Elements Of Taxes Applicable In Indonesia

Tally Solutions | Updated on: May 13, 2022

• What are the taxes in Indonesia?
• Carbon tax Indonesia
• Corporate income tax
• Individual income tax
• Withholding tax and final tax
• Value Added Tax
• Transfer pricing
• What are the tax elements?
• How do taxes work in Indonesia?

For any business operating in Indonesia, it is essential to understand the Indonesia tax structure. Understanding the taxation system in Indonesia helps in understanding tax liabilities and stay compliant. The taxes can be classified as the state taxes and local taxes and applies to individuals as well as companies.

What are the taxes in Indonesia?

Indonesia has state taxes and local taxes. The state taxes include corporate, individual, and withholding income tax, Value Added Tax (VAT), customs tax, and stamp duties. The local taxes apply to vehicles, real estate, leisure, and promotional activities.

Carbon tax Indonesia

Indonesia is doing its part in fighting climate change by reducing its carbon emissions and has pledged to reduce its carbon emissions to 41% by 2030 to the United Nations Framework Convention on Climate Change (UNFCCC) as well as the Paris Agreement. From April 2022, a carbon tax will be implemented in an attempt to reduce greenhouse gas emissions. This tax will be applicable to all the carbon emissions that could harm the environment and will be at a rate of IDR 75 per kilogram of CO2e as specified under Indonesia’s Tax Bill (Article 44G).

The carbon tax will be levied on:

• Individuals or companies purchasing carbon-containing items and/or engaged in carbon-emitting activities
• Any commodities or actions causing environmental externalities such as pollution, depletion of natural resources, or harm to the environment
• The carbon-containing goods that include, but are not limited to, carbon-emitting fossil fuels
• Activities in the sectors of agriculture, energy and transportation, forestry and peatlands, industrial, and waste treatment sectors that emit carbon

Corporate income tax

There are two types of corporate income taxes in Indonesia; resident and non-resident. So, the location of your business establishment determines which Indonesia tax applies to your company. A company that is incorporated and doing business within Indonesia is taxed as a resident company. A foreign company with a permanent establishment (PE) in Indonesia is also taxed as a resident company. But a company that is incorporated outside Indonesia but generating revenue from the country is taxed as a non-resident company. Resident companies in high-priority sectors get tax relief from the government. The general tax rate is 25%, and if special conditions are fulfilled this may be reduced by 5%. A small business with a gross turnover of less than IDR 50 billion attracts only 50% off the standard tax rate.

Individual income tax

Following cases are eligible for individual tax:

• A person who lives in Indonesia;
• A person who is in Indonesia for more than 183 days within 12 months;
• A person in Indonesia during a fiscal year and intends to reside in Indonesia.

Non-resident individuals are taxed at 20% withholding tax on Indonesia-sourced income. Almost all the income earned by individual taxpayers in Indonesia is subject to income tax unless modified by a tax treaty.

Withholding tax and final tax

Much of the income tax is withheld by the employer from the payout to the employees. The tax is withheld at a rate based on the individual's residence status.

Value Added Tax

The transfer of taxable goods and services attracts value-added taxes. Some of the taxable events and services delivered by an enterprise are:

• Delivery of taxable goods
• Import of taxable goods
• Deliveries of taxable services
• Use or consumption of taxable intangible goods/services originating from outside the country
• Export of taxable goods (tangible and intangible) or services

The VAT rate is usually 10% in Indonesia, but the exact rate varies according to government regulation. The VAT on exporting certain taxable tangible and intangible goods and export of services is fixed at 0% with certain limitations and conditions.

Transfer pricing

The Income Tax Law of 2008 sets out the rules for transfer pricing. Indonesia uses the principle of arm’s length for transfer pricing. This means that the profits are taxable based on the location of the economic activity. Transfer pricing is tracked as the relationship between related companies could suppress the actual profits to evade taxes. There are three tiers for the transfer pricing documentation, namely, master file, local file, and country-by-country reports (CbC). Transfer pricing is applicable when there are transactions between group companies, subsidiaries, or any other parties that are considered to be related under the rules.

Individuals are said to have a special relationship if:

• The taxpayer has direct or indirect ownership or capital participation of at least 25 percent of another taxpayer
• There is a relationship between the taxpayers through ownership of at least 25 percent of two or more taxpayers
• There is a family relationship through marriage or blood
• The taxpayer participates in management or technology even without ownership.

The transfer pricing methods for tangible or intangible transactions are:

• Comparable uncontrolled price (CUP) method
• Cost-plus method
• Resale price method
• Profit split method
• Transactional Net Margin Method (TNMM).

The CUP method is preferred by Indonesia’s Directorate General of Taxes (DGT)and when it is not applicable, the TNMM method is used.

What are the tax elements?

It is essential to maintain the accounting records in accordance with the prevailing accounting standards to calculate taxes correctly. Proper account maintenance also helps in easy and quicker Indonesia tax audits. The many different tax elements have to be calculated individually and filed separately for each filing period. A tax audit, if necessary, will be for each specific filing. The most common taxation elements are; Carbon tax, corporate income tax, individual income tax, withholding tax and final tax, Value Added Tax and luxury tax.

How do taxes work in Indonesia?

Taxpayers in Indonesia self-assess their taxes. They are responsible for calculating, paying, and reporting their tax liabilities, complying with the laws and regulations. Tax assessments are for each specific tax and each specific period. They usually cover the tax amount due, tax credits if any, the balance due, and penalties if any. The DGT may audit the tax to verify if the self-assessment is correct. This audit can be for one tax or all the taxes.  Tax refund requests usually trigger a tax audit. If there is a request for documents, they should be submitted in a month’s time. The tax auditors send the taxpayer a notification after the audit. If there are any corrections the taxpayer can present them with supporting documents.

Using software such as TallyPrime helps companies maintain accounting records  as per the accounting standards of Indonesia. Self-assessment and filing of returns are quick with the automated generation of all the relevant reports and information. Tax audits are easier when all the information is easy to access on TallyPrime.

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