Compared to other major cities in Asia, Indonesia’s cost of living is relatively lower than average. For employers, it translates into a lower cost in utilities, rent and wages. However, there is a wide range of taxes in that businesses, investors and individuals need to comply with – VAT, tax for mining activities, luxury-goods sales tax, corporate income tax, individual income tax…
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It is of fundamental importance for an employer to understand the tax obligations and taxation system where the business is. To help employers and HR leaders grasp the basics of taxation in Indonesia, Links has put together some essentials of what you need to know about Indonesia tax rates, corporate tax and income tax.
Tax Obligations as an Employer in Indonesia
Indonesia’s tax obligations generally come in a monthly and annual basis, tax payments and filings are settled each month. Most taxes are collected through withholding a certain amount from the employee’s salary or the goods or services in question.
Filing Monthly and Annual Tax Returns
Employers are liable to pay tax instalments and file tax returns to the Directorate General of Taxes on a monthly or annual basis depending on the type of tax in question. Late payments of taxes will incur monthly penalties, at an interest rate of 2%, late payment of a single day will be considered and penalised as a full month. Late filing or failing to file tax returns will also induce penalties.
Withholding Tax on Employee’s Remuneration
Employee’s income tax is generally collected through a system of withholding taxes. Employers are liable for withholding or collecting of the tax when income tax applies and pay the tax to the State Treasury on behalf of the employee.
Social Security Contribution
Employers are to ensure employees are covered by a social security system. Similar to tax payments, employee’s social security contributions are also collected through withholding the payable amount from the salary each pay cycle.
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Corporate Tax Rate in Indonesia
Indonesia’s corporate tax rate has remained at a flat rate of 25% from 2010 with qualifying companies eligible for a further 5% reduction.
A resident company in Indonesia means that the company or business entity is incorporated in Indonesia. Non-resident companies incorporated overseas yet receive or accrue income locally through a permanent establishment in Indonesia are generally obligated to carry out the same taxation obligations as resident companies.
Resident companies are taxed on their worldwide income where non-resident companies are taxed only on Indonesian-sourced income.
Double Taxation Avoidance
The Indonesian government has signed 66 double taxation agreements (DTAs) with partner countries. The benefits come in the form of tax exemption for service fees and reduced withholding tax rates on royalties, dividends, interests and profits received by tax residents from their treaty partners.
All goods and services other than exempted items are taxable. The VAT rate is normally at 10%, certain goods and services are subject to a higher or lower VAT under government regulations, the rate can range from 5% to 15%. The tax base for calculating VAT is the transaction value of the concerned goods or services.
Corporate Tax Holidays
To encourage investment in pioneer industries, Indonesia’s government introduced an incentive to reduce the corporate income rate for up to 20 years (the period begins when the commercial operation of the businesses commences). However, there is a minimum amount of investment of IDR 100 billion.
“Pioneer Industries” include the manufacturing of main components of trains, vessels, aircraft, electronics, telematics, power plant machinery and more. The recent revision of the regulation also added digital economy and agriculture as two new industries.
Tax holiday rates for investments under IDR 500 billion:
- 50% reduction in income tax for the first 5 fiscal years
- 25% reduction in income tax for the following 2 fiscal years
Employee’s Income Tax in Indonesia
As an employer, it is important, and a responsibility, to understand and facilitate your employee’s tax obligations in addition to your own. This is especially vital for employers in Indonesia with the system of withholding taxes involved.
Generally speaking, most income earned by an employee who is a tax resident in Indonesia is subject to income tax at the normal rates. Income tax in Indonesia is charged on a progressive scale, for up to 30% on the income in the highest bracket.
An employee will be regarded as a tax resident in Indonesia if he/she meets one of the following conditions:
- The employee resides in Indonesia;
- The employee is present in Indonesia for more than 183 days within any 12-month period;
- The employee is present in Indonesia during a fiscal year and intends to reside in Indonesia.
Individuals are required to obtain a tax number (NPWP) for tax purposes, without an NPWP, an extra 20% is imposed on top of the progressive income tax rates.
Normal Individual Income Tax Rate in Indonesia
|Up to Rp 50,000,000||5%|
|Rp 50,000,001 – Rp 250,000,000||15%|
|Rp 250,000,001 – Rp 500,000,000||25%|
|Rp 500,000,001 or above||30%|
Non-resident employees are subject to a 20% withholding tax on Indonesia-sourced income.
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