Indonesia may have executed a successful tax amnesty, but the hard work of reforming its tax system to collect revenue more efficiently is still underway. Higher tax revenue will be key to Indonesia’s ability to boost public spending on infrastructure, and drive economic growth.
While the tax authority makes plans to use new technology to raise tax compliance standards and tax takings, taxes remain an important lever to attract investment and shape businesses’ behaviour.
For instance, the Indonesian government in April updated its tax holiday incentives, which will now be granted to new businesses in an expanded list of 17 industry sectors significant to its economy, up from just eight sectors previously. A key aim: to make them simpler and more attractive to foreign investors.
And, to help local small and medium enterprises better manage cash flow and pursue expansion, the government halved the final income tax rate for SMEs with annual revenues of under 4.8 billion rupiah to 0.5 per cent, from an earlier 1 per cent. This takes effect on July 1.
Here are the key tax rates:
A flat corporate income tax rate of 25 per cent is imposed on all Indonesian companies as well as foreign companies operating in Indonesia via a permanent establishment.
Small companies with a gross turnover of not more than 4.8 billion rupiah (S$460,000) are subject to a final income tax of 0.5 per cent of annual sales (reduced from an earlier one per cent, as of July 1, 2018).
Reduced tax rates
Small and medium-sized local companies, those with an annual turnover of less than 50 billion Indonesian rupiah, get a 50 per cent reduction of the tax rate imposed on taxable income corresponding to a turnover of up to 4.8 billion rupiah.
Listed companies with at least 40 per cent of their paid-up capital traded on the stock exchange get a five percentage points deduction in their tax rate (an effective tax rate of 20 per cent).
Indonesia does use tax incentives to encourage capital investments in particular industry sectors as well as geographic locations.
Various tax incentives are granted to resident companies investing in particular businesses or regions, such as the northeastern provinces and those located in Sulawesi. These include a 30 per cent tax investment allowance, accelerated depreciation or amortization, extended carryforward of losses for up to 10 years and others.
Also, the simplified and expanded tax holiday incentives for new domestic or foreign investment in Indonesia’s “pioneer industries” include a guaranteed 100 per cent tax cut. This means that new businesses that qualify will be exempted from corporate tax for a period of 5 to 20 years, depending on how large their investment is.
In Indonesia, a value-added tax of 10 per cent is levied on goods and services. This includes intangible goods (such as royalties), all manufactured goods, whether produced locally or imported, and services provided outside Indonesia to Indonesian businesses.
The VAT on exports of taxable goods and certain services is zero rated. Certain other goods are also not subject to the VAT: unprocessed minerals, agricultural products, basic necessities, banking and insurance services, hotel and restaurant activities, various social services.
Indonesia also levies a sales tax on luxury goods, with rates ranging from 10 per cent to 125 per cent.
Dividends: Dividends paid to non-residents are subject to a 20 per cent withholding tax. If the dividends are paid to a resident company, they would be subject to a 15 per cent withholding tax. If the dividends are paid to a tax-resident individual, then a 10 per cent final withholding tax is imposed.
Interest: Interest paid to a non-resident is subject to a 20 per cent withholding tax. If the interest is paid to a resident, it is subject to a 15 per cent withholding tax. Certain recipients are exempt from withholding tax: resident banks.
Royalties: Royalties remitted abroad are subject to a 20 per cent withholding tax. If the royalties are paid to a resident, they will be subject to a 15 per cent withholding tax.
Indonesia’s progressive system of personal income tax rates runs from 5 per cent to 30 per cent. The top marginal rate of 30 per cent applies to annual taxable income that exceeds 500 million Indonesian rupiah. All income earned or by an individual doing business, that does not exceed 4.8 billion rupiah within a fiscal year, is also subject to a reduced final tax of one per cent.What’s taxable? Profits from employment, a business, capital gains, less deductible expenses and allowances.
Who is taxed? Resident taxpayers are taxed on their worldwide gross income, while a non-resident is taxed only on Indonesia-source income. An individual is considered to be a tax resident if he is in Indonesia for 183 days or more in any 12-month period.
Need more information?
Official: The Directorate General of Taxes
KPMG: Indonesia Tax Profile (Updated June 2015)
Here are our other TAX GUIDES: