Bloomberg Tax
Free Newsletter Sign Up
Login
BROWSE
Bloomberg Tax
Welcome
Login
Advanced Search Go
Free Newsletter Sign Up

Indonesia—Top Tax Issues for Multinational Companies

Aug. 26, 2022, 7:00 AM

This article will discuss the tax environment in Indonesia for multinational companies, describing the most important direct and indirect tax regulations and potential tax incentives. It will also consider some pitfalls companies may face when investing in Indonesia, and finally will discuss recent developments and potential future changes in the tax laws and regulations.

Omnibus Law and HPP Law

At the end of 2020, Indonesia passed the “Omnibus Law” to attract foreign investment to sustain future economic growth. As part of the Omnibus Law, some of the tax laws were also amended. The most notable changes which may have a direct impact on foreign investors are the reduction in the corporate income tax rate from 25% to 22%—although the further decrease to 20% as per 2022 was revoked in the Harmonization of Tax Regulations Law, the “HPP Law,” of October 2021—and the introduction of an obligation for certain foreign companies to charge, report and collect value-added tax on the sale of digital goods and the delivery of digital services.

The HPP Law of October 2021 amended various tax laws, and some of the amendments relevant for foreign investors will be discussed below.

Corporate Income Tax

Indonesia taxes resident companies on their worldwide income. A company is considered a resident if it is established or domiciled in Indonesia. In addition to companies, Indonesia also treats partnerships, permanent establishments of foreign companies, and foundations as taxable companies for CIT purposes. The general corporate income tax rate is 22%. The corporate tax is levied on the net income (gross income minus business expenses) of the company. Public companies that satisfy a minimum listing requirement of 40% and fulfill some other conditions are entitled to a tax cut of 3%, leading to an effective tax rate of 19%.

Most Indonesian companies are subject to thin capitalization rules (some industries are excluded from these rules, like banking and infrastructure). Under the thin capitalization rules, companies should adhere to a maximum debt-to-equity ratio of 4:1. The debts include both related and unrelated party debts.

In the HPP law, a provision was introduced that gives the authorities the possibility to introduce other type of thin capitalization rules, based on a percentage of earnings before interest, taxes, depreciation, and amortization (EBITDA). However, to date no implementing regulations have been issued in this respect.

Corporate Income Tax—Final Tax

Certain revenue is subject to final tax (which is also a CIT). This means that the gross income is taxed at a lower rate, but the company cannot deduct any expenses. For example, the income from the rental of real property is taxed at 10% on the gross rental income. Any costs regarding the renting out of property cannot be deducted.

Companies earning both normal taxed income and income subject to final tax should ideally have separate bookkeeping for both activities. If they do not, because it is administratively quite cumbersome, they should make a cost allocation. Indirect costs should be allocated on a pro rata basis.

Withholding Tax

Apart from CIT, Indonesian resident companies are also subject to various withholding taxes both on domestic payments and payments offshore.

Various WHTs may apply to domestic payments with differing rates. It is not possible to discuss every potential WHT in this article. However, as an example, service fee payments to domestic vendors are subject to 2% WHT and interest payments to local companies (non-banks) are subject to 15% WHT. For the vendor, this WHT is prepaid tax, which can be credited with the annual corporate income tax due. In case the annual tax due is not enough to credit the full WHT, the vendor can ask the tax office for a refund. However, such a refund request will trigger an automatic tax audit.

All payments to foreign parties, such as payments of interest, dividends, royalties, and service fees, are subject to 20% WHT. Under applicable tax treaties this rate may be reduced (see Tax Treaty Access below for a discussion of tax treaty application).

Value-Added Tax

A taxpayer who conducts the delivery of taxable goods and/or services subject to VAT and whose annual revenue from taxable goods and/or services exceeds 4.8 billion Indonesian rupiah ($323,000), must register itself as a taxable entrepreneur and must impose, remit, and report VAT to the Indonesian Tax Office.

In general, VAT at 11% is levied on the supply of “taxable” goods and/or services within Indonesia, as well as imported goods and on certain services utilized offshore Indonesia.

The HPP Law increased the VAT rate to 11% (from 10%) as from April 1, 2022 and the rate will be further increased to 12% as from Jan. 1, 2025.

Under the VAT system in Indonesia, input VAT (i.e., VAT paid on purchasing taxable goods and/or services) is generally creditable against output VAT (i.e., the VAT imposed on the sale of taxable goods and/or services). If the input VAT exceeds the output VAT, the excess can be refunded or carried forward to the following month. Requesting a refund will trigger a tax audit. Input VAT must be treated as non-creditable if the input VAT paid is related to revenue not subject to VAT. Creditable input VAT paid must be calculated by proportioning revenue subject to VAT compared to total revenue subject and not subject to VAT.

The VAT law regulates that VAT is payable on taxable services provided from outside of the Indonesian customs area and utilized in the Indonesian customs area, or upon purchase of intangible assets from outside the Indonesian customs area. This VAT should be paid by way of self-assessment (reverse charge). The amount of self-assessed VAT that is paid by a taxpayer can be claimed as creditable input VAT against business related output VAT.

Foreign entities selling digital goods or delivering digital services to Indonesia could be appointed by the ITO as VAT collector. If so, these companies should charge, report, and collect VAT.

Tax Treaty Access

In order to qualify for any relief under a relevant tax treaty, nonresidents must complete and submit a special form created by the ITO—a “DGT Form"—which should be stamped by the tax authorities in their country of residence or should be accompanied with an official certificate of residence issued by the tax authorities in their country of residence.

The DGT Form contains several queries regarding substance and beneficial ownership. In general the DTA application will be denied by Indonesia if there is an indication of DTA abuse, signified by the following: the transaction does not carry any economic substance and is structured solely to take advantage of the DTA; the transaction’s legal structure differs from its economic substance due to the intention to take advantage of the DTA; or the income recipient is not the beneficial owner of the income.

For claiming tax treaty benefits, the DGT Form should be completed and filed with the ITO through the Indonesian WHT agent. The form is valid for a maximum of 12 months. This means that foreign taxpayers in principle can submit one DGT Form for the whole period of validity (maximum 12 months), even in case of multiple withholding agents. The form should be submitted electronically to the DGT’s website. The Indonesian withholding agent receives a receipt and should attach this receipt to the WHT return.

It should be noted that the ITO will not give upfront approval regarding the applicability of a tax treaty. The tax withholder will have to assess whether the tax treaty should apply and, in case the ITO disagrees (e.g., in a tax audit) is liable for the unpaid tax.

General Anti-Abuse Rule

Indonesia does not have a GAAR in its tax laws. However, the HPP law amended the elucidation of Article 18 (which deals with related party transactions) and it is now specifically indicated that the tax office can prevent tax avoidance by taxpayers.

Some examples explicitly given are (i) performing transactions that are not based on the actual conditions and are not in line with the substance over form principle; (ii) reporting profits that are too low compared to the financial performance of other taxpayers active in the same business; and (iii) reporting unreasonable losses although the company has been in existence for more than five years. With regard to (ii) and (iii) the tax office is allowed to perform a benchmark study to establish the tax that should be due. In practice, the risk exists that the tax office will use this elucidation as a GAAR.

Tax Audits

The ITO can conduct a tax audit within the statute of limitations after taxes becoming payable. The statute of limitations is five years. A tax audit is automatically triggered if a taxpayer claims a tax refund or is in a tax overpayment position (the company’s prepaid tax or tax credit exceeds its tax liability). Interest penalties with a rate determined by the Ministry of Finance are imposed on tax underpayments assessed during a tax audit (maximum 24 months).

A company can be subject to consecutive tax audits for a combination of reasons, including:

  • automatically triggered by being in tax overpayment and refund positions (which is the most common);
  • industry-wide ITO tax audit policy on higher risk sectors;
  • perennial carried forward tax loss positions;
  • outcomes from previous tax audits;
  • specific monitoring of a company’s tax affairs based on ITO in-market intelligence or suspicions; or
  • just an unlucky run of random ITO selection.

Tax audits are not pleasant and are something most companies in Indonesia try to avoid. The ITO typically takes an aggressive position, and assessment disputes, objections, and tax court litigation are not uncommon.

Tax Incentives

Indonesia has various tax incentives, the most important being the tax holiday. Tax holidays may be available for significant investments in business sectors which constitute “pioneer” industries. The eligible industries are published in a separate list of business sectors—KBLIs—by the head of the foreign investment authority, BKPM. Non-listed business sectors may still be eligible to apply for a tax holiday if all remaining requirements have been fulfilled.

To qualify, applicants must invest a minimum of 100 billion Indonesian rupiah. The potential percentage and duration of the tax holiday depends on the investment amount. For investments between 100 billion and 500 billion rupiah, a 50% tax reduction may apply for a five-year period and a 25% reduction for the following two years after expiry. For investments from 500 billion rupiah up to 30 trillion rupiah and above, a 100% tax reduction applies for a period of five to 20 years and a 50% reduction for the following two years after expiry.

It remains to be seen for how long the tax holiday incentive will remain, given the developments around BEPS Pillar Two (see Recent Developments below).

Apart from tax holidays, Indonesia also has tax incentives for investments in certain businesses and/or regions, tax facilities for investments in labor-intensive industries, for human resources development in certain competencies, and for certain research and development activities in Indonesia. In addition, Indonesia has various Special Economic Zones and Free Trade Zones.

Pitfalls for Business

The Indonesian tax system is very compliance-based with potentially a large number of tax returns to file monthly. Therefore, it is very important that a good tax function is in place (supported by external counsel to the extent necessary), especially because the ITO performs tax audits often and may take aggressive positions. The establishment of a good tax function is the first line of defense in a tax audit situation.

Another pitfall is that the Indonesian tax law and implementing regulations are not always clear, and are sometimes even contradictory. This may give rise to uncertain positions and discussions with the ITO.

Recent Developments

As mentioned above, Indonesia just implemented the Omnibus Law, which was a large overhaul of various laws (e.g., employment laws, foreign investment laws and tax laws) and the HPP Law. Some of the relevant HPP Law changes were discussed above.

Another important change is the introduction of a carbon tax imposed on carbon emissions which have a negative impact on the environment. It is applicable to individuals or corporations who buy goods containing carbon, or carry out activities which produce carbon emissions exceeding certain amounts within a specific period. In the HPP Law, it was foreseen that the carbon tax would be introduced as per April 1, 2022. However, the implementation has been delayed: It is not clear when the implementing regulations will be issued.

Although Indonesia is not an Organisation for Economic Co-operation and Development member, as a G-20 member it is part of the OECD/G-20 Inclusive Framework. Recently, Indonesia’s Ministry of Finance announced its readiness to implement the OECD’s two-pillar approach, effective from 2023.

One of the challenges is the Indonesian tax incentives, specifically the tax holiday, which Indonesia offers to foreign investors. Under BEPS Pillar Two it may be necessary for Indonesia to amend its tax holiday incentive and. consequently, it may be possible that Indonesia will develop other tax and non-tax incentives to attract foreign investors which are not in conflict with the BEPS Pillar Two initiatives.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Views expressed herein are the author’s personal views and not necessarily those of KPMG Indonesia.

Jacob Zwaan is Partner, International Tax/M&A Tax, with KPMG Advisory Indonesia.

The author may be contacted at: jacob.zwaan@kpmg.co.id