Tax Summary in Indonesia
1. Direct Tax – Corporate Income Tax
Residence. Non-resident companies are those which are incorporated overseas, but receive or accrue income from Indonesia. Non-residents are obliged to register for tax purposes if they have a permanent establishment (PE) in the country.
Representative Offices of foreign companies are required to register as taxpayers because they must withhold tax on payments to employees and third parties, and lodge relevant tax returns.
Basis. Non-residents are taxed on income sourced in Indonesia, including income attributable to a PE.
Losses. Losses can be carried forward for a period of five (05) years following the year of incurrence. Under special circumstances, this period may be extended up to ten (10) years. The carry back of losses is not permitted.
Rate. The standard corporate tax rate is 25%.
Withholding tax. Withholding tax is imposed at 20% on various amounts payable to non-residents (e.g. dividends, interest, royalties), unless the non-resident has a PE in Indonesia, in which case the rates applicable to payments to residents apply.
PEs of foreign enterprises are also subject to a 20% branch profits tax, which is imposed on their after-tax profits, unless reduced by a tax treaty.
Tax treaty provisions. The stated withholding tax rates might be reduced under a tax treaty. To qualify for relief under a relevant tax treaty, non-residents must provide a certificate from the tax authority in their country of residence.
Compliance. Companies are required to self-assess and lodge annual corporate income tax returns. The annual corporate tax returns must be lodged with the relevant Tax Office within 04 months after the end of the calendar year or tax year, which may be extended for 02 months by notifying the Director General of Taxation.
Indonesia has a ruling system in place, but tax rulings are not generally published, and are only applicable to the relevant taxpayer that requested such ruling.
2. Indirect Tax
Value-Added Tax (VAT). The standard VAT rate is 10%, which applies to goods, services and imports into Indonesia. Exports of goods are not subject to VAT, but only certain exports of services receive the same treatment, i.e. subcontracting services, repair and maintenance services attached to movable goods utilized outside of the Indonesian customs area, and construction services attached to immovable goods situated outside of the Indonesian customs area.
3. Tax Incentives
Tax incentives are available to entities with capital investments in certain industry sectors or those operating in certain geographic locations, if certain conditions are met. Incentives include a tax investment allowance, accelerated depreciation/amortization, an extended carry forward of losses and a reduced withholding rate on dividends paid to non-residents.
A public company with a minimum of 40% of total paid-up shares traded on the Indonesian stock exchange may be entitled to an income tax rate reduction of 5%, if certain conditions are met.
A tax holiday regime is available for new domestic or foreign investment in specified business sectors, but companies that use this regime are not entitled to the previously stated tax incentives.
Qualifying projects in high-priority sectors may be granted the following incentives:
- a 10% to 100% reduction in corporate income tax liability, for a minimum investment of IDR 1 trillion;
- up to a 50% corporate income tax reduction for taxpayers in the telecommunications, information and communication sectors that introduce high technology with a minimum investment value of IDR 500 billion, but less than IDR 1 trillion;
- a tax holiday period, from 05 to 15 years from the commencement of commercial operations.
Tax exemptions are available for certain transactions, e.g. merger and spin-off, and newly established foreign owned companies.
4. Merger and Acquisitions
Indonesian GAAP account for most combinations as acquisitions, whereas IFRS treat all business combinations as acquisitions.
Asset transfer. Indonesian regulations impose conditions on tax-neutral transfers of assets, where both parties must pass a business purpose test to ensure that the motivation of the merger or acquisition is not to avoid tax. When the transfer occurs within the context of business expansion, the transfer of assets is only recorded at book value if the transferor and/or acquirer are planning an initial public offering (IPO).
When an asset transfer at book value is approved, the acquirer should assume the asset history of the transferor. Approval is granted only when both parties have no outstanding tax assessments or unpaid tax balances. A number of other conditions must be met, or else the transfer of assets would be assessed at market value.
Loss transfer. Losses remain with the entity incurring them. If the acquired entity ceases to exist or becomes dormant after the acquisition, the tax losses within that entity becomes unavailable for relief against any further profits.
Share transfer tax. The transfer of the shares of an unlisted resident company by a non-resident shareholder is subject to a withholding tax of 5% of the transfer value, unless an exemption applies under a tax treaty. An independent appraisal report is required to demonstrate that the transaction value is an arm’s length price.
Share purchase or asset purchase. Most acquisitions in Indonesia take the form of a share purchase, due to both tax and commercial considerations.
The sale of shares listed on the Indonesian stock exchange is subject to a final tax of 0.1% of the transaction value (an additional tax of 0.5% applies to the share value of founder shares at the time of an IPO).
On the other hand, the transfer of titles to land and buildings under an asset purchase subjects the seller to a 5% final income tax and the acquirer to a 5% transfer of title tax, both of which may be entitled to relief under an approved merger or consolidation. The transfer of the trade and assets of a business is also subject to the standard VAT rate of 10%.
However, there are several benefits for the acquirer in a trade and asset acquisition, including reduced risk of inheriting tax history and liabilities, and amortization of goodwill being tax-deductible. Furthermore, sales of unlisted shares by a foreign company are subject to a final tax of 5% of gross proceeds, unless protected by a tax treaty. Thus, the seller is liable for the tax even when the shares are sold at a loss.
5. Indonesian Anti-Avoidance System
Thin Capitalization. Where a “special relationship” exists between parties, interest may be disallowed as a deduction where such changes are considered excessive. Interest-free loans from shareholders may, in certain cases, create a risk of deemed interest being imposed, giving rise to withholding tax obligations for the borrower.
A certain portion of interest arising from debt is nondeductible for tax purposes of the taxpayer’s debt-to-equity ratio exceeds 4:1, except for the mining and oil and gas sectors.
Controlled Foreign Company (CFC). A CFC is a foreign unlisted corporation in which an Indonesian resident individual or corporate shareholders hold 50% or more of the total paid in capital. The Indonesian shareholders shall be deemed to receive dividends:
- within 04 months after filing the tax return;
- or 07 months after the end of the fiscal year where there is no obligation to file an annual tax return, or if the country of residence does not have a specific tax filing deadline.
Transfer Pricing. Transactions between parties that have a special relationship must be commercially justifiable and on an arm’s length basis.
Director General of Taxes is authorized to reallocate income and deductions between related parties and to characterize debt as equity in taxable income calculations, in order to assure that the transactions are those which would have been made between independent parties.
If total transactions with a related party exceed IDR 10 billion, certain documentation is required which would include, for example, an overview of operations and structure, transfer pricing policy, a comparability analysis, and an explanation of arm’s length price or profit determination method.
Anti-stepping. A taxpayer who purchases shares or assets of another entity through a special purpose company can be deemed as the real party who conducts the transaction, if such taxpayer is the affiliation of the special purpose company and the price of the transaction is unfairly settled.
Anti-treaty shopping. Abuse of tax treaty occurs when (1) the transaction has no economic substance and is designed solely to benefit from the tax treaty; (2) the transaction has a structure or legal format in contrast to its economic substance, solely to benefit from the tax treaty; or (3) the income recipient is not the actual owner of the economic benefits of said income.
To utilize the tax treaty provisions, a non-resident must confirm in Form DGT-1 that the transaction has economic substance and is not solely designed to take advantage of a tax treaty.