What are Indonesia's new tax reforms?

In 2019 Indonesia recorded an economic growth rate of 5.3%. From an output perspective, the agriculture, forestry and fisheries sectors, as well as trading and construction, significantly contributed to the country’s GDP. In terms of tax intake, the government set a revenue target of Rp1786trn ($125.9bn) for the year and had successfully collected 86.5% of that figure by the end of December 2019. In 2020 the tax revenue target was raised to Rp1861.7trn ($131.2bn).

In recent years, the government has made significant strides in resolving taxpayer concerns regarding existing tax legislation and announced reforms designed to make Indonesia a more attractive destination for investment. These include proposed gradual reductions in the corporate income tax (CIT) rate from the current rate of 25% to 20% – with an even lower rate suggested for companies that have recently listed.

Recent Reforms

Another example of reforms aimed at making Indonesia more attractive for investment is the three omnibus laws that the government is seeking to introduce in 2020. As of May 2020 the omnibus laws have not yet been passed by the Indonesian parliament. The first law is related to tax, and looks to promote investment, enhance voluntary tax compliance, and achieve equality between domestic and foreign businesses. Some of the measures outlined in the Omnibus Tax Law were adopted in a separate law that became effective in 2020 as part of the country’s response to the Covid-19 pandemic. The second law aims to create job opportunities in Indonesia and will include an updated positive investment list, and the third piece of legislation will focus on the development of the financial sector.

The Omnibus Tax Law, entitled “Tax Provisions and Concessions for Economic Consolidation”, will amend the General Tax Provisions and Procedures Law, the Income Tax Law, the Value-Added Tax (VAT) Law, and the Regional Tax and Retribution Law. Notwithstanding the Omnibus Tax Law, it is expected that the government will continue to assess the possibility of reforming the tax laws more comprehensively through the regular amendment process.

To stimulate the development of large-scale infrastructure projects in Indonesia, the government has updated the tax holiday and tax allowance incentives to be more attractive for investors and easier to secure. The government has also introduced new super-deduction tax incentives, comprising tax facilities for labour-intensive industries, human resource development in certain competencies, and research and development (R&D) activities in Indonesia.

In addition, the Ministry of Finance has updated the rules for controlled foreign companies (CFCs). The new rules shift the determination of CFC income, which previously included all CFC profits, but now denotes only certain types of income – dividends, interest, rentals, royalties, and gains from the sales or transfer of assets – with certain limitations.

In 2019 Indonesia took further steps to simplify the taxation process by introducing an online filing and payment system for major taxes. As a result of these measures, the country ranked 81st out of 190 countries for paying taxes in the World Bank’s 2020 ease of doing business index, up from 112th in 2019.

Furthermore, the government has stated its aim to make Indonesia the leading digital economy in Southeast Asia in 2020. To achieve this goal, a roadmap has been implemented to advance digital ecosystems and tax holiday incentives that support the development of digital enterprises.

International Tax

Indonesia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on June 7, 2017 and provided a list of reservations and notifications on the same date. Indonesia ratified the MLI on November 13, 2019 and identified 47 tax treaties to which it intends to apply the legislation. The MLI will enter into force in Indonesia once the ratification document has been deposited to the Organisation for Economic Cooperation and Development.

The Indonesia-Tajikistan tax treaty was ratified on November 13, 2019. It will be effective after the exchange of ratification documents has been completed. The treaty stipulates that dividends are taxable at 10%, and interest and royalties are also taxable at 10%. Only the beneficial owners of such income are acknowledged as the parties that are entitled to the benefits of the tax treaty. The branch profit tax rate is 10%. This rate is not applicable to production-sharing contracts or any other similar contracts in the oil and gas industry, nor is it applicable to state agencies and state-owned enterprises in this specific industry.

The protocol to the Indonesia-Mexico Tax Treaty entered into force on September 18, 2019. The protocol updates Article 26 of the tax treaty, which concerns the exchange of information. The update stipulates that both countries must entertain information requests even if one country has no need for the information for its own tax purposes. The parties also cannot decline an information request solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity, or because it relates to ownership interest in a person.

Indonesia ratified its tax information exchange agreement (TIEA) with the Bahamas on May 9, 2019. The TIEA will be effective after the exchange of ratification documents has been completed. Indonesia also has TIEAs with Bermuda, Guernsey, the Isle of Man, Jersey and San Marino.

Zero-Rated Services

Indonesian law has, for a long time, allowed certain exported services to be zero-rated for VAT purposes. The scope of the zero-rating had been quite limited, however, and was largely restricted to toll manufacturing and certain construction activities. The range of services is now expanded to cover:

• Services connected to movable goods utilised outside of the Customs area that comprise: ◊ Toll manufacturing services; ◊ Repair and maintenance services; and ◊ Freight forwarding for export-oriented goods.

• Services connected to immovable goods located outside of the Customs area in the form of consultation services for construction; and

• Other services where the output is utilised outside of the Customs area and utilisation is based on a request from an overseas recipient through either direct or indirect transmission (e.g., via postal services or electronic channels) or the provision of access outside of the Customs area. These services are to comprise:

• Information and technology services;

• Interconnections, satellites and/or data connectivity services;

• R&D services;

• The rental of aircraft and/or ships for international flights or shipping activities;

• Trading services, which assist in finding domestic sellers to procure goods for export purposes; and

• Consultation in the form of: ◊ Management and business services; ◊ Legal services; ◊ Interior and architectural design services; ◊ Human resource services; ◊ Engineering services; ◊ Marketing services; ◊ Accounting services; ◊ Financial audit services; and ◊ Tax services.

Super-Deduction Facility

Certain types of expenditure are eligible for this income tax facility. Labour-intensive industries: Companies that carry out a new investment or expansion in certain sectors and employ a large number of staff are granted a reduction in net income of 60% of the amount invested in the form of tangible fixed assets, including land. Human resource development: Companies that conduct an internship or vocational training programme in certain competencies are granted a reduction in gross income of up to 200% of the amount spent for this activity. The activities eligible for this facility include:

• Internships for students and teachers from vocational education institutions within a high school, a diploma-level institution or a training centre; or

• Vocational programmes for unemployed people administrated by the government. Both must be conducted by the taxpayer at their place of business as part of a vocational education curriculum designed to master skills or expertise in certain fields; and/or vocational training, which means training activities conducted by parties assigned by a taxpayer in a vocational education institution in a high school, diploma-level institution or training centre.

The field of competency is different for each educational institution level. The primary fields are: manufacturing, health, agri-business, tourism and creative industries, digital economy and migrant work. Facility for certain R&D activities: Companies may be granted a reduction in their gross income worth up to 300% of the amount spent on conducting certain R&D activities in technology or the transfer of technology in Indonesia.

Tax Allowance

The Tax Allowance is now available for 183 eligible types of investment (based on the Standard Classification of Indonesian Business Fields). This includes 166 designated sectors and 17 categories of investment in designated sectors and regions. The requirement to conduct the business in a designated region is no longer applicable to some businesses.

Tax Facility Package

The principal tax facilities remain the same, but the following changes apply:

• A reduction in net taxable income of up to 30% of the amount invested in the form of fixed assets ( including land), prorated at 5% for six years of commercial production, provided that the assets invested are not being misused and are not transferred out within a certain period. The fixed assets must be: ◊ New, unless originating from a complete relocation from another country; ◊ Listed in the new business licence as the basis for obtaining a tax allowance facility; and ◊ Owned directly by the taxpayer (not through a lease) and utilised for the main business activity.

• An acceleration of fiscal depreciation and amortisation deductions;

• A reduction of the withholding tax rate on dividends paid to non-residents to 10% or the applicable reduced tax treaty rate; and

• An extension of the tax-loss carry-forward period to more than five years but not exceeding 10 years.

Tax-Loss Carry-Forward Period

There are several new updates to the annual qualification for extending the tax-loss carry-forward period. Options to extend the tax-loss carry-forward period for eligible investment and eligible investment carried out in an industrial zone and/or bonded zone will be automatically available upon the granting of a tax allowance facility. The other options to extend the tax-loss carry-forward period can only be utilised by the taxpayer after obtaining approval.

Changes to the Application Process

Taxpayers should use the online single submission (OSS) system to process tax allowance applications, which must be made before the start of commercial production, either along with the taxpayer’s application for a business identification number or within one year of the new business licence being issued by the OSS system.

Tax Concession for Interest on Bonds

Interest on bonds is generally subject to 15% tax when paid to resident taxpayers and a 20% tax when paid to non-residents. Concessionary tax rates of 5% up to 2020 and 10% from 2021 onwards apply for interest payments to mutual funds operating under a collective investment contract (KIK). The applicability of these concessionary rates is now expanded to infrastructure investment funds, real estate investment funds and asset-backed securities – if they operate under a KIK.

Draft Omnibus Tax Law

The most recent draft of the Omnibus Tax Law was announced by the Ministry of Finance on November 25, 2019. The government submitted a draft to Parliament in January 2020, which was being revised as of May 2020. The government has indicated that the law will provide:

A reduction in the CIT rate: The CIT rate will be gradually reduced from the current rate of 25% to 22% in 2021-22 and to 20% starting from 2023. The CIT rate for companies newly listed on the Indonesia Stock Exchange that meet certain requirements would be reduced by a further three percentage points for the first five years of listing. Therefore, the CIT rate will be 19% in 2021-22 and 17% in 2023.

As part of the country’s Covid-19 response, CIT rate changes were brought forward to 2020 under a separate law. As such, the CIT rate will be reduced to 22% for 2020-21 and will be reduced to 20% from 2022 onwards. The CIT rate for companies newly listed on the Indonesia Stock Exchange that meet certain requirements will be reduced by a further three percentage points for the first five years of listing. Therefore, the CIT rate will be 19% in 2020-21 and 17% in 2022. Tax exemption on dividends: Indonesian-sourced dividends received by resident taxpayers will be exempt from paying CIT if reinvested in Indonesia for a certain period. Foreign-sourced dividends, or the after-tax profits of a permanent establishment, that are earned by resident taxpayers (either listed or non-listed) will be exempt from CIT if reinvested in Indonesia for a certain period.

Tax reduction on interest income: The 20% Article 26 income tax withholding that currently applies to interest payments due to foreign taxpayers will be reduced where the interest is sourced from Indonesia. Territorial basis in calculating taxable income: Indonesian citizens that reside abroad for more than 183 days will be treated as non-resident if they fulfil certain requirements. Withholding on their Indonesian-sourced income will be at the 20% Article 26 income tax rate. Non-Indonesian sourced income will be non-taxable while the Indonesian citizen is non-resident. Expatriates with dual tax residency and who reside in Indonesia beyond the 183-day period will be deemed to be residents. However, only Indonesian-sourced income will be subject to Indonesian income tax.

Relaxation on creditable input VAT: Input VAT incurred on the utilisation of goods and/or services prior to the VAT-eligible entrepreneur being registered will be creditable to a level of 80% of the entrepreneur’s taxable delivery. Input VAT discovered during a tax audit process will also be creditable. New standard rate on administrative sanctions: In an effort to increase voluntary compliance, tax administrative sanctions will be adjusted to follow a prevailing bank interest rate. This should result in tax administrative sanctions lower than the current 2% per month. The tax administrative sanctions due on the improper issuance of VAT invoices, or for not registering as a VAT-eligible entrepreneur, will be reduced to 1% of the tax base.

New standard rate on interest compensation: The use of the prevailing bank interest rate will also apply to interest compensation paid by the tax authority on incorrect tax assessments.

E-commerce: The Omnibus Tax Law will outline a framework for foreign e-commerce or digital business platforms to collect VAT on transactions in the Indonesian market and to report this VAT to the tax authority. The government will separately expand the scope of a permanent establishment to include foreign digital players with a significant economic presence in Indonesia even without any physical presence. This is with a view to increasing the tax collected on the Indonesian-sourced income of e-commerce businesses, subject to any tax treaty intervention.

Harmonisation of regional taxes: Regional governments are already authorised to collect regional taxes where the tax objects and tax rate thresholds are determined by Parliament through the Regional Tax and Retribution Law. The Omnibus Tax Law will give the central government the authority to set the rates of these taxes through a presidential decree after consultation with the relevant regional governments.

Greater regional harmonisation is the apparent goal of this change. It is hoped that this will create a better business environment and encourage investment and job creation, while also maintaining the ability of regional governments to collect tax revenue.

Tax Concessions

Indonesia has several tax concessions, including the tax holiday, the super-deduction on spending for vocational training and R&D in Indonesia, among others, and concessions for:

• Labour-intensive industries;

• Special economic zones;

• Government securities traded in the international market; and

• Reductions or exemptions of regional taxes. Under the Omnibus Tax Law, these concessions will be summarised into a specific category so as to provide more consistency and a stronger legal basis.

Luxury Goods Sales Tax

The government introduced a new tax incentive to encourage the use of energy-saving and environmentally friendly vehicles that will be available for 10 years from October 16, 2021. The incentive is in the form of a reduction of the tax base to 75%, 50% or 0% depending on the vehicle’s features. The luxury goods sales tax (LST) rate follows the normal rate. There are four categories of low-carbon emission four-wheeled motor vehicles, and each category has its own LST rate(s) and tax base reduction facilities.