In 2018, Indonesia issued new regulations regarding tax policy with the aim of improving the investment climate together with state revenue, simplifying administrative provisions, and providing clearer guidance for taxpayers. We set out below some of the key points of the new regulations.
1. Indonesia Reduces Administrative Requirements on Tax Treaty Implementation
To simplify the administrative requirements for implementation of a tax treaty, the Government of Indonesia issued Director General of Tax Regulation No. PER-25/PJ/2018 on Tax Treaty Implementation. The regulation was issued on 21 November, and it came into force on 1 January 2019.
Implications for Taxpayers
A foreign taxpayer that is entitled to tax treaty protection is no longer required to submit a Form DGT to each tax withholder every month. Under the new regulation, during the validity period of the Form DGT, a foreign taxpayer is only required to submit one Form DGT for all of the taxpayer's transactions.
Meanwhile, a domestic taxpayer that collects withholding tax is required to submit the Form DGT electronically to the Director General of Tax. The receipt of this submission must be provided to the foreign taxpayer. This receipt serves as a replacement of the submitted Form DGT during its validity period.
Therefore, a foreign taxpayer is no longer required to submit a different Form DGT to each tax withholder.
2. The New Tax Holiday Regulation of Indonesia
The Government of Indonesia recently amended the regulation on tax holiday facilities for taxpayers in certain industries. The regulation was amended by Minister of Finance Decision No. 150/PMK.010/2018. In the new regulation, the government amended the minimum amount of investment and the list of pioneer industries.
Implications for Taxpayers
The period of the facility depends on the amount of investment. The details are as follows:
|Investment (IDR)||Income Tax Reduction||Facility Period|
|100,000,000,000 - < 500,000,000,000||50%||5 years|
|500,000,000,000 - < 1,000,000,000,000||100%||5 years|
|1,000,000,000,000 - < 5,000,000,000,000||7 years|
|5,000,000,000,000 - < 15,000,000,000,000||10 years|
|15,000,000,000,000 - < 30,000,000,000,000||15 years|
|≥ 30,000,000,000,000||20 years|
After the facility period ends, the taxpayer will still receive corporate income tax reduction. For the next two fiscal years after the end of the facility period, the taxpayer will receive a 50% reduction (for investment of more than IDR 500,000,000,000) and 25% reduction (for IDR 100,000,000,000 to < 500,000,000,000) of its corporate income tax.
The tax holiday facility can only be enjoyed by taxpayers in certain industries. However, businesses in industries that are not listed in the regulation can apply for the facility under this regulation by submitting an application to the Capital Investment Coordination Board.
The facility can be enjoyed starting from the fiscal year when the taxpayer starts its commercial production. The commercial production is considered to be started when the product is first sold or self-used. The Director General of Tax will determine the starting time of the commercial production based on a field inspection.
A taxpayer that receives the facility is required to submit an annual report to the Director General of Tax, which explains the taxpayer's production and investment realization. The deadline to submit the annual report is 30 days after the end of a fiscal year.
3. Tax Treatment of Remuneration Earned by Buyer in a Sale-Purchase Transaction
Due to numerous questions on tax treatment of remuneration earned by a buyer in a sale-purchase transaction, the government of Indonesia issued Circular Letter No. SE-24/PJ/2018 as a guideline.
Implications for Taxpayers
In summary, the tax treatment of remuneration is as follows:
- Remuneration earned on achievement of certain requirements
Remuneration earned on achievement of certain requirements can be in the form of cash, goods and/or reduction in liability. The remuneration can be considered as a remuneration on management service if it is stated in the agreement that a service will be provided and there is either acknowledgment on the income or invoice related to the service.
The remuneration is treated as income for the buyer and the seller is obliged to withhold the relevant withholding tax. The tax base itself refers to the value agreed in the agreement. If the agreed value is not stated, it is based on the market price.
VAT also applies if the seller is a taxable entrepreneur for tax purposes. The tax base refers to the value agreed in the agreement. If the agreed value is not stated, it is based on the market price.
- Remuneration on provision of space and/or certain equipment
Remuneration provided in return for space and/or certain requirements is deemed as income from rental of equipment or land and/or buildings for the buyer. The seller is required to withhold the relevant withholding tax.
If the buyer is a domestic taxpayer, the applicable tax is as follows:
- final income tax article 4 (2) if the remuneration is in the form of provision of space
- income tax article 23 if the remuneration is in the form of provision of certain equipment
If the buyer is a foreign taxpayer, the remuneration is subject to income tax article 26.
VAT also applies if the seller is a taxable entrepreneur for tax purposes. If the buyer is overseas, the provision of space outside the customs area is not subject to VAT. If the remuneration on the provisions of space is in form of taxable goods, it is treated as export of taxable goods.
- Remuneration in the form of compensation
It is possible for a seller to give compensation to a buyer in the form of cash, goods and/or obligation reduction in return for bearing the risk of change of price, late delivery or a specific sales program required by the seller. In this case, the compensation is deemed as income of the buyer. Therefore, the seller is required to withhold the relevant withholding tax.
VAT also applies if the seller is a taxable entrepreneur for tax purposes. If the compensation is in the form of taxable goods, the VAT treatment is the same as delivery of taxable goods. If the buyer is overseas, it is treated as export of taxable goods. However, if the compensation is in the form of cash and/or obligation reduction, it is not subject to VAT.