The understanding tax system in Indonesia for businesses is at the heart of conducting business in the emerging global powerhouse of Southeast Asia which is poised to be the 4th biggest economy in the world by 2050.
With more than 20% of its population categorized as Middle Class & Affluent Customers (MAC), Indonesia offers a huge pool of customers to businesses to tap into.
Various Tax Articles in Indonesia
Although it makes Indonesia an extremely attractive destination for businesses to expand their operations, Indonesia is one of the most complex countries in Southeast Asia from the perspective of the tax system and tax compliance perspective.
This is partly because businesses in Indonesia must comply with a tax system that is composed of various tax articles as per the tax law. These tax articles include the following:
- Article 21 (known as PPh 21)
- Article 23 (known as PPh 23)
- Article 26 (known as PPh 26)
- Article 4(2) (known as PPH 4(2))
- Value Added Tax (known as PPN)
- Corporate Tax
Compliance with the tax system in Indonesia composed of the above-mentioned tax articles is explained in detail below:
1. Tax Article 21 (PPh 21)
Article 21 (PPh 21) of the tax system in Indonesia follows a progressive rate system where those employees who are earning higher income are taxed at a higher rate. Employers are required to withhold Article 21 tax from the salaries payable to their employees and pay the tax to the State Treasury on behalf of employees every month. The amount of tax depends on the income of employees. There are some reliefs as well which are available depending on the marital status of the employees.
| TAXABLE INCOME |
RATE |
TAX (IDR) |
| Up to IDR 60,000,000 |
5% |
3,000,000 |
| Above IDR 60,000,000 up to IDR 250,000,000 |
15% |
28,500,000 |
| Above IDR 250,000,000 up to IDR 500,000,000 |
25% |
62,500,000 |
| Above IDR 500,000,000 up to IDR 5,000,000,000 |
30% |
1,350,000,000 |
| Above IDR 5,000,000,000 |
35% |
35% of the relevant amount |
| DEADLINES | ||
| Tax payment deadline |
The 10th of the following month |
|
| Tax return filing deadline |
The 20th of the following month |
|
2. Tax Article 23 (PPh 23)
Article 23 (PPh 23) tax system in Indonesia means that dividends, interest payments and consulting services fees payable to resident taxpayers in Indonesia are subject to Article 23 at a rate of either 15% or 2% of the gross amounts as given below:
| INCOME TYPE |
RATE |
| Dividends, interest, royalties etc |
15% |
| Management and consultation services etc |
2% |
| DEADLINES | |
| Tax payment deadline |
The 10th of the following month |
| Tax return filing deadline |
The 20th of the following month |
An important point to remember here is that if you are a consulting firm and provide services to clients and your client deducts 2% withholding tax under Article 23 then do not forget to ask for the proof of deduction (also known as Bukti Potong). Article 23 deduction can be credited to annual corporate tax which will result in a reduction in tax payable.
3. Tax Article 26 (PPh 26)
Article 26 tax system in Indonesia is the withholding tax on the payments made to non-residents. Resident taxpayers, organizations and representatives of foreign companies are required to withhold tax at a rate of 20% from the following payments to non-residents:
| INCOME TYPE |
RATE |
| Dividends, interest, royalties, service fee, pensions, rental, pensions, gains etc |
20% |
| DEADLINES | |
| Tax payment deadline |
The 10th of the following month |
| Tax return filing deadline |
The 20th of the following month |
It is important to note that Article 26 tax treatment is also subject to Tax Treaty between Indonesia and other countries. Certain transactions may be exempt from Article 26 tax if there is Double Tax Treaty for that particular transaction. COR (Certificate of Residence) is needed from the non-resident recipient and non-resident is also required to file a form called DGT Form to claim tax exemption
4. Tax Article 4(2) (PPh)
Resident companies, Permanent Establishments (PEs), representatives of foreign companies, organizations and appointed individuals are required to withhold final tax from the following gross payments to resident taxpayers and Permanent Establishments (PEs):
| INCOME TYPE |
RATE |
| Rental of land or building |
10% |
| Proceeds from the transfer of land and buildings |
2.5% |
| Fee for construction work, planning or supervision |
2/3/4/6% |
| Interest on saving deposits |
20% |
| Interest on bonds other than payable to banks |
15% |
| DEADLINES | |
| Tax payment deadline |
The 10th of the following month |
| Tax return filing deadline |
The 20th of the following month |
A common example of this tax application is the tax on payment of rental of the company office. This tax is a final tax which means it cannot be credited in the annual corporate tax computation.
5. VAT (PPN)
Value Added Tax (VAT) or known as PPN in Indonesia is typically due on the events involving the transfer of taxable goods or the provision of taxable services in the Indonesian Customs Area. The VAT obligations arise when the turnover exceeds IDR 4.8 billion (approximately US$ 330,000) per annum.
| INCOME TYPE |
RATE |
| VAT |
10% |
| VAT on export of goods and services |
0% |
| DEADLINES | |
| Tax payment deadline |
The last date of the following month |
| Tax return filing deadline |
The last date of the following month |
VAT registration can still be done voluntarily even if the turnover is less than IDR 4.8 billion (approximately US$ 330,000).
6. Annual Corporate Tax
All companies must file their annual income tax return with The Directorate General of Taxes (DGT).
| INCOME TYPE |
RATE |
| Corporate tax rate |
22% |
| DEADLINES | |
| Tax payment deadline |
4th month after the financial year-end before filing the tax return |
| Tax return filing deadline |
4th month after the financial year-end |
Companies with revenue less than IDR 4.8 billion may opt under the PP23 scheme whereby companies are taxed 0.5% final on their revenue. However, this tax must be paid on monthly basis by the 15th of the following month. For example, if a company has a revenue of IDR 100,000,000 then tax will be IDR 500,000 (IDR 100,000,000 x 0.5%) and it is payable by the 15th of February.
If a company is making a loss, then it is advisable to not opt for the PP23 scheme because under the PP23 scheme tax is payable on revenue rather than profit. If a company is making a loss, then the business can carry forward the loss up to five years in the future.
A Word of Advice
Indonesia offers huge business opportunities to those who comply with tax laws. It is also important to do the tax planning in advance to avoid any surprises due to the complicated tax system in Indonesia. Businesses should avoid any dispute with tax offices because this can be very costly and time-consuming. Penalties for non-compliance are quite significant in Indonesia and can be a hindrance to the long-term growth of the business.
There is a famous saying which comes to my mind, “If you think compliance is expensive then try non-compliance.
How can MAM Corporate Solutions help?
MAM Corporate Solutions has extensive experience helping clients with tax compliance in Indonesia.
We have significant experience in helping businesses with their regular individual and corporate tax compliance in Indonesia. Since failure to comply with the tax system in Indonesia can result in significant fines, it is of utmost importance to ensure that individuals and businesses continue to remain compliant.
Our team of tax experts are well versed with Indonesian tax laws and whether you need assistance with tax registration, payment of tax obligations on time, filing of timely tax returns, advice on the withholding taxes or correspondence with the DGT on any other tax matter, our team can assist you in all tax-related matters to ensure that not only you comply with all the tax laws but also that you are never penalized for any non-compliance.
Contact MAM Corporate Solutions
If you need assistance to comply with the tax system in Indonesia, you can contact our expert anytime by Clicking here or provide below as much detail about your inquiry as possible below to receive the most relevant response.