Law number 6 of 1983 (Law No. 6/1983) which was last amended by Law No. 16/2009 on General Tax Provisions and Procedures regulates that the Indonesian tax system is based on residency.
Both natural persons and legal entities that satisfies certain criteria must register for an Initial Taxpayer Number or Nomor Pokok Wajib Pajak (NPWP) which further grants them with certain taxation rights and obligation.
Indonesia has several taxes, namely:
- Income tax (pajak penghasilan)
- Value added Tax/VAT (Pajak pertambahan nilai or PPN)
- Luxury Good Sales Tax (Pajak Penjualan atas Barang Mewah or PPn BM)
- Land and Building Tax (Pajak Bumi dan Bangunan or PBB)
- Regional taxes and retribution (Pajak dan Retribusi Daerah).
Indonesian residents shall be taxed on their worldwide income while non-Indonesian residents are only taxed on their income source from Indonesia. An Indonesian Limited Liability company, regardless of its investment status, is treated as a resident of Indonesia for tax purposes. A foreign legal entity carrying out business activities using the permanent establishment (PE)/Badan Usaha Tetap (BUT) framework in Indonesia will generally have the same tax obligations as a resident taxpayer.
Tax Rates
Taxable business profits are calculated on the basis of normal accounting principles modified by certain tax adjustments. A flat rate of 22% is generally applicable for the 2021 fiscal year. Starting on fiscal year 2022 however, a flat rate of 20% will apply. Limited Liability Companies of which 40% of their shares are traded in the Indonesian stock exchange that satisfy other conditions are entitled to get a 3% lower tax rate than normal.
Small enterprises with an annual turnover of not more than Rp 50 billion are entitled to a 50% discount of the standard tax rate which is imposed proportionally on taxable income of the part of gross turnover up to Rp 4.8 billion (around US$331,623). Enterprises with a gross turnover of not more than Rp 4.8 billion are subject to a Final Tax at 0.5% of turnover.
Capital Gain Tax
Capital gain tax also applies on corporate taxation under a progressive rate of between 5% and 25%, which varies on the tax object, capital gain source, and business activity.
Most expenses incurred in deriving business income may be deducted. These include wages, fees, interest, rent, royalties, travel expenses, bad debts, insurance premiums, administration costs and levies, depreciation and amortization, operating losses and contributions, and approved pension funds. Non-deductible items include the payment of dividends, unapproved reserves, fringe benefits, charitable contributions and the income tax itself.
Based on the Government Regulation No. 36/2008, losses can only be compensated for five years, although it may be extended to 10 years under certain terms and conditions. Investments in certain sectors and regions may get a tax facility of 30% deduction of the invested amount from the taxable profit over a period of six years of 5% for each year. Exempt from this regulation are investments located in Integrated Economic Development Zones (KAPET), of which their tax facilities fall under Government Regulation No. 147/2000.
As mentioned above, the periodic payment of tax liabilities to the State Treasury must be made through a designated tax-payment bank (bank persepsi), and relevant tax returns must be filed through a tax office. Depending on the tax obligation, the payments and tax returns filing for a particular tax must be undertaken monthly and/or annually. These payments and filing obligations can also be conducted electronically.
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