11 November 2021
To grow into a developed country, Indonesia needs to enhance its infrastructure, adapt to technology and carry out regional development. These actions need to be supported with funds. Therefore, the government keeps doing reformation from the fiscal perspective. After carrying out tax reform in 2020 through the issuance of the Omnibus Law, the government continues the reformation through the issuance of the Law of Tax Regulation Harmonization (Undang-undang Harmonisasi Perpajakan – New Law). The House of Representatives has approved the New Law on 7 October 2021. The New Law is now waiting to be signed by the President of the Republic of Indonesia to be promulgated. If the President does not sign the New Law within 30 days, it will automatically be promulgated as a law.
The issuance of this New Law affects some prevailing laws:
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Law on The General Provisions and Tax Procedures, which changes will be effective as of the promulgation date of the New Law,
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Income Tax Law, which changes will be effective in the Fiscal Year of 2022,
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VAT ad Luxury Taxed Goods Law, which changes will be effective on 1 April 2022, and
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Excise Law, which changes will be effective as of the promulgation date of the New Law.
In addition, the New Law also addresses additional issues, i.e., (i) regulation on Carbon Tax, which will be effective on 1 April 2022 and (ii) Tax Amnesty, which will be effective for the period of 1 January – 30 June 2022.
This publication will discuss the important changes made by the New Law, in comparison to the previous regulations.
A. Law on The General Provisions and Tax Procedures
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Identification Number (NIK) will be regarded as a Taxpayer Identification Number
The government hopes that this could simplify the tax procedures for the taxpayers to fulfill their rights and obligations. It is important to note that even though the NIK is used as a taxpayer identification number, this does not mean that every citizen of the Republic of Indonesia will be obliged to pay taxes. The citizen will be obliged to pay taxes if their income is higher than the threshold set out by the government.
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Decrease of Sanction Rate
The decrease of the sanction rate is in line with the spirit of the Omnibus Law. The purpose of this decrease is to create fairness and legal certainty. The new sanction rate is as follow:
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Investigation Sanction and Sanction for not Submitting Tax Return
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Sanction to be Paid for Legal Remedy
This type of sanction is given to the taxpayer who takes legal remedy and appeals for a decision but the decision in the appeal court is in favor of the directorate general of taxation.
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Attorney of the Taxpayer
The New Law regulates that taxpayer can authorize anyone to act as their attorney as long as the attorney fulfills the competency requirement (has tax knowledge). The knowledge requirement, however, is waived once the attorney is an immediate family of the taxpayer (e.g., husband, wife).
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Appointment of Other Parties as Tax Collector
The government can appoint other parties to act as tax collectors. The purpose of this is to ensure that the tax regulation keeps up with the digital transaction that is very dynamic. The government has also addressed this matter in separate regulations concerning taxation on electronic system trading.
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Cooperation for Tax Collection with Other Countries
The Indonesian government can cooperate with other countries/jurisdictions that have been partnered with Indonesia to actively collect taxes. The cooperation can be in the form of assistance or a request for tax collection.
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Mutual Agreement Procedures (MAP)
Different from the previous regulation that stops the MAP procedures if there is a tax court or supreme court decision even though the substance of the decision is not the same as the substance in the MAP application, the regulation states that MAP application can be conducted simultaneously with objection or appeal. The MAP will:
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be continued if the material is not the same as the appeal’s or case review’s decision,
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be stopped if the material is the same as the appeal’s or case review’s decision.
This change is to promote fairness to the taxpayer and to follow the international best practice.
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Change of Penal Sanction in place of Prison Time
The approach taken by the government is to prioritize the recovery of the State’s losses. In this regard, the government opens an opportunity for the taxpayer to repay the State’s losses by paying the tax principle and the sanctions as a replacement for the prison time
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B. Income Tax Law
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Tax Tariff
The government made changes to the individual tax tariff by considering fairness to the citizen with lower incomes. For the individual tax tariff, the government increases the first tier of taxation income from IDR 50 million to IDR 60 million. On the other hand, it adds a new tier for citizens having an income of more than IDR 5 billion. Below is the comparison table of the tax tariff of the previous income tax law and the New Law:
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For the corporate tax tariff, there is a change of plan of the government. Initially, the government planned to reduce the corporate tax tariff to be 20% for the financial year of 2022. However, after some considerations and by comparing the practices around the world, the government cancels the plan to further reduce the corporate tax tariff to be 20% as the 22% rate is already competitive enough amongst the ASEAN countries. Thus, the changes in the corporate tax tariff are as follow:
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Addition of Income Tax Object
The New Law adds Fringe Benefits Tax (FBT) as an object of income tax. However, there are some exemptions, among others: meals, FBT in a certain region, FBT due to nature of the work, FBT from State/Regional Budget, and certain types of FBT. These types of FBT are still exempted from income tax.
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New Threshold Exemption for Individual Micro, Small, Medium Enterprises (UMKM)
The government tries to provide more support to the individual UMKMs. Therefore, the New Law adds a new threshold exemption for the individual UMKMs. The individual UMKMs are exempted from income tax if their gross turnover is less than or equal to IDR 500 mio. From >IDR 500 mio onwards, the income will bear 0.5% final income tax.
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Instruments for Tax Avoidance Prevention
The New Law adds new regulations or provides a better explanation to optimize the instruments for tax avoidance prevention, among others:
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The New Law emphasizes the substance over form principle in determining the existence of tax avoidance,
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The New Law provides a guideline for the loan that can be used for the income tax calculation, in which it should be a reasonable debt to equity ratio (percentage of the loan compared to the EBITDA or other methods of calculation),
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The New Law adds more methods for the determination of arm’s length price, i.e., comparable uncontrolled transaction method, tangible asset and intangible asset valuation and business valuation,
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The New Law regulates on benchmarking that will be applied to the taxpayers who report (i) the smaller amount of profit compared to other taxpayers with similar business activities or (ii) unreasonable loss for the taxpayers who have carried out their business for five years,
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The New Law adds new regulation on secondary adjustment, in which the difference of (i) affiliated transaction amount that is not in line with customary practices and (ii) affiliated transaction amount that is in line with the customary practices will be considered as a dividend that will be subject to income tax.
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Global Tax Consensus
The New Law extends the authority of the government to establish and/or implement taxation agreements and/or memorandum of understanding with partnered country or partnered jurisdiction for the purpose of (i) double tax avoidance and the prevention of tax evasion, (ii) prevention of tax base erosion and profit shifting (iii) tax information exchange, (iv) tax collection assistance, and (v) other tax cooperation. According to the timeline, the plan is to agree on the global consensus in 2021, sign multilateral instruments with other jurisdictions that ratify the global consensus in 2022, and further implement the consensus by the issuance of government regulations/minister of finance regulations in 2023.
C. VAT and Luxury Taxed Goods Law
The New Law reduces the list of exempted VAT objects. The reason for this reduction is to promote fairness and preciseness. Examples of the deleted VAT objects are goods resulting from mining or drilling activities, money transfer services by postal money order, broadcasting services (without advertisement purposes). In addition, the New Law also changes the VAT tax tariff to be as follow:
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Last, for certain goods or certain sectors, there will be a final VAT tariff, to be regulated in a Minister of Finance Regulation (similar to the GST system applied in other jurisdictions).
D. Excise Law
In line with the spirit in the amended Law on the General Provisions and Tax Procedures, the government plans to put penal sanction as the last resort (ultimum remidium). Therefore, the New Law adds a new opportunity for the taxpayer to pay for the sanction tariff during the examination period. The new regulation on the penal sanction tariff is as follow:
E. Carbon Tax
In an attempt to protect the environment and to fulfill Indonesia’s commitment to reduce greenhouse gas emissions by 29% by 2030, the government adds a new regulation concerning carbon tax in the New Law. The carbon tax regulation will be implemented regularly following the government’s roadmap. The first implementation will be against the coal powerplant sector – will be effective on 1 April 2022. The government will apply a cap and tax system. In this system, if an entity cannot purchase an emission permit or emission decrease permit for the emission that is produced above the capped ratio, then the entity will be imposed with a carbon tax. The tariff of the carbon tax is higher or equal to the market price, with a minimum tariff of IDR 30,- per kg of CO2e.
F. Tax Amnesty
Following the success of the tax amnesty program in 2016, the government re-launch the tax amnesty program in this New Law. The program will be divided into two policies, which will be effective from 1 January 2022 – 30 June 2022. The first policy is for the tax subject who participated in the previous tax amnesty program but has not reported all of his/her assets. The second policy is for the asset that is obtained in 2016-2020 that has not been reported in the tax return. The summary of the policies are as follow:
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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: 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
