A comprehensive survey of tax rules and regulations in Indonesia

Indonesia is continuing its efforts to promote foreign and domestic investment, capital accumulation, and the export of goods outside of energy and mineral resources. While a broad range of deregulatory measures have already been implemented, additional measures, such as tax facilities, are expected to be announced. It is anticipated that these measures will further enhance the investment climate.

Current State

The government has set the tax revenue target for 2018 at Rp1618.1trn ($11.5trn), and the country had collected 94% of that goal by end of December 2018. In addition, the GDP growth rate for the last quarter of 2018 was 5.18%. Based on output figures, the biggest growth was seen in the agriculture, forestry and fisheries sector.

Amendments to the three primary tax laws – the General Tax Provisions and Procedures Law ( Ketentuan Umum dan Tata Cara Perpajakan, KUP), the Income Tax Law, and the Value-Added Tax (VAT) and Luxury Sales Tax (LST) Law – are expected to be discussed by Parliament over the next five years to 2024. As of early 2019 a draft bill of the KUP Law had been sent to Parliament and was being discussed.

To increase the number of large-scale investment projects, the government has updated and simplified the tax holiday incentive so that it is more attractive for investors and easier to obtain. The government also announced plans to provide vocational training and tax incentives for companies conducting research and development in Indonesia. Furthermore, there are ongoing plans to further develop the digital industry, enabling Indonesia to potentially become the leading digital economy in South-east Asia by 2020. To achieve this goal, the government has published a national roadmap for the development of the e-commerce sector and highlighted the regulations related to e-commerce that need to be developed. In addition, tax holiday incentives supporting the development of a digital economy have already been made available.

To promote the use of technology in tax compliance, the government has made it mandatory for certain types of tax returns to be submitted electronically. This e-filing method proved popular among individual taxpayers: about 80% of the 2017 annual income tax returns received by the Directorate General of Taxes (DGT) were submitted electronically. The government has also launched a new electronic system for Article 23/26 withholding tax in order to gather more accurate data on transactions and provide certainty for taxpayers. The system simplifies filings and reduces the documents necessary for tax compliance.

The government is also considering expanding the types of taxable services that would be zero-rated for VAT if delivered to overseas customers. This change would increase Indonesia’s competitiveness in the international marketplace and establish a level playing field for the country’s entrepreneurs.

Growing Access

The Law on Financial Information Access for Tax Purposes, implemented in 2017, introduced increased information openness and provides the DGT access to a wide variety of relevant information from financial institutions.

This enables the DGT to fulfil Indonesia’s Automatic Exchange of Financial Account Information agreement. Accounts in the name of individuals with balances or values exceeding Rp1bn ($70,900) as of December 31 of each reporting year are subject to this provision. The data collected will be processed by a specialised Centre for Tax Analysis, which will have access to all of the DGT’s data. As of the end of September 2018, the DGT was ready to implement the Automatic Exchange of Account Information. Out of a participating 102 countries, Indonesia will receive data from 88 countries and provide data to 73. The countries that will share information with Indonesia are generally those with which the country already has international agreements that mandate the automatic sharing of financial information. Some 11 of the 88 countries have not requested information from Indonesia, while the remaining four will exchange information reciprocally, which is expected to begin some time in September 2019.

The Ministry of Finance (MoF) issued a regulation that requires 69 government agencies and public associations to report tax-relevant information to the DGT. The information required is specific to the field of each government agency or public association, for example, import and export information from the port authorities, a list of investment approvals from the Indonesia Investment Coordinating Board (BKPM), and a record of land or building owners from the National Land Agency. These institutions must submit the information in electronic format on a regular basis and at least once annually.

The government also launched a programme using the social network analysis, which aims to identify taxpayers’ related party networks based on family relationships or other effective control. The data gathered from these sources is processed by a specially appointed team under the Directorate of Information Technology within the DGT, profiling and identifying taxpayers who have potentially underpaid taxes or who exhibit indications of tax fraud.

The final tax regime, introduced in 2013, is applicable to taxpayers with annual gross turnovers of a maximum of Rp4.8bn ($340,000), with the exclusion of certain types of income. A new regulation reduced the final tax rate from 1% to 0.5%, and also provided taxpayers in this category an option to choose to apply the normal tax regime instead.

Venture Capital

Under long-standing provisions, dividends received by a venture capital company (VCC) from capital participation in small and medium-sized enterprises (SMEs) – where the shares are not traded on a stock exchange in Indonesia – are non-taxable. The latest regulation on this provides that dividends received by a VCC from a SME are non-taxable, subject to the following requirements:

• The VCC has a business licence from the Financial Services Authority;

• The SME’s annual net sales threshold is a maximum of Rp50bn ($3.5m), an increase on the previous threshold of Rp5bn ($355,000); and

• The VCC holds the shares for a maximum of 10 years, or the SME has not listed its shares on the stock exchange.

TAX REFUNDS: A preliminary tax refund is available for the following taxpayers that meet certain criteria:

• Golden taxpayers with good history in tax compliance;

• Taxpayers with low refund value; and

• Low-risk VAT-able entrepreneurs. The DGT will examine all applicants for the preliminary tax refund status. A decision for a preliminary tax refund will be issued if the taxpayer satisfies each of the requirements individually. The Indonesian Tax Office can still perform a tax audit on the tax year or period for which a preliminary tax refund has been granted. If the tax audit results show that taxes have been underpaid, then administrative sanctions will apply as follows:

• For golden taxpayers: 100% increase of the underpaid tax;

• For taxpayers with a low refund value: 100% increase of the underpaid tax; and

• For low-risk VAT-able entrepreneurs: interest of 2% per month up to a maximum of 48%.

Tax Holiday

The tax holiday facility is provided to new investments in pioneer industries that have wide ranges in scope, provide additional value and high externalities, introduce new technologies and have strategic value for the economy. Currently, this facility is available for the following business sectors:

• Integrated upstream basic metal;

• Integrated oil and gas refinery;

• Integrated petrochemicals from oil, gas or coal;

• Integrated inorganic basic chemicals;

• Integrated organic basic chemicals from agriculture, plantation or forestry products;

• Integrated pharmaceutical raw materials;

• Main components of electronic and telematics equipment;

• Irradiation, electromedical or electrotherapy equipment;

• Machinery and main components of machinery;

• Motor vehicles and main components of motor vehicles;

• Robotics components that support the creation of manufacture machinery;

• Main components of vessels;

• Main components of aircraft and activities supporting the aerospace industry;

• Main components of trains;

• Main components of power plant machinery;

• Economic infrastructure;

• Agricultural, plantation or forestry-based processing industries that produce pulp; and

• Digital economy, which includes data processing, hosting and related activities. To identify which businesses can apply for the tax holiday, taxpayers should refer to the BKPM regulation that lists the eligible businesses using the Line of Business Classification Code. This list minimises disparities in the interpretation of whether or not certain businesses qualify as pioneer industries and aims to provide more certainty for taxpayers when initially applying for the tax holiday.

Economic infrastructure is one of Indonesia’s pioneer industries. The infrastructure intended for this tax facility is specified as investment in toll roads and electricity power plants. Taxpayers that execute projects considered to be national strategic projects may also partake in this tax holiday. That said, the government is open to input on pioneer industries that have not been listed, should the applicant meet the remaining requirements in full.

The online single submission (OSS) system, which is administered by BKPM, should be used to submit the tax holiday application prior to the start of commercial production. A proposal for holiday approval will be made by BKPM after conducting a review of the applicant. Under the latest regulation, proposals can be submitted to the DGT, which is authorised to award the incentive on behalf of the MoF until a projected end-date of November 26, 2023.

Bonded Zone

The bonded zone facility is provided to companies that manufacture for export or as part of an onshore supply chain that supports exports. Produced goods may be sold domestically; however, domestic sales may not exceed 50% of the previous year’s total sales. Tax and Customs facilities are as follows:

• Non-collection of import taxes (i.e., VAT and/or LST, Article 22 Income Tax) on import of certain goods;

• Postponement of import duty on certain goods;

• Exemption of excise tax on importation of certain goods; and

• Non-collection of VAT and/or LST on domestic purchases of certain goods. The MoF has recently issued a bonded zone regulation that aims to simplify zone procedures as well as harmonise tax and Customs treatment for various types of goods flowing into or out of the zones. The Customs officer will deny a taxpayer’s bonded zone application if the applicant, administrator or entrepreneur within the bonded zone has tax, Customs and/or excise arrears. The application can be easily submitted via the OSS system.

The bonded zone regulation provides for a tax-free facility on the temporary release of goods from the bonded zone to overseas, other economic zones or other parts of the Customs area.

The scope of the tax-free facilities has been expanded to cover temporary release for testing or quality development and other purposes, given the approval of the head of the Customs office. Based on receipt of a taxpayer’s request, or on an ex-officio basis, the head of the Customs office may decide to appoint an entrepreneur within the bonded zone to conduct self-service operational activities in this zone, wherein activities may include the unloading of goods, stockpiling and/or the release of goods.

Article 22

The government has also adjusted Article 22 Income Tax provisions on imports by moving some goods to a new category with a higher tax rate. This has been done with the goal of managing the import of goods that might affect the rupiah’s stability. Article 22 Income Tax is placed on the following: a. Imports of certain consumer goods as set in Article 22 Income Tax regulations. The applicable tax rate is either 10% or 7.5% depending on the type of the goods. These rates are applicable regardless of whether or not the goods are imported using an importer identification number (angka pengenal impor, API); b. Imports of soybeans, wheat and wheat flour, which are taxable at 0.5%; and c. Imports of any goods other than (a) and (b). The tax rate is 2.5% if the goods are imported using API or 7.5% if not using API. PMK-110 has updated the goods covered under category (a) by moving some goods within the category or including additional goods in the list. The update is detailed in the below table.

The increase of Article 22 Income Tax Rate may affect importers’ cash flows; however, it should not result in any additional costs for the importer as it constitutes prepayment of the current year’s Corporate Income Tax liability for that particular importer.

Mineral Mining

Article 31D of the Income Tax Law allows the government to issue special rules for certain industries. One regulation that has been issued specifically regulates Penerimaan Negara Bukan Pajak (tax and non-tax state revenue) arrangements for the mineral mining sector. It provides different tax arrangements according to the type of mineral mining concession in question.

For most concession holders, the provisions are generally applicable from 2019. It should be noted that these rules do not extend to the coal mining sector, for which special rules were issued in 2018.