After speaking about expat taxes in Thailand, South Korea and Japan, Germany, Singapore and France, this article will speak about expat taxes in Indonesia.
Alongside looking at income taxes for individuals, we will also focus on other forms of tax, including for firms and on capital gains overseas.
Whilst it shouldn’t be considered as tax advice, it is correct as far as we are aware at the time of writing.
With the ongoing covid situation, some of the information in this article is subject to change, including expat taxes and work permits.
If you are looking for portable expat tailored investment solutions, which is what we specialise in, you can contact me on this form.
Introduction
The tax system in Indonesia is fairly transparent and straightforward. All taxes can be divided into 2 blocks: taxes collected by the central government and taxes collected by local governments.
The main group of taxes includes:
PPh (Pajak Penghasilan) – income tax. For individuals (PPh 21), the income tax has a progressive scale. If your annual income is:
- up to 50 million Indonesian rupiah (IDR) – 5%
- from 50 to 250 million IDR – 15%
- from 250 to 500 million IDR – 25%
- from 500 million IDR – 30%
The tax system for legal entities has its own differences. If your company’s annual income is:
- up to 4.8 billion IDR – 1% of total revenue (so called bukan PKP)
- from 4.8 billion to 50 billion IDR – calculate using the formula: (0.25 – (0.6 billion / total income)) x income-expense. If your company’s income exceeds IDR 50 billion, then the tax will be 25% of the income. And the dividend tax is 15% (PPh 23).
It should be noted that the above tables give only a general idea of taxes and do not take into account many subtleties. For example, income taxes are not counted in our spreadsheets do not take into account the number of dependents, which in fact will slightly reduce the actual amount of tax.
For a company with income less than 4.8 billion and Bukan PKP status, when transferring money from a company with PKP status, 2% of the transfer amount will be withheld, as well as if you provide services. Companies with foreign capital or companies owned by a foreign person also have their own tax peculiarities.
- Personal income tax in Indonesia
All Indonesian residents, including those holding a Temporary Residence Permit (KITAS) and receiving salaries, are responsible for income tax reporting. Lack of tax reporting in Indonesia can lead to deportation or prosecution and imprisonment of foreigners.
What you need to do to avoid problems with the local tax office? As a resident taxpayer, you must submit an annual return (SPT) to the tax office. It states:
- The income you earn
- Income tax calculation
- Liabilities / arrears
- Family member list
You must provide complete, clear and accurate information without trying to gloss over the facts.
With a valid temporary residence permit (KITAS) or tax identification number (Nomor Pokok Wajib Pajak – NPWP), the tax office will register you no later than 3 months after the end of the tax year. Aliens who are tax residents must have an NPWP. If there is none, then this fact is equated with illegal stay in Indonesia.
A tax resident is a person who permanently resides in the country or stays in the territory of Indonesia for more than 183 days during the year, or during the financial year and has plans to reside in the country.
Please note that 20% tax applies to non-resident income earned from Indonesia. For example, dividends for stakeholders will be taxed even if they don’t have an NPWP yet. Or a foreigner who owns shares in an Indonesian company intends to sell his shares, the proceeds from the sale of these shares are taxed 20%.
All foreigners holding KITAS in Indonesia are considered residents. If you are a commission agent – living in the country but receiving neither salary nor dividends – you do not need to pay taxes.
Specific tax rates are determined by local governments and may vary in different regions of the country.
If the income was received as a salary, the burden of calculating, retaining and reporting it falls on the employer. This tax rate also applies to foreigners who are Indonesian residents. As already mentioned, residency means staying in the country for 183 days or more in 12 months.
Filing tax returns for residents is mandatory in most cases. Total income includes not only wages, but also lottery winnings, various fees, income from the sale or lease of property. If the tax resident does not have a TIN (NPWP), the income tax rate increases by 20%.
For low-income strata of the population (income up to 24 million rupees), full exemption from the tax burden is provided.
- Personal income tax for expatriate workers
Expat workers need to be aware that personal income tax (PIT) in Indonesia is calculated using a self-assessment scheme.
The country has a worldwide income tax system, which means that persons deemed to be tax residents of Indonesia pay tax to the government on income earned in Indonesia, as well as on income received from abroad, unless there is an applicable double taxation treaty.
Non-resident taxpayers will only be required to pay personal income tax on income they receive in Indonesia, unless the country in which they are tax residents has an applicable tax treaty with Indonesia. In these cases, the taxpayer may not pay taxes in Indonesia or pay a reduced amount.
Who is eligible to pay personal income tax in Indonesia?
Foreign workers that are designated as tax residents in Indonesia must pay PIT. The key criteria to determine whether or not an individual must be considered as an Indonesian tax resident isn’t nationality, but rather the length of stay (or intended stay).
A foreign individual is considered a tax resident of Indonesia when they meet the following conditions:
- In-country for more than 183 days during a 12-month period in Indonesia (anyone who has spent that length of time in the country, regardless of the type of visa they are using to visit the country, will be considered as a tax resident in Indonesia);
- Intends to reside in the country for more than 183 days even if they have spent less than 183 days in the country (for instance, in cases where the individual’s dependents have moved to Indonesia and it was clear they are staying in the country for a reasonable length of time); and
- Individuals who work abroad for more than 183 days within a 12-month period, but are still earning any form of income in Indonesia, must pay PIT on the Indonesian income.
Individuals that work overseas for more than 183 days within a 12-month period and do not earn any income in Indonesia are not eligible to pay Indonesian PIT.
Notably, an expatriate will be considered a tax resident in Indonesia until the date of their final departure from the country.
Individuals exempted from personal income tax
Some foreign expatriates, due to their special legal status, are not considered tax residents in Indonesia and are exempt from personal income tax, even if they stay more than 183 days a year or reside and intend to stay in Indonesia.
These exclusions apply to:
- Foreign diplomatic and consular personnel;
- Military and civil servants of foreign military forces; and
- Representatives of international organizations designated by the Minister of Finance.
Taxable income in Indonesia
According to the Personal Income Tax Law, income should be defined as an increase in economic potential. It can include, among others, income from employment and income from personal investments.
According to Article 4 of Chapter 3 of the Law, income includes:
- Labor income;
- Income from engaging in an independent profession or business;
- Passive income (dividends, royalties, interest, insurance income);
- Capital gains (from the sale or transfer of property); and
- Rent and other income from the use of property
When leaving Indonesia
Expatriates leaving Indonesia are strongly advised to permanently cancel their tax registration in order to avoid misunderstandings and thus avoid permanent tax resident status in Indonesia.
To do this, foreigners must apply to the local tax office, which will then conduct a tax audit of the taxpayer’s declarations and supporting documents before issuing a deregistration permit.
The individual must ensure the availability of all tax documents pending a tax audit (including bank statements, payroll receipts, foreign tax documents, if applicable, employment contracts, etc.).
- Corporate tax in Indonesia
Both corporate and individual taxes in Indonesia are calculated on a progressive scale, depending on the amount of income.
Value added tax is charged according to a scheme similar to the Russian one, and you don’t have to pay real estate tax at all. We have talked about this type of tax above but now about everything in order.
For enterprises with foreign participation, the principle of self-taxation applies.
In other words, information on income and tax calculation is obtained from the submitted returns and is considered correct if it has not been challenged within five years.
All registered companies are required to pay VAT. Payments are made monthly, and their amount is determined on the basis of reports for the previous year. If the company’s turnover is less than 4.8 billion rupees (22,080,000 rubles), then the tax rate will be 1% on turnover. In this case, VAT is not paid.
When the company’s turnover exceeds the indicated amount, but does not reach 50 billion rupees (230 million rubles), the rate increases to 12% (on taxable profit), and it also becomes necessary to pay VAT at a rate of 10%.
If the turnover goes over 50 billion, then you will have to share 25% of the profit with the state, while VAT has not been canceled either.
The key point in taxation is obtaining an individual number, an analogue of the domestic TIN. In Indonesia, it is called Nomor Pokok
Wajib Pajak (NPWP). Obtaining this number is very economically justified, since without it the tax rate increases by 40%.
A company that ceases to operate in Indonesia is subject to a mandatory deregistration procedure. This process often involves a tax audit.
- Value Added Tax (VAT) in Indonesia
The normal VAT rate in Indonesia is 10%. In some cases, it increases or decreases, varying within 5-15%.
In the case of exports, the VAT rate is reduced to 0% (we are talking about both goods and services). Some socially important goods and services are also not subject to VAT; their list is established by government orders. For imported goods, VAT is calculated based on the declared value, taking into account customs duties.
As mentioned earlier, when using the simplified taxation system (1% of turnover), the company is exempt from VAT.
Luxury goods sales tax
In addition to VAT, Indonesia has a so-called Luxury Sales Tax (LGST), a tax introduced during the Suharto era to create a more just society.
This tax implies that the supply or import of certain taxable industrial goods, such as luxury cars, apartments and houses, is subject to an additional tax. LGST rates are currently set in the range of 10-125 percent (the law allows a maximum LGST rate of 200 percent).
Customs and excise
Although Indonesian legislation allows import duties ranging from 0 to 150 percent (of the customs value of imported goods, the highest currently set is 40 percent.
Due to the globalization of the economy, Indonesia has signed a number of free trade agreements, an effective waiver or significant reductions in import duty rates.
However, as part of protectionist strategies, the government continues to impose high rates on certain goods, and there are also anti-dumping import duty rates applicable to certain goods from certain countries.
Free Trade Zones in Indonesia
The Indonesian government has established free trade zones and free ports on the islands of Batam, Bintan and Karimun, which allows companies to not require VAT registration.
In addition, imports of goods and services subject to taxation in the Free Trade Zone are exempt from VAT and / or tax on the sale of luxury goods.
VAT liability:
In Indonesia, you may not be subject to VAT if you would like your income to come primarily from other Indonesian companies.
A voluntary VAT obligation obliges you to collect VAT on your goods and services, but it also entitles you to a refund of the VAT you charge others.
Resolution of the Ministry of Finance No. 197 / PMK.03 / 2013 dated December 20 from January 1, 2014 provides that a VAT liability is required if the annual income exceeds 4.8 billion rupees (~ 360,000 US dollars), previously 600 million rupees (~ $ 45,000).
Income earned by an individual with a salary in Indonesia is subject to income tax. Non-residents are subject to a 20% withholding tax on income earned in Indonesia.
- Other taxes
Foreign companies, as well as foreigners acting as tax residents in Indonesia, do not pay taxes on real estate and land plots, since they are prohibited by law from becoming the owners of such objects.
Indonesia also has a tax on rent, dividends, transfer of ownership, and a number of stamp duties paid for the preparation of certain legal documents.
In addition, depending on the decisions of the municipal government, Indonesians pay taxes on entertainment, cars, hotels, street lighting, and the use of surface and ground water. A detailed description of these taxes is beyond the scope of our small overview.
Particular qualities of the application of tax legislation
In Indonesia, control over the taxation of organizations (in particular – with foreign capital) is stricter than on contributions from individuals.
The share of the tax burden distributed to citizens is significantly less than in other developing economies. Developing this direction, the government is increasing the staff of regulatory bodies, as well as introducing measures such as a temporary tax amnesty for citizens.
The corporate tax control system is much more efficient. It provides for the verification of cross-border cash transactions, as well as some financial transactions within the country.
Dummy legal entities through which trade operations with foreign companies are carried out are identified.
When analyzing the financial activity of an enterprise, overhead costs, rates on internal loans, and the costs of management and technical services are taken into account.
When large financial assets pass from hand to hand, the presence of family ties and other criteria for affiliation are checked.
Avoiding double taxation
Only Russia and Indonesia have signed an agreement to avoid double taxation.
It was signed in 1999 and is still in effect. The agreement applies to corporate tax, as well as to personal income tax.
Following the logic of the agreement, each income should be considered as a tax base in only one of the jurisdictions. The agreement is intended both to protect the interests of taxpayers and to prevent companies or individuals involved in international trade from leaving taxation.
Double taxation protection measures do not work “automatically” and do not relieve taxpayers of their reporting obligations. They are usually applied as a tax deduction provided by one of the countries.
Tax incentives
Indonesia offers a variety of tax incentive and incentive schemes for businesses, including tax holidays, incentives for inbound investments, reinvestment of branch profits, tax cuts for state-owned companies, and tax-neutral mergers.
An example of one is the 50 percent discount on the corporate tax rate for small businesses with an annual turnover of less than IDR 50 billion (roughly $ 5 million). To be eligible for these benefits, businesses need to meet certain requirements. For more information, contact your tax advisor.
- Tax Administration
Tax liabilities for a certain period or year must be paid to the State Treasury through a designated taxpayer bank and then recorded with the Indonesian tax office by filing the relevant tax returns. Tax payments and tax filing for a specific tax must be made monthly or annually, or both (depending on the tax liability), and can also be done electronically.
Corporate tax returns must be filed by the end of the fourth month after the end of the fiscal year, and tax payments must be completed prior to filing. The deadline for filing a tax return can be extended up to two months by written notice and a preliminary tax estimate submitted before the deadline in the DGT.
Corporate tax can also be paid on a prepaid basis based on obligations from the previous tax year.
This includes monthly payments that must be made by the 10th or 15th of each month, and tax returns are due by the 20th of the following month.
In comparison, VAT is a monthly obligation with a tax return deadline before the end of the next month and tax payments required before that date.
Late payment of the above taxes entails a penalty of two percent per month (in this case, even part of a month, for example, one day, is considered a full month), but not more than 48 percent.
Late filing or failure to submit a tax return will result in an administrative fine ranging from IDR 500,000 (US $ 50) to IDR 1 million (approximately US $ 100).
Tax calculation
Taxable business profits are calculated using ordinary accounting principles, subject to certain tax adjustments.
Generally, a deduction is allowed for all expenses incurred in obtaining, collecting and maintaining taxable business profits. A time difference may arise if an expense that is recognized as an accounting expense cannot be immediately claimed as a tax deduction.
Tax losses
Losses can be carried forward for a maximum of five years. No carry forward is allowed, and tax consolidation and group benefits are not available.
Conclusion
The situation with expat taxes could change in Indonesia and beyond in the coming years, as governments need more money in a post-covid world.
There might especially be changes for digital nomads, or location independent individuals, living in Bali and Indonesia more generally.
Right now, however, Indonesia is not a particularly tax-inefficient place for expats to live.
