Taxation in Indonesia
Indonesia’s parliament has approved the Harmonized Tax Law (HTL), which will overhaul the existing tax structure. Changes include an increase in the value-added tax (VAT) rate, a new carbon tax, scrapped plans to reduce the corporate income tax (CIT), and changes to the topline personal income tax (PIT) rate.
The new law aims to optimize tax revenue collection and compliance amid state revenues already battered to cover the costs caused by the pandemic, although some business groups have questioned the timing of the tax hikes, considering that economic recovery is still fragile. The bill could generate up to 250 trillion rupiah (US$17.5 billion) in tax revenue, equivalent to 1.5 percent of GDP.
Through the bill, the government hopes to return its fiscal deficit back to three percent of GDP by 2023 from an estimated 5.8 percent in 2021 and could reach 4.85 percent by 2022.
Corporate Income Tax in Indonesia
The corporate income tax rate (CIT) will remain at 22 percent for 2022.
The effective fiscal year 2022, the lowest tax bracket cap for individual income tax will be increased from 50 million rupiah (US$3,486) to IDR 60 million (US$4,183)and a new 35 percent tax bracket will be added for individuals earning more than 5 billion rupiah (US$348,634) annually.
Individual Income Tax in Indonesia
Expatriate workers need to know that personal income tax (PIT) in Indonesia is determined through a self-assessment scheme.
The country has adopted a worldwide income taxation system, meaning that individuals considered as Indonesian tax residents must pay tax to the government on the income they earned in Indonesia, and also on income they earned from abroad, unless there is an applicable double tax agreement.
Non-resident taxpayers will only be liable to pay PIT for income they earn in Indonesia, unless the country in which they are a tax resident has an applicable tax treaty with Indonesia. In these cases, the taxpayer might not pay any tax in Indonesia or pay a reduced amount.
[tips title="Did You Know"]Effective fiscal year 2022, the lowest tax bracket cap for individual income tax will be increased from IDR 50 million to IDR 60 million and a new 35% tax bracket will be added for individuals earning more than IDR 5 billion annually.[/tips]
Given these tax treatments, it is important for expatriate workers to understand their tax liabilities in Indonesia. It is advisable to use the services of registered local tax advisors to help determine which tax law regime will be applicable along with any exemptions that may bring.
Value Added Tax in Indonesia
The new Harmonized Tax Law calls for the VAT rate for almost all goods and services to increase from the current 10 percent to 11 percent in April 2022 and to 12 percent by 2025. There was an earlier plan to waive the VAT exemption for basic goods and services, such as healthcare, education, food, and financial services, but this was dropped amid concerns it could hurt consumption and fan inflation.
Around 25 percent of Indonesia’s tax revenue or 298.84 trillion rupiah (US$20.9 billion) last year came from domestic VAT.
Indonesia International Taxation
International taxation in Indonesia mainly comprises of two entities: the transfer pricing and advanced pricing agreement.
Transfer pricing applies to companies that transact between companies from the same group, such as a subsidiary, or other ‘related’ parties.
Transfer pricing in Indonesia is regulated under the Income Tax Law of 2008, which authorizes a tax officer to redetermine the tax income of a taxpayer who has a ‘special relationship’ with other taxpayers.
Advanced Pricing Agreement
In 2020, the Directorate General of Taxes issued Regulation No.22/PMK.03/2020 (PMK-22) governing the implementation of advanced pricing agreements (APA).
An APA is an agreement between one or more taxpayers and one or more tax authorities to determine in advance a set of criteria, and within a specific period, for specific cross-border transactions. This is to ensure such transactions comply with the arm’s length principle as well as assist in avoiding transfer pricing disputes.
Tax Incentives for Businesses in Indonesia
In June 2019, the Indonesian government issued GR 45/2019, which sets out a series of tax incentives for businesses that invest in labor intensive industries, training programs, as well as research and development (R&D).
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On September 6, 2019, the Ministry of Finance issued Regulation No. 128 of 2019 (GR 128, 2019), which sets out tax incentives for businesses that invest in developing talent in Indonesia.
Further, Indonesia’s government on December 13, 2019, issued Government Regulation 78 of 2019 (GR 78, 2019), which sets out a variety of income tax incentives for businesses investing in specific industries and provinces in the country.
Taken together, the incentives are designed to encourage more foreign direct investment (FDI), expand the skilled labor base, and develop industry.
Accounting and Audit in Indonesia
Indonesia Accounting Standards
Audits are to be conducted based on the Indonesian Financial Accounting Standards (SAK), which are set by the Financial Accounting Standards Board (DSAK IAI) and the Indonesian Sharia Accounting Standards Board (DSAS IAI), for sharia-based companies.
Since 2015, the DSAK IAI has converged its accounting standards with that of the International Financial Reporting Standards (IFRS), issued by the IFRS Foundation and the International Accounting Standards Board (IASB). Current harmonization revolves around the chronological adoption of past IFRS with emphasis on closing the gap between Indonesia’s adoption status and the most up to date international standards.
Audit and Compliance in Indonesia
Foreign investors will need to be aware that regulations regarding auditing, accounting, and financial reporting are stipulated over several laws and bylaws, and that a good understanding of these can ensure their business stays compliant.
[tips title="Did You Know"]There is currently no single unifying regulation on auditing and compliance in Indonesia. [/tips]
Foreign investors should, however, focus on the Company Law, which dictates the terms for when audits become obligatory in addition to the accounting standards companies should adhere to when preparing financial statements.
Investors should use the services of registered local advisors to make sure they understand the prevailing regulations.