14 October, 2020
Discussions on the Indonesian tax reform has been ongoing for quite sometimes. Early this year, a draft of Law on the Taxation Provisions and Facilities for Strengthening the Economy, commonly known as the taxation omnibus bill has been circulated amongst the public. One of the most promising content on this draft is the incentives given by the government, including adjustment on the corporate income tax rate. Due to the Covid-19 pandemic, some regulations which were initially contained in the draft has been formalized as law due to the issuance of Law Number 2 of 2020 on the Stipulation of Government Regulation In Lieu of Law Number 1 of 2020 on State Financial and the Stability of the Financial System Policies for the Mitigation of Coronavirus Disease 2019 (Covid-19) Pandemic and/or to Deal with Threats that are Potentially Harmful to the National Economy and/or the Stability of the Financial System (Law 2). The issuance of Law 2 has formalized the regulations on (i) the decrease of corporate income tax rate to 22% for the financial year of 2020-2021, and 20% for the financial year of 2022; and further 3% reduction for qualified public companies; and (ii) imposition of value added tax in the utilization of intangible taxable goods and/or taxable services from outside of customs area in the custom area through electronic system trading.
As for the other regulations which have not been formalized by Law 2 yet, the government decided to merge this into the draft for Law on Job Creation (Undang-Undang Cipta Kerja), which is also known as the Omnibus Law. Based on the provided information, the government merged the content for the purpose of efficiency, because the content of the regulations in the taxation omnibus bill draft are in line with the spirit of Omnibus Law. The house of representatives has legalized the draft of Omnibus Law as a law on 5 October 2020. This draft still needs to be signed by the President to be promulgated. If the President does not provide his signature within 30 days, the draft of Omnibus Law will automatically be promulgated as Law.
The Omnibus Law affects the following taxation regulations: (1) Law No. 6 of 1983 concerning General Procedures and Provisions for Taxation, last amended by Law No. 16 of 2009 (Taxation General Provisions Law); (2) Law No. 7 of 1983 on Income Tax Law, last amended by Law No. 36 of 2008 (Income Tax Law); and (3) Law No. 8 of 1983 on Value Added Tax of Goods and Services and Sales Tax on Luxury Goods, last amended by Law No. 42 of 2009 (VAT Law).
This article highlights some of the key points of Law 2 and the Omnibus Law which may affect Investment in Indonesia from taxation law perspective.
Taxation on Electronic System Trading
The government has long been planning to issue an underlying regulation as a basis to tax the trading of goods and services via online platform. This was finally realized by the issuance of Law 2. In addition to Law 2, the government has also issued implementing regulations for this, among others: (i) Minister of Finance Regulation Number 48/PMK.03/2020 of 2020 on Procedures for Appointment of Collectors, Collection and Deposit, and Reporting of Value Added Tax in the Utilization of Intangible Taxable Goods and/or Taxable Services from Outside of Customs Area in the Customs Area through Electronic System Trading (PMK 48), which comes into force as of 1 July 2020; (ii) Directorate General of Taxation Regulation Number PER-12/PJ/2020 of 2020 on Certain Criteria of Collector and Appointment of Collector, the Collection, Deposit and Report of VAT in the Utilization of Intangible Taxable Goods and/or Taxable Services from Outside of Customs Area in the Customs Area through Electronic System Trading (PER 12); and (iii) Circular Letter of Directorate General of Taxation Number SE-44/PJ/2020 of 2020 on Guidelines on the Implementation and Appointment of VAT Collector for the Utilization of Intangible Taxable Goods and/or Taxable Services from Outside of Customs Area in the Customs Area through Electronic System Trading (SE 44).
Pursuant to Law 2 and the implementing regulations, Electronic System Transaction (EST) can attract:
a) VAT in the utilization of intangible taxable goods and/or taxable services from outside of Indonesia in Indonesia through the EST
The VAT rate is 10% of the purchase price. This VAT shall be collected and deposited by either (i) the foreign merchants/foreign e-commerce service providers who fulfills some criteria and have been appointed as a VAT Collector by the Directorate General of Taxation; or (ii) the consumers – if the related foreign merchants/foreign e-commerce service providers have not been appointed as VAT Collector. Up to September 2020, the Directorate General of Taxation has appointed 28 companies as a VAT Collector, among others: Skype Communications SARL, Zoom Video Communications, Inc, Google Asia Pacific Pte. Ltd. and Spotify AB.
The criteria for foreign merchants/foreign e-commerce service providers to be appointed as a VAT Collector are:
- having transaction value with Indonesian customer for over IDR 600 million in a year or IDR 50 million in a month; and/or
- having Indonesian traffic or Indonesian party who accesses the electronic system for over 12,000 in a year or 1,000 in a month
b) Income tax or electronic transaction tax for the EST transactions conducted by foreign tax subjects who fulfill the criteria of significant economic presence
Determination of significant economic presence will be tested based on the following criteria:
- having certain amount of consolidated gross circulation of a business group;
- having sales in Indonesia for certain amount;
- having active users of digital media in Indonesia for certain amount.
Both the income tax and electronic transaction tax will be calculated against the amount received by the foreign tax subject for the goods/services sold through the EST. The difference between them is that the electronic transaction tax will be imposed to foreign tax subjects which country of origin has tax treaty with Indonesian government that prohibits the Indonesian government to stipulate the foreign tax subjects as a permanent establishment in Indonesia. Hence, the electronic transaction tax will only be imposed to the foreign tax subjects if they cannot be stipulated as a permanent establishment due to tax treaty – otherwise, the income tax will be imposed.
Omnibus Law on 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 who (a) resides in Indonesia; (b) are present in Indonesia for more than 183 days in twelve months; or (c) are present in Indonesia in a fiscal year and have intention to reside in Indonesia can be categorized as domestic taxpayer. For the foreign individuals who has become domestic taxpayer, the Omnibus Law regulates that the taxable incomes of these individuals are only the incomes generated in Indonesia, provided that:
- these individuals have certain expertise;
- this exemption applies for 4 fiscal years as of 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.
Further regulations on the exemption of foreign income as a taxable income for foreign individuals who have become domestic taxpayer will be further regulated in a Minister of Finance regulation.
On the other hand, Indonesian citizens who are not present in Indonesia for more than 183 days in twelve months and fulfill the following criteria(s) of (i) residency; (ii) main activities; (iii) place of conducting their habits; (iv) taxpayer status; and/or (v) other requirements as will be regulated in a minister of finance regulation; can be categorized as a foreign taxpayer.
2) Non-taxable Dividend
The Omnibus Law opens opportunity for dividend earned by local taxpayers to be non-taxable, as long as it is re-invested in Indonesia. For dividend earned from foreign companies, there are additional requirements, i.e., the invested amount should be at least 30% of the profit after tax. Further regulations on the criteria, guidelines and period of this exemption will be further regulated in a minister of finance regulation.
The purpose of this exemption is to encourage local taxpayers to invest their money in Indonesia – in line with the main objectives of the Omnibus Law, to promote investment in Indonesia. The government hopes that by this exemption, the local taxpayers will choose to invest in Indonesia other than saving their money or invest in other jurisdictions.
3) Exclusion of Some Items from Taxable Income Objects
The Omnibus Law excludes the followings from the list of taxable income objects:
a) deposit fund for Fee of Administering Hajj (Biaya Penyelenggaraan Ibadah Haji) and the income earned from developing the fund;
b) excess fund received/earned by registered social institutions and religious institutions.
The exclusion of these items in the Omnibus Law has cleared out the issues which commonly bring out a dispute between these institutions and the Directorate General of Taxation.
4) Adjustment on Interest Tax Tariff
The Omnibus Law regulates that government may reduce the interest tax tariff for the domestic interest received by foreign taxpayers, which currently is at the rate of 20%. This reduction will be further regulated in a government regulation.
Omnibus Law on Taxation General Provisions Law
1) Adjustment on Administrative Sanction and Interest Return Tariff
Prior to the issuance of Omnibus Law, administrative sanction and interest return tariff are fixed at the rate of 2% per month. After the issuance of the Omnibus Law, this tariff is changed to 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 certain rate.
2) Adjustment on Administrative Procedures
The Omnibus Law provides certain amendments to the administrative procedures for tax collection. The purpose of these amendments is to create a legal certainty on tax collections. The important updates on the administrative procedures are:
a) Tax assessment will no longer be issued for tax crimes which have been decided;
b) The issuance of tax assessment will be expired in five years;
c) Tax assessment can be issued to invoice interest return which are not supposed to be given.
Omnibus Law on VAT Law
Some of the key amendments made by Omnibus Law on the VAT Law are:
a) consignment is no longer listed in the definition of delivery of Taxable Goods;
b) the Omnibus Law affirms that coal products are part of VAT subject;
c) inbreng (capital participation in the form of goods) is no longer considered as delivery of Taxable Goods;
d) the identification number (nomor identitas kependudukan) can be used as a replacement of taxpayer identification number for the identity part of the purchaser in the Tax Invoice;
d) the Omnibus Law provides relaxation on the credit of Input Tax by regulating that Input Tax (i) obtained before the entrepreneur is declared as a taxable entrepreneur; (ii) which was not reported in the tax return and found during audit; and (iii) which is invoiced in the tax assessment; are now creditable. The current regulation does not permit these kinds of Input Taxes to be creditable. The purpose of this relaxation is to boost voluntary compliance by the taxpayers.
*Disclaimer: The final draft of the Omnibus Law has not yet been distributed by the government. Therefore, there may be further updates or changes to this publication once the Omnibus Law has been promulgated.
For further information, please contact:
+62818103949
fkaryadi@abnrlaw.com
Anastasia Irawati, Senior Associate, ABNR
airawati@abnrlaw.com
