9 March, 2021
Earlier in 2020, Law Number 11 of 2020 on Job Creations, which is well known as the Omnibus Law, reformed a lot of prevailing laws and regulations in Indonesia, including taxation regulations. The taxation regulations that are affected by the issuance of the Omnibus Law are among other regulations relating to taxation general provisions of law, Income Tax Law, and Value Added Tax (VAT) law.
Now, four months after the issuance of the Omnibus Law, the government has issued new implementing regulations to promote a smooth transition of the previous laws and regulations to Omnibus Law. This publication will focus on the taxation part of the Omnibus Law, to serve as an update of the previous publication, i.e., Update Of Tax Aspects Of Electronic Trading System And Tax Provisions In Omnibus Law, specifically on (a) Income Tax Law, and (b) VAT Law. Thus, this publication will discuss the update from the relevant implementing regulations, Government Regulation Number 9 of 2021 on Tax Treatments to Support Ease of Doing Business (PP 9) and Minister of Finance Regulation Number 18/PMK.03/2021 on the Implementation of Omnibus Law in the Field of Income Tax, Value Added Tax and Tax on Sale of Luxury Goods, as well as General Provisions and Tax Guidelines (PMK 18).
INCOME TAX LAW
1. Redefinition of Individual Tax Subject
The Omnibus Law uses the concept of territorial for the imposition of income taxes. Foreign individuals can be categorized as domestic taxpayers if they:
a. Reside in Indonesia;
Based on PMK 18, a person will be deemed as residing in Indonesia if he/she (i) stays in a place in Indonesia that can be possessed/used at all times, owned/leased/available for use, and is not used for a stopover place only, (ii) has main center activities (private, social, economy and/or finance) in Indonesia, or (iii) conducts usual activities or habits in Indonesia
b. Are present in Indonesia for more than 183 days in 12 months; or
The 183 days will be calculated from the present days of such person in Indonesia within 12 months, either continuous or discontinuous
c. Are present in Indonesia in a fiscal year and have an intention to reside in Indonesia
Intention to reside in Indonesia, according to PMK 18, must be proven by the existence of (i) permanent residence or KITAP, (ii) limited stay visa (VITAS/ITAS) with a validity of more than 183 days accompanied by employment agreement/business agreement/activities in Indonesia for more than 183 days, (iii) other documents (e.g., lease agreement for more than 183 days or transfer document of family members.
For the foreign individuals who have become domestic taxpayers, the Omnibus Law regulates that the taxable incomes of these individuals are only the incomes generated in Indonesia (this also includes incomes that generated from their activities in Indonesia but paid overseas). This will be applied under the following conditions:
● these individuals are (a) expatriates who occupy the post of certain positions (as listed in Attachment 2 of the PMK 18 – among others: chemists, biologist, lecturers, product designers, system analysts, software developers, mining supervisors), and (b) foreign researchers;
● these individuals fulfill the following criteria (i) they are foreign citizens, (ii) have expertise in science, technologies and/or mathematics – which must be evidenced by a certificate of expertise, diploma, and/or minimum of five years of work experience, (iii) they are obliged to conduct a transfer of knowledge;
● this exemption applies for four fiscal years as these individuals become a domestic taxpayer; and
● these individuals do not utilize the benefits given under the tax treaty on the Avoidance of Double Taxation.
To be eligible as a domestic taxpayer, the foreign individuals must apply to the Directorate General of Taxation (DGT). The DGT will respond to the application within 10 business days as of the receipt of the complete application. Foreign individuals who meet the requirement and have become domestic taxpayers before the issuance of PMK 18 can also apply for the application of domestic (Indonesian) taxable income only as long as they have not become domestic taxpayers for four fiscal years. Specific for these foreign individuals, the effective period of the domestic (Indonesian) taxable income application will start from the effective date of the Omnibus Law.
On the other hand, an Indonesian taxpayer who has fulfilled the following tie breaker rule requirements:
● resides in foreign countries and no longer lives in Indonesia; or
● conducts his/her main activities (e.g. families and source of income located abroad, and becoming member of offshore organization) in outside Indonesia only in the event the above point cannot be satisfied; or
● has place to do his/her activities or habitual abode only in offshore jurisdiction in the events two points above cannot be satisfied;
then he/she who is already a resident taxpayer in other jurisdiction can apply to be categorized as non-resident taxpayers through a system provided by the DGT or a written application. The DGT will respond to the application within 30 days as of the receipt of the complete application.
The compliance of the above tie breaker rule is to avoid that (i) the taxpayer has dual tax resident status at the same time of fiscal year / period; and (ii) the taxpayer has no tax resident anywhere.
2. Non-taxable Dividend
The Omnibus Law opens an opportunity for incomes earned by local taxpayers to be non-taxable, subject to fulfillment of certain criteria. The exempted incomes are:
a. Onshore dividend
For individual taxpayers to enjoy the exemption, the onshore dividend must be re-invested in Indonesia for at least three tax years. If the taxpayers only re-invest some portion of the dividend, they will only get the exemption for the re-invested portion – the not re-invested dividend will still be taxable. On the other hand, for corporate (entity) taxpayers the exemption is automatically applied – there is no additional requirement.
b. Offshore dividend
The offshore dividend is divided into (i) stock exchange dividend, and (ii) non-stock exchange dividend. For stock exchange dividends, the amount of the dividend being re-invested in Indonesia for a minimum period of three tax years will be exempted from income tax. The amount that is not re-invested in Indonesia will still be taxable.
For non-stock exchange dividends, there are additional requirements that (a) the invested amount should be at least 30% of the profit after-tax, (b) the dividend must be re-invested before the DGT issues a tax statement to the taxpayer, and (c) the dividend arises from profit after-tax from the tax year of 2020 that is obtained or received after 2 November 2020. If the dividend is re-invested after the taxpayer receives the tax statement from the DGT, the dividend cannot be exempted. The PMK 18 also provides a guideline for the calculation of the taxable amount if the taxpayer re-invests less or more than 30% of the profit after-tax amount. Once the taxpayer re-invests less than 30%, the following scenario will be applied:
i. the re-invested dividend will be exempted from the income tax,
ii. the difference of 30% of the profit after-tax amount and the re-invested dividend will be subject to article 17 of the Income Tax Law,
iii. the remaining profit after-tax deducted by the re-invested dividend and the difference as referred to in point ii. above will not be taxable.
Meanwhile, if the re-invested amount is more than 30%, the following scenario will be applied:
i. the re-invested dividend will be exempted from the income tax,
ii. the remaining profit after-tax deducted by the re-invested dividend will not be subject to the income tax.
c. Offshore after-tax income of a permanent establishment
The offshore after-tax income of a permanent establishment will be exempted from the income tax if at least 30% of the profit after-tax amount is re-invested in Indonesia for the minimum period of three tax years. The same scenarios as offshore dividends will be applied if the taxpayers re-invest less or more than 30% of the profit after-tax amount.
d. Offshore income not from a permanent establishment
PP 9 and PMK 18 define the onshore income not from a permanent establishment (Offshore Income) as income generated from active business offshore but not from offshore subsidiaries of the taxpayer. This Offshore Income will be exempted from the income tax if it is re-invested in Indonesia for the minimum period of three tax years. If the taxpayer does not re-invest all of the amounts from the Offshore Income, the difference of the total income and the re-invested amount will be subject to article 17 of the Income Tax Law.
Other important things to note from the perspective of taxpayers:
● What are dividends – PP 9 and PMK 18 describe dividends as dividends that are distributed by a general meeting of shareholders or interim dividends.
● Permitted type of re-investment – Article 34 of the PMK 18 list the permitted type of re-investment for this purpose of income tax exemption, among others: Indonesia’s State securities (SBN RI), traded bonds supervised by the OJK, infrastructure investment, real sector investment based on the prioritized list by the government, direct capital participation in Indonesian companies, and financing for Indonesian micro and small enterprises.
● Lock-up period – PMK 18 stipulates that the re-investment must be held for a minimum of three tax years and it cannot be transferred unless it is transferred to other permitted types of re-investment according to the regulations.
● Reporting requirements – the taxpayers who obtain this exemption (except for corporate (entity) taxpayers who obtain an automatic exemption for their onshore dividend) are obliged to submit a periodic report on investment realization electronically or through other means as regulated by the DGT.
● Retroactive effect – PMK 18 regulates that taxpayers can request for refund of overpayment for a qualified exempted onshore dividend that has been withheld for income tax.
● Adjustment on minimum re-invested amount – PMK 18 provides the opportunity for the government to adjust the minimum re-invested amount.
3. Adjustment on Interest Tax Tariff
The Omnibus Law regulates that government may reduce the interest tax tariff for the domestic interest from loan repayment guarantee received by foreign taxpayers, which currently is at the rate of 20%. In line with this, the newly issued PP 9 reduces the interest rate to 10%, or in line with the tax treaty’s rate, for bond interests received by non-permanent establishment foreign tax subjects. The bond interests include (i) interest on bonds with coupons that is equal to the gross amount of the interest under the bond’s term of ownership, (ii) discount on bonds with coupons that is equal to the difference between the selling price or nominal value above the cost of the bonds, excluding the current interest, and (iii) discount of the interest-free bonds that is equal to the difference between the selling price or the nominal value above the bond acquisition price. The reduced tariff will be effective within six months as of the effective date of the PP 9, i.e., on 3 August 2021.
PP 9 regulates that the withholding of the interest tax should be conducted by (i) bond issuers or custodians as the appointed payment agent, and/or (ii) securities companies, dealers, or banks as the intermediary sellers and/or buyers
VAT LAW
1. Relaxation on the Credit of Input Tax
The Omnibus Law (as further elaborated in PMK 18) provides relaxation on the credit of Input Tax by regulating that Input Tax (i) obtained before the entrepreneur is declared as a taxable entrepreneur – will be credited by using the guidelines for crediting input tax in the amount of 80% of the output tax to be collected by the taxable entrepreneur, and (ii) input tax which was not reported but being notified and/or found during the audit – can only be credited as long as the result of the audit has not been notified to the taxable entrepreneur. According to the previous regulations, these kinds of input taxes could not be credited, but they can be credited now, after the issuance of the Omnibus Law. The purpose of this relaxation is to boost voluntary compliance by the taxpayers.
2. Exclusion of inkind contribution
The Omnibus Law excludes a transfer of Taxable Goods in the framework of mergers, consolidations, expansions, spin-offs, and acquisitions, and transfer of Taxable Goods for capital injection in place of shares, which are conducted by Taxable Entrepreneurs from the definition of delivery of Taxable Goods. PP 9 further clarifies that capital participation in the form of goods (or also known as inbreng) is part of capital injection in place of shares, as stipulated in the Omnibus Law.
AMENDMENT ON SANCTION TARIFF
Before the issuance of Omnibus Law, administrative sanctions are generally fixed at the rate of 2% per month. After the issuance of the Omnibus Law, this tariff is changed to a floating rate, referring to the rate to be determined by the Minister of Finance. The Minister of Finance explains that the purpose of this change is to promote fairness – so that the tariff will reflect the actual situation not fixed at a certain rate. In addition, the Omnibus Law also provides easement on the imposition of administrative sanction as a result of audit for VAT and luxury goods tax. Before the issuance of the Omnibus Law, a taxable entrepreneur can be imposed with administrative sanctions in the form of both interest and increase. After the issuance of the Omnibus Law, the taxable entrepreneur can only be imposed with either interest or increase administrative sanction, whichever is the higher.
Below is a summary of the difference in the regulations of administrative sanctions pre and post-Omnibus Law:
|
|
Pre-Omnibus Law |
Post-Omnibus Law |
|
If the taxpayers voluntarily correct the tax return that results in higher tax debts |
2% |
Floating rate issued by the Minister of Finance (MoF) for the maximum period of 24 months
Note: The floating rate issued by the MoF will be calculated based on the benchmark interest rate plus 5% and divided by 12 effective on the date the calculation of the sanctions.
|
|
If the taxpayers voluntarily submit the tax return or correct the tax return during preliminary investigations but before notification to the prosecutors
|
150% of underpayment |
100% of underpayment |
|
If the taxpayers voluntarily disclose improper filing of the tax return during an investigation by the directorate general of taxation but before the issuance of a notice of tax assessment |
An increase of 50% |
Based on the benchmark interest rate plus 10% and divided by 12 effective on the date the calculation of the sanctions |
MISCELLANEOUS
In addition to the regulations as described above, PP 9 and PMK 18 also regulate other things, among others: exclusion of deposit fund for Fee of Administering Hajj (Biaya Penyelenggaraan Ibadah Haji) and the income earned from developing the fund and excess fund received/earned by registered social institutions and religious institutions from taxable income objects, procedures for crediting input tax, electronic tax invoice, guidelines for granting of interests, guidelines for preliminary evidence investigation, guidelines for the fulfillment of tax obligations electronically.
For further information, please contact:
Freddy Karyadi, Partner, ABNR
+62 818 103 949
fkaryadi@abnrlaw.com
Anastasia Irawati, Senior Associate, ABNR
airawati@abnrlaw.com
