13 July 2021
Following the issuance of the Macroeconomic Framework and the Main Points of Fiscal Policy for the 2022 Financial Year by the Ministry of Finance, one of the main objectives of the government is to expand the tax basis to (i) balance the incentives given by the government and (ii) fund the State Budget. Therefore, it is expected that new regulations will be issued from 2021 to 2022 to back up this objective.
Recently, the government has shared a draft of Law which will amend among others the general provisions and taxation procedures, Income Tax Law, and VAT Law. This publication will discuss (a) the proposed further amendment to the Value Added Tax (VAT) and Income Tax Laws in Indonesia, and (b) recent update on tax regulations in Indonesia.
VAT Law
There are two highlights of the proposed amendments to the VAT Law in the draft, i.e., (a) amendment to VAT tariff and (b) expansion on the VAT’s object.
Tariff
The draft proposed to increase the VAT tariff to 12% while the current VAT tariff is 10%. Nevertheless, the draft provides room for the government to adjust the tariff to be as low as 5% or as high as 15%. Further changes to the VAT tariff will be imposed by the government by issuing a government regulation.
In addition to the regular tariff, the draft also regulates that the government can impose different VAT tariffs for specific objects. The tariff for these specific objects can be as low as 5% or as high as 25%. Government regulation will be issued to provide further regulation on the imposition of VAT tariffs for these specific objects.
VAT’s Object
The draft deleted some VAT objects that previously were exempted from VAT obligations. By this deletion, it can be assumed that these objects will subject to VAT obligations upon the issuance of the draft as a law. The deleted objects are among others:
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goods resulted from mining or drilling activities,
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essential goods,
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medical services,
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social services,
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mail services with postage,
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financial services,
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insurance services,
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educational services,
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broadcasting services (without advertisement purposes),
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transportation services,
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employment services,
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public telephone services, and
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money transfer services by postal money order.
Income Tax Law
The highlight of the proposed amendment to the Income Tax Law in the draft is the implementation of another tax amnesty program by the government. The Indonesian government recently implemented a tax amnesty program in 2016. It was reported that the government earned approximately IDR 130 trillion (approx. USD 8.9 billion) from this program. Following the success of the tax amnesty program in 2016, it seems that the government would like to implement another tax amnesty program in Indonesia for additional State income.
The concept of the tax amnesty that is regulated in the draft is similar to the previous tax amnesty program in 2016, in which the taxpayer can voluntarily report their unreported net assets to the government. Following this disclosure, the government will treat the unreported net assets as income that will be imposed with the final tax income tariff.
The government differentiates the tariff for the unreported net assets obtained during (i) 1 January 1985 – 31 December 2015, and (ii) 1 January 2016 – 31 December 2019. For the net assets obtained during the period of 1 January 1985 – 31 December 2015, the final tax income tariff will be (a) 15% or (b) 12.5%, if invested in the designated securities. On the other hand, for the assets obtained during the period of 1 January 2016 – 31 December 2019, the final tax income tariff will be (a) 30% or (b) 20%, if invested in the designated securities. To enjoy the lower tariff by investing in the designated securities, the taxpayers must invest the net assets in the designated securities by the government by 31 March 2022 at the latest. The minimum length of investment is five years.
If the taxpayers enjoy the lower tariff but do not invest the assets in the designated securities by the stipulated deadline, an additional final tax income tariff will be imposed on the not-invested portion. The additional tariff is:
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For the net assets obtained during the period of 1 January 1985 – 31 December 2015
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5%, if the directorate general of taxation has issued a tax underpayment assessment letter, or
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3.5%, if voluntarily reported by the taxpayers.
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For the net assets obtained during the period of 1 January 2016 – 31 December 2019
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15%, if the directorate general of taxation has issued a tax underpayment assessment letter, or
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12.5%, if voluntarily reported by the taxpayers.
Throughout 2020 and 2021, the government has provided many incentives to the undertakings in Indonesia to minimize losses and boost economic growth. Like two sides of a coin, these incentives caused the government to suffer losses on its income from taxes. Thus, in order to balance the deficit, the government tries to explore other aspects of taxation for additional income. We view the reform in VAT Law and the implementation of another tax amnesty as the government’s ways to balance the deficit incurred due to the incentives given during the Covid-19 situation.
Recent Update
The Minister of Finance recently issued Minister of Finance Regulation number 56/PMK.010/2021 on the Second Amendment to Minister of Finance Regulation number 52/PMK.010/2017 on the Use of Book Value for Transfer and Acquisition of Assets in the Framework of Merger, Consolidation, Spin-off, or Acquisition of Business (Reg 56). The amendments are among others:
1 – Reg 56 adds two new criteria for spin-off transactions that can use book value for the transfer and acquisition of assets, i.e.:
a. A spin-off that is carried out through the transfer of some of its assets and obligations to one or more domestic taxpayers without (i) establishing a new entity and (ii) liquidating the old entity – which is categorized as spin-off under the prevailing laws and regulations in VAT Law,
b. Series of actions to separate two or more domestic taxpayers by (i) transferring some portion of their assets and obligations and (ii) combining a separated entity into one legal entity without liquidating the old entity.
The taxpayers that can use the abovementioned criteria for using book value in their spin-off transactions are:
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Taxpayers who are State-owned enterprises who obtain additional capital participation from the State, as long as the spin-off is not conducted for establishing a holding company of the State-owned enterprises, or
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Corporate taxpayers who fulfill certain criteria and conduct the spin-off as part of a restructuring of the State-owned enterprises.
2 – Reg 56 expands the criteria for acquisition transaction that can use book value for the transfer and acquisition of assets by adding restructuring of State-owned enterprises as one of the criteria, provided that the restructuring fulfills the following requirement:
a. the ownership of the transferred shares (i) consists of more than 50% of the total issued and paid-up capital, or (ii) can decide (either directly or indirectly) management and/or policy of the transferred domestic taxpayers,
b. it must fulfill all the requirements for acquisition transaction as regulated in capital market laws, if the acquired taxpayers are a listed limited liability company,
c. the restructuring is carried out no later than early Tax Year of 2021,
d. the transfer of assets is not carried out by sale and purchase or exchange of assets, and
e. the restructuring and transfer of assets have obtained approval from the relevant minister.
3 – Reg 56 extends the deadline for registration with Financial Services Authority for taxpayers who carry out the spin-off (and (i) intends to conduct an initial public offering, or (ii) are listed companies provided that all spin-off entities conduct the initial public offering) to be two years as of obtaining approval from the directorate general of taxation to carry out spin-off transaction by using book value. The deadline was previously set at one year.
For further information, please contact:
Freddy Karyadi, Partner, ABNR
+62 818 103 949
fkaryadi@abnrlaw.com
Anastasia Irawati, Senior Associate, ABNR
airawati@abnrlaw.com
*Disclaimer: This publication is prepared based on the draft of the laws, which may need to be adjusted upon the enactment of the Law. The views and opinions expressed in this article are those of the authors and do not necessarily reflect and/or represent the views, opinions, or positions of Ali Budiardjo Nugroho Reksodiputro (ABNR) whatsoever.
