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Taxation in Indonesia

From Wikipedia, the free encyclopedia

Taxation in Indonesia includes income tax and value added tax (goods and sales tax).

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Transcription

Man: Let's say that I run a country or I run a company, I should say, that is based inside of the United States. So this right over here is my company. Maybe I have some smokestacks of some kind. So that is my company and it makes a million dollars in pretax profits. 1 million dollars and this is before tax, so pretax profits. Let's say that the country that I'm in and the way that I have drawn it, this is the United States. Let's say at the time that I make those pretax profits, the corporate tax rate is 35%. So it's pretty straightforward to think about how much taxes I would have to pay. I would pay 35% on this 1 million dollars or essentially I would pay $350,000 in taxes. I would have $650,000 left in profit. Now what I want to think about. Let's say my company wants to get a little bit more creative about how it might save on taxes. So what it does is it realizes that there is an island not too far off the US coast and there are actually several of them that has a substantially lower tax rate and I'm just picking it arbitrary but let's say it has a 5% corporate tax rate. So how can this company, which is physically, or for the most part based in this country, somehow benefit from this lower tax rate that is happening offshore? Well what they'll typically do is set up another subsidiary, one that this company owns and controls, but it is set up in this little island nation. So let's set it up right over here. So that's the other company. And what it'll do is it will tend to oftentimes it will give it some intellectual property, maybe patents, trademarks, things like that. So it gets all of the intellectual property of the parent company. Then what it can say is, and this is owned by the parent entity, so I'll draw a little dotted line here. It's owned and controlled by this country, this company that is based in the US. And what they'll say is, "Look we don't have a "million dollar pretax profit anymore "because we essentially licensed the use "of this intellectual property," whether it's trademarks, copyrights, patents, "We've got to pay this entity right over here some amount of money "to use that intellectual property." So let's say that they say that we're going to pay them I don't know, $800,000. This is essentially transfer pricing. In theory there should be a way of deciding what is the fair rate for that intellectual property but oftentimes that intellectual property is fairly unique so it's hard to determine a market rate which really just leads this company to decide it for itself. Let's go into that reality, where instead of this reality, this company, before it had a million in pretax profits, but now it's paying $800,000 in royalties and licensing to this entity right over here. So out of that 1 million you have $800,000 going offshore. So the real pretax profit for this company now based on accounting for it this way, based on paying this subsidiary that is offshore for use of the intellectual property, the company now has 200K in pretax profits. That was before the licensing, now this is after the licensing. This is the new pretax number. So the US it would only pay 35% of the $200,000. Instead of paying $350,000 in taxes, it would now pay, so it's no longer $350,000 in taxes. 35% of 200K is 70K in taxes. The US, I guess you could say parent company, would show a profit of 200K minus the 70K of $130,000. I would call it net profit, or we could say posttax profit. Then this character right over here, let's say it has very minimal cost. Let's say it has no cost for simplification. It would have some to do some paperwork. All of this would essentially be profit. Maybe have a few thousand dollars in cost but we'll ignore that for now. So all of this would be its pretax profit. It would have to pay 5% of it. 5% in taxes to this country right over here. So 5% of $800,000 is $40,000. So it would pay $40,000 in taxes to the government of this island right over here. Then it would be left with the remainder $760,000, so it would have $760,000. I guess you could call that it's net profit after paying taxes. So you can see here the company saved substantially on taxes. It paid $70,000 in the US and $40,000 abroad. So it paid a total of $110,000 in taxes versus the $350,000 it would have had to pay if it was based purely in the United States. You might say, "Hey this is a great thing. "Why even have a $800,000 transfer price, "why not do a million?" Obviously if you do it a little bit too ridiculously it will get more and more scrutiny, so there is some balancing influence there. Obviously if there is a market for this intellectual property or that type of intellectual property, or if you are licensing to other people, that might dictate what this is. You might say, "Well why not do this night and day?" Well the question is, you now have this profit and it might be in the form of cash. We go into other videos in more depth when it might not be. But you have essentially this profit. You won't be able to get it back into the United States without paying a tax on it. So if you want to get it back in the United States, that's actually the check. The reason why we do tax, repatriation of funds, is so that companies can't do this night and day. Essentially transfer profits abroad and then bring the cash back in. In order to close this loophole, that's why the repatriation of these funds are actually taxed. I want you to think about, and it obviously depends on what the transfer prices are and things like that, but essentially what this tax rate would have to be in order for a company to come out neutral. There are other ways of getting around it and I'll do other videos later, of ways that this cash could be put to use and it still is not actually taxed.

Contents

Definitions

Indonesian taxation is based on Article 23A of UUD 1945 (1945 Indonesian Constitution), where tax is an enforceable contribution exposed on all Indonesian citizens, foreign nationals and residents who have resided for 183 cumulative days within a twelve-month period or are present for at least one day with intent to remain.[1] Generally if one is present less than 120 days, then no tax is owed except on Indonesia source income. Some tax treaties may supersede this or defer to the Indonesia presence test for the year in question. Tax treaties deal with taxation of foreign source income for services rendered in Indonesia which are generally taxed if performed for 120+ days (depending upon treaty) even though one may not be a tax resident. Indonesia has a stratification of taxation including Income Tax, Local Tax (Pajak Daerah) and Central Government Tax.

The Indonesian Taxation Laws

The relevant fundamental taxation laws of Indonesia include:

  • General Provisions and Taxation Procedures Law "Undang-undang Ketentuan Umum dan Tatacara Perpajakan/UU KUP" Law No. 6/1983, amended by Law no.16/2009;
  • Income Tax Law ("Undang-undang Pajak Penghasilan/UU PPh": Law Number 7 of 1983, amended by Law No. 17/2000; amended by law No 36/2008
  • Value Added Tax VAT termed 'Goods and Services and Sales Tax on Luxury Goods' ("Undang-undang Pajak Pertambahan Nilai atas Barang dan Jasa dan Pajak Penjualan atas Barang Mewah"/UU PPN and PPn BM ): Law No. 8/1983,amended I by Law No. 11/2000, amended II by Law No. 18/2004, Last amended by Law No. 42/2009;
  • Land Tax and Building Tax ("Undang-undang Pajak Bumi dan Bangunan - UU PBB"): Law No. 12/1985 amended by Law No. 12/1994;
  • Warrant for Tax Collection ("Undang-undang Penagihan Pajak dengan Surat Paksa/UU PPSP") Law No. 19/1997, amended by Law No. 19/2000;
  • Fees for Acquisition of Rights to Lands and Buildings ("Undang-undang Bea Perolehan Hak atas Tanah dan Bangunan/UU BPHTB") Law No. 21/1997 amended by Law No. 20/2000;Not valid after Local Tax and user Charges Law applied
  • Tax Court Law ("Undang-undang Pengadilan Pajak/UU PP"): Law No. 14/2002;
  • Stamp Duty ("Undang-undang Bea Meterai/UU BM") in short, Law Number 13 of 1985.
  • Local Tax and user Charges Law ("Undang-undang Pajak Daerah dan retribusi Daerah") in short, Law Number 28 of 2009.

Definitions

Indonesian Taxation law provides the following definitions to clarify whom exactly is obligated to pay tax:

Individuals or statutory bodies which meet relevant criteria stipulated, including certain tax collectors or withholders.

Statutory bodies are defined by Indonesian Taxation Law as groups of persons and/or capital which constitutes a unit. These are more clearly defined as such entities undertaking or not undertaking businesses, covering limited liability companies, limited partnership companies, other companies, state or regional administration-owned companies in whatever names and forms, firms, joint companies, cooperatives, pension funds, partnerships, groups, foundations, mass organisations, social and political organisations or organisations of the same type, institutions, permanent establishments and other forms of statutory bodies.

Companies and entrepreneurs are defined in the context of Indonesian Taxation Law as those in their business activities or works/jobs produce goods, import goods, export goods, undertake trading businesses, utilize goods, provide or utilize services from regions outside the customs area.

Companies are subject to Value-Added Tax, pursuant to Law of 1984 and all amendments, excluding the few small-scale businesses whose criteria are stipulated by the Minister of Finance.

The Indonesian Tax Period is defined as one calendar month or other periods stipulated by a decision of the Minister of Finance at the maximum of 3 (three) calendar months (quarters). Tax Year shall be the period of 1 (one) calendar year unless taxpayers use accounting years different from the calendar year.

Indonesian Taxpayers must submit a Tax Return form which details and reports the calculation of tax payment owed by them. Tax Returns may cover a tax period or a tax year.

Tax Payments shall be letters used by taxpayers to pay or remit tax due to the state cash through Post Offices and/or state- or regional administration-owned banks or other payment point appointed by the Minister of Finance.

The penalties for Tax Evasion and Avoidance are very strict in Indonesia. For Underpaid-Tax, Additional Underpaid-Tax, Overpaid-Tax and Nil-Tax Assessments- which may be received by the debtor in the form of letters, warrants and administrative sanctions. Tax Credits for over-taxation or overpayment is withheld until the subsequent year- as payouts are not issued within the same financial year. Independent works/jobs shall be jobs executed by individuals having special expertise in a bid to earn income not bound by certain working relations.

Appeals against the Directorate General of Taxes may be arbitrated via the Court of Appeals at taxpayer expense.

Taxation Rates

Indonesia has a series of progressive sliding rate taxes for all categories. Furthermore, as a developing nation, much economic activity is done at the 'cottage' level where sales and services taxation are tax exempt.

Indonesia's taxations system recognises the economic reality of the majority poorer citizens and the poor are exempt from almost any taxation. The underlying ethic of "gotong-royong"- "neighbourly [sic moral] help" is applied where the more fortunate wealthier are enforced to meet their moral obligation of a heavier burden of tax- regardless of arbitrary arguments to its fairness.

The tax-free poverty threshold for Indonesian income earners is also dependent on regions as there exists some disparity between the purchasing power of the Rupiah between regions and intra-regionally between larger urban cities and smaller ones. The Capital, Jakarta is considered the most expensive city in term of all goods, services and wages.

Income Tax

Income taxation is subject to provincial (Propinsi) government regulations defined by the economic realities of that particular area. As mentioned above, the poorer denizens are exempt from almost all taxation.

Band Annual Income Rate
Tax Free Up to Rp54,000,000 0%
Band I Up to Rp50,000,000 5%
Band II Rp50,000,000 to Rp250,000,000 15%
Band III Rp250,000,000 to Rp500,000,000 25%
Band IV Above Rp500,000,000 30%

Although rates are Regionally variable, for the sake of illustration income tax basically employs a progressive rate, commencing at 10% gross salary income per annum, sliding to 30% per annum. Regulations are being debated as of 2008 to include income from shares, dividends, trusts and such related.

For example, the most urbanised and industrialised region, DKI Jakarta (Special Administrative Region of Greater Municipality of Jakarta), income taxation commences with salaries greater than one million Rupiah (IDR) per calendar month, at a rate of 10%, which slides progressively to 40%.

Corporation Tax

Companies in Indonesia are taxed at a rate of 25%, for both domestic and international sourced income. Resident Indonesian companies are required to withhold tax at a rate of 20% from payments to foreign companies.

Value Added Taxation/Goods and Services Taxation

A Goods and Services Tax (GST) is levied at the rate of approx 10% at point of sales, by major vendors. Sales and services tax are exempt from cottage economies and industries.

A VAT rate of 0 (zero) percent is applied to the following taxable events: - export for taxable goods - export for intangible taxable goods - export for taxable services

VAT base on equivalent to the sale price/service fee or import/export value.

Land and Constructions Tax

Land Tax and Tax for the buildings constructed thereupon must be paid annually, or may be paid via arrangement in ten-year blocks by Indonesian land title deed-holders, pursuant to relevant criteria for exclusions. In general terms, this tax is applicable mainly to those of the middle classes and upwards. Land holding businesses must also pay this tax.″—

Land and Constructions thereupon are calculated at a value calculated by the Regional government- which is less than real market worth. This calculated value has the caveat of being a legally non-negotiable purchase price if the Government wishes to procure said land. In Jakarta, land tax is 10% of Government calculated value.

Non-Indonesians may not legally own land but may arrange long-term assured leases from the Indonesian Central Government. As such, Foreign Nationals may not subject to the Land Tax obligation of Indonesians. Exemptions from Land Tax exist for poorer society. Land Tax calculations are considered a highly specialised skill- most especially as the punishments and sanctions for false reportage are very severe and indeed costly.

Vehicles

Passenger Vehicle Tax is required to be paid by all owners, the rationale being those fortunate enough to afford a motor vehicle can afford to subsidise their poorer brethren who rely on far less luxurious public transportation. Again, Regional Government legislates the specific definitions regarding this tax.

For the city of Jakarta, the city with the greatest vehicle ownership, most congested city, 1% of current vehicle real agreed market is due annually. Furthermore- passenger vehicles with an engine capacity greater than 4 cylinders are taxed again and as are those mass greater than 1500 kilogrammes (commonly four-wheel drives and SUV's).

Transportation and logistics vehicles, trucks/lorries, buses, vans and utility pick-ups are taxed according to axle number, vehicle mass and maximum safe gross loaded weight. Maximum loaded weight inspections are frequent and random and joked colloquially as the Police's cash-cow.

Petroleum is taxed at a rate of approximately 25% – though remains cheaper than neighbouring developed nations such as Australia or Singapore.

References

  1. ^ "Indonesian Tax Guide 2015 - Deloitte Indonesia - Tax Services - Publications". Deloitte Singapore. Retrieved 18 April 2018.
  • Indonesian Tax Directorate General, Brochure: "Sudah Punya NPWP? Segara Sampaikan SPT Tahunan PPh Anda (Do you have a tax number? File your Tax Return Now)" in Indonesian

External links

This page was last edited on 16 December 2018, at 19:25
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