from foreign sources can be credited to the tax owed under the Income Tax Law in the same tax year. The amount of the tax credit is the amount of the foreign income tax paid abroad, but must not exceed the tax owed under the Indonesian Income Tax Law.
VII TAXATION OF FUNDING STRUCTURES
Indonesian PTs are usually funded by capital pay-ins and loans. The minimum authorised capital of PTs under the Indonesian Company Law of 2007 is 50 million rupiah. However, laws and regulations governing certain types of businesses may determine a minimum capital higher than this figure.
i Thin capitalisation
For foreign direct investment companies, there are requirements as to the debt-to-equity ratios depending on the type of the business in which they will be engaged. Pursuant to Minister of Finance Regulation No. 169/PMK.010/2015 on Determination of the Amount of Debt-to-Equity Ratio of Companies for the Purpose of the Calculation of the Income Tax (taking effect from tax year 2016), the maximum debt-to-equity ratio for companies is 4:1, except for certain taxpayers such as banking, finance and insurance companies, and taxpayers engaging in the business of oil and gas, mining and infrastructure. In cases where the debt-to-equity ratio of the taxpayers exceeds the maximum figure, the expense to service the loan that is tax deductible is only up to the expense to service the loan up to the maximum debt-to-equity ratio.
ii Deduction of finance costs
Finance costs, such as interest and bank arrangement fees, can be deducted if these are expenses for the purposes of earnings, or collecting or maintaining income.
iii Restrictions on payments
There are some rules on payments of dividends to shareholders of a PT under Indonesian company law. Pursuant to the Indonesian Company Law of 2007, a PT can only declare and distribute dividends out of its net profits to its shareholders provided that the requirement for setting aside sums to the reserve fund has been satisfied. The Company Law does not provide what particular percentage of the PT's net profits in any one financial year must be set aside for the reserve fund. The setting aside of net profits for the reserve fund shall be carried out until the reserve fund reaches at least 20 per cent of the issued and paid-up capital of the PT. This does not mean that in one financial year a PT must set aside its net profits for the reserve funds to reach 20 per cent of its issued and paid-up capital. However, reserve funds that have not reached 20 per cent of the issued and paid-up capital can only be used by the PT to cover losses that cannot be covered by other reserves. The use of net profits, including determination of the amount for the reserve fund, must be decided by a general shareholders' meeting.
iv Return of capital
Return of capital can be achieved by a company purchasing its own shares from shareholders. Pursuant to Article 37(1) of the Company Law, a PT can purchase its own shares based on a resolution of the general shareholders' meeting provided that:
- the repurchase of the shares does not cause the net assets of the PT to become smaller than the issued capital plus the mandatory reserve fund that has been set aside; and
- the total amount of all shares repurchased by the PT, and the pledge of shares or the fiduciary encumbrance over the shares held by the PT or other companies, or both, whose shares, directly or indirectly owned by the PT, do not exceed 10 per cent of the issued capital of the PT, unless provided otherwise in capital market laws and regulations.
For tax purposes, the payment by a PT to a shareholder for purchasing the shares owned by such shareholder in the PT will be treated in the same manner as a distribution of dividends to a shareholder.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Foreign companies acquiring local businesses generally structure transactions by acquiring shares in the Indonesian target company (share deals) or by purchasing assets of the target company (asset deals).
A foreign entity may acquire shares in an Indonesian target company directly or indirectly through another foreign entity provided that the business sector of the target company is open for foreign investment. For the transfer of shares in a closely held company, if the seller is another foreign entity, such seller will have a final income tax of 5 per cent of the share price (withholding tax of 20 per cent and net deemed profit of 25 per cent of the share price) imposed on it, unless, pursuant to the relevant tax treaty, the taxing authority is not Indonesia.
The PT should only record the transfer of the shares in the shareholders' register if evidence is presented to it that the income tax has been completely settled. In cases where the purchaser of the shares is a foreign entity, the PT is deemed as the party who has the obligation to collect the income tax.
Pursuant to Article 18(3c) of the Income Tax Law, the sale of shares in an Indonesian (target) company by a conduit company or special purpose company established or domiciled in a tax haven country that has a special relationship with an entity established or domiciled in Indonesia or a PE in Indonesia can be deemed as the sale or transfer of shares by the Indonesian entity or PE in Indonesia.
A foreign entity is not allowed to acquire assets of an Indonesian entity directly to operate a business in Indonesia. As discussed above, except for certain limited business sectors, foreign entities are not eligible to obtain business licences in Indonesia. To acquire assets of the Indonesian (target) company and operate a business in Indonesia, a foreign entity must use its Indonesian company, or must first establish a PMA company, to acquire such assets. If the acquired assets are land and buildings, the purchaser of the assets will have duty imposed on the acquisition of land and buildings at a rate of 5 per cent of the price of the assets imposed on it.
Pursuant to Article 18(3b) of the Income Tax Law, the indirect purchase of shares or assets of an Indonesian (target) company by an Indonesian entity through a special purpose company can be deemed as the purchase of shares or assets by the Indonesian entity if the special purpose company has a special relationship with the Indonesian entity or if there is unreasonable pricing.
As a general rule, the transfer of assets in business mergers, consolidations or spin-offs is conducted at market value. This results in taxable gain or loss. This loss is basically tax-deductible. Upon approval of the Director General of Tax, the assets can be transferred at book value for a tax-neutral merger or consolidation provided that the business purpose tests are satisfied.
In Indonesia, there is no provision that can allow a merger of a local entity with a foreign entity.
If a business decides to relocate to another country, the Indonesian entity must be dissolved and must further be liquidated. As one of the exercises in the liquidation process, that entity must also resolve its tax liability, and for these purposes there will be a tax audit. Upon the settlement of the tax obligation, the tax authority will issue a tax clearance. Once the tax clearance has been obtained, the Indonesian entity can completely dissolve and cease to exist as a legal entity.
There is no tax penalty merely for relocation of a business to another country.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
As discussed in Section VIII.i, the Indonesian Income Tax Law provides avoidance rules for the sale of shares or assets meeting certain requirements.
Pursuant to Article 18(3b) of the Income Tax Law, the indirect purchase of shares or assets of an Indonesian (target) company by an Indonesian entity through a special purpose company can be deemed as the purchase of shares or assets by the Indonesian entity if the special purpose company has a special relationship with the Indonesian entity or if there is unreasonable pricing.
Pursuant to Article 18(3c) of the Income Tax Law, the sale of shares in an Indonesian (target) company by a conduit company or special purpose company established or domiciled in a tax-haven country that has a special relationship with an entity established or domiciled in Indonesia, or a PE in Indonesia, can be deemed as the sale or transfer of shares by the Indonesian entity or PE in Indonesia.
Indonesia no longer has a tax treaty with Mauritius, a low-tax jurisdiction.
ii Controlled foreign corporations
As discussed above, in most business sectors controlled foreign corporations must take the form of a PT. As such, the rules for the distribution of dividends to a shareholder that is a foreign entity are basically the same as those that apply to shareholders of a closely held PT.
iii Transfer pricing
Pursuant to Article 18(3) of the Income Tax Law, the Director General of Tax has the authority to adjust taxpayers' income or costs in transactions with related parties not carried out under the arm's-length principle by using the comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method and other methods. Currently, the transfer pricing documentation must also be attached to the corporate income tax return for any transaction with a related party that: (1) exceeds 20 billion rupiah for tangible goods transactions; or (2) exceeds 5 billion rupiah for service provision, interest payment, intangible goods utilisation or other affiliated transactions per entity per year. For such purpose, the taxpayer must conduct a comparable analysis or determine comparable data to show that the transaction with the related party conforms to the arm's-length principle.
Pursuant to Article 18(3a) of the Income Tax Law, the Director General of Tax also has the authority to enter into advance pricing agreements with taxpayers or the tax authority of another country on the application of the arm's-length principle to transactions between related parties.
iv Tax clearances and rulings
It is possible to obtain advance tax rulings from the tax authority to secure certainty. Tax rulings may also be required to acquire a local business.
To issue a tax clearance, the tax authority will need to conduct a tax audit. In the acquisition of a local business, the seller of the local business is usually reluctant if the tax clearance is required as a condition precedent for the conclusion of the transaction.
v Mutual Agreement Procedures
In an effort to more effectively prevent and settle international taxation disputes, the Minister of Finance has also recently issued Regulation No. 49/PMK.03/2019 on Procedures for the Implementation of Mutual Agreement Procedure (taking effect from 26 April 2019). The Mutual Agreement Procedure (MAP) refers to an administrative procedure provided for under a tax treaty for the settlement of disputes that arise during the implementation of a tax treaty. As a general rule, Minister of Finance Regulation No. 49/PMK.03/2019 provides opportunities for Indonesian domestic taxpayers to submit requests to the Director General of Tax for the implementation of MAP, in the event that a tax treatment by a tax treaty partner state is in contradiction to the relevant tax treaty. In addition to Indonesian domestic taxpayers, the request for the implementation of MAP can also be filed by: (1) Indonesian citizens who have become domestic taxpayers in a tax treaty partner state (which request is to be filed via the Director General of Tax); (2) the Director General of Tax; or (3) the tax authority of the tax treaty partner state (which request is to be filed via the authorised official in the tax treaty partner state in accordance with the tax treaty).
Pursuant to Minister of Finance Regulation No. 49/PMK.03/2019, following the application for MAP, the requests will be reviewed by the Director General of Tax. Subsequently, there will be a follow-up (e.g., notification to the authorised official in the tax treaty partner state) and a negotiation conducted between the Director General of Tax and the tax treaty partner authority. The outcome of the negotiation will be set out in a mutual agreement that sets out the agreement or disagreement on the points requested for MAP. If an agreement is reached between the parties, a decree confirming the implementation of the mutual agreement is then delivered to the requesting parties.
X YEAR IN REVIEW
The transfer pricing issues involved in transactions between related parties have been scrutinised by the Indonesian tax authorities in recent years. Many taxpayers have challenged the adjustments made by the tax authority to the Tax Court for nullification. The Tax Court has rendered decisions on some of these, but others are still pending before it. Certain of these disputes are also pending with the Supreme Court, and some disputes have been decided by the Supreme Court. The typical reason for taxpayers to challenge the adjustments is that the tax authority did not provide the comparable data necessary to show that transactions between related parties that have been entered into are not in accordance with the arm's-length principle.
There is only one Tax Court in Indonesia, which is situated in Jakarta. However, the Tax Court has also held sessions in Yogyakarta and Surabaya on 7 June 2012 and 14 March 2013, respectively.
XI OUTLOOK AND CONCLUSIONS
Similar to the previous year, it has been reported that there are plans to reform the current tax law regime, some of which are plans to amend the General Provisions and Procedures of Taxation Law, the Income Tax Law and the VAT Law, in the framework of tax reform. The reasons for the amendment of the General Provisions and Procedures of Taxation Law are, inter alia, to make it easier for taxpayers to fulfil their obligations, to ease the process of tax withholding, and to increase the state revenue from the tax sector. The revision of the articles in the Income Tax Law is expected to be in line with the paradigm and trend of global taxation, which emphasises equality of rights, transparency, and moderation of tax rates. Meanwhile, the VAT Law revision is expected to make the VAT Law clearer, simpler and more certain. Further, the government is also looking to address the taxation issues of the digital economy/e-commerce industry and to expand the coverage of tax exemptions and reduction.
Recent reports also suggest that the government is planning to introduce sweeping regulatory reforms in the forms of omnibus laws, which are hoped to boost the country's economic growth and address employment scarcity issues. One of the omnibus laws being proposed is the omnibus law on taxation. The omnibus taxation bill is expected to reduce income tax for individuals and corporations and also eliminate dividend tax for shares ownership of less than 25 per cent. Specifically regarding the proposed reduction of corporate income tax, it has been reported that the government plans to gradually cut the corporate income tax from the current 25 per cent up to 20 per cent in 2023 (this plan is reported to also include an additional 3 per cent reduction for go-public companies).
1 Mulyana is a partner and Sumanti Disca Ferli, Bobby Christianto Manurung, Ratna Mariana and Astrid Emmeline Kohar are associates at Mochtar Karuwin Komar.
2 Set out in Law No. 7 of 1983 on Income Tax as amended by Law No. 7 of 1991, Law No. 10 of 1994, Law No. 17 of 2000 and Law No. 36 of 2008.
3 Set out in Law No. 8 of 1983 on Value Added Tax on Goods and Services and Luxury-goods Sales Tax as amended by Law No. 11 of 1994, Law No. 18 of 2000 and Law No. 42 of 2009.
4 Set out in Law No. 28 of 2009 on Regional Taxes and Dues. Note also the decision of the Constitutional Court No. 46/PUU-XII/2014, dated 26 May 2015, which annuls the elucidation of Article 124 of this Law with respect to the regional dues for telecommunication tower control and the decision of the Constitutional Court No. 15/PUU-XV/2017 dated 10 October 2017, which annuls a number of articles in Law No. 28 of 2009 with respect to taxation of heavy equipment treated as motor vehicles.
5 There have been reports that in an effort to further encourage the movement of capital into Indonesia, the government is planning to change the taxation regime for individual (non-corporate) taxpayers from the (currently) worldwide system to the territorial basis. When applied, this proposed change would result in the taxation of income deriving only from Indonesia.
6 This extraordinary legal remedy is available for both taxpayers and the tax authorities, such as the Director General of Tax.
8 By Law No. 28 of 2009 on Regional Taxes and Dues, the duty on the acquisition of land and building rights became a local (regional) tax.
9 PBB was historically governed by Law No. 12 of 1985 on Tax on Land and Buildings, as amended by Law No. 12 of 1994 (PBB Law) and was part of the national taxes. Starting from 1 January 2010, by virtue of Law No. 28 of 2009 on Regional Taxes and Dues (Regional Tax Law), PBB became part of the local taxes governed thereunder with the exception of areas used for plantation, forestry and mining, where PBB remains part of the national taxes.