Who Is Liable For Income Taxes In Indonesia
Indonesian-resident taxpayers are subject to tax on worldwide income. Nonresidents are subject to tax on Indonesian-source income only. Diplomats and representatives of certain international organizations are excluded from Indonesian tax if the countries they represent provide reciprocal exemptions.
Individuals are considered resident for tax purposes if they are present in Indonesia for more than 183 days within a 12-month period or if, within the calendar tax year, they reside in Indonesia with the intent to stay.
Under a tax regulation, which was issued on 12 January 2009, an Indonesian national who works overseas for more than 183 days within any 12-month period is considered a nonresident.
Income subject to tax. The taxation of various types of income is described below.
Employment income. Taxable income of an employee includes wages, salary, commissions, bonuses, pensions, directors’ fees and other compensation for work performed. Compensation in kind for work or services is not taxable income for the employee and is not a deductible expense for the employer. However, this treatment does not apply to employees of the following:
- Oil and gas companies under contracts entered into under pre-1984 law
- Representative offices, which are not subject to Indonesian corporate income tax
- Various international organizations and embassies
- Employers who are taxed based on a “deemed profit” basis
- Employers who are subject to final tax
Although fringe benefits provided to employees, including employer-provided housing and automobiles, are not included in an employee’s taxable income, they are allowable deductions for the employer if the employee works in a remote area. Approval for remote area status must be obtained by the employer. Benefits received in the form of cash allowances are taxable.
Termination pay and lump-sum pension payments are subject to final withholding tax at the rates.
An Indonesian national who works overseas for more than 183 days is not subject to tax on his or her employment income that is earned overseas and that is subject to tax overseas.
Self-employment and business income. Members of partnerships, firms and associations, as well as other individuals, may be subject to tax on self-employment or business income.
Taxable income includes trading profits, profits from the sale of property connected with a business, annuities and waivers of debts (except waivers of debts for a small entrepreneur of up to Rp 5 million).
Self-employment and business income is combined with other income and taxed at the rates.
Directors’ fees. Directors’ fees are included in taxable employment income.
Investment income. Dividends paid to individuals, rents, royalties and certain interest are subject to withholding tax at various rates.
These types of investment income generally are combined with other income and taxed at the rates. However, the 20% withholding tax on interest derived from the following investments is a final withholding tax:
- Time deposits, including time deposits placed abroad through a bank established in Indonesia or through a branch of a foreign bank
- Certificates of deposit
- Savings accounts
Income from the rental of land and buildings is subject to a final withholding tax at a rate of 10%.
Dividends paid to resident individuals are subject to a final withholding tax at a rate of 10%.
Taxation of employer-provided stock options. Employer-provided stock options are not taxable to an individual at the time of grant or exercise. Income tax at the individual’s marginal tax rate is imposed at the time of sale on the difference between the sale price of the shares and the strike price. Sales of stock on the Indonesian stock exchange are also subject to a final withholding tax at a rate of 0.1% on the gross sale value of the stock.
Capital gains and losses. Capital gains are taxed at the same rates as business income and income from employment. Capital gains are added to income from other sources to arrive at total taxable income.
The transfer of shares listed on the stock exchange is subject to withholding tax at a rate of 0.1% of the gross value of the transfer if the transferred shares are ordinary shares. An additional tax at a rate of 0.5% of the share value is levied on sales of founder shares associated with a public offering. Both withholding taxes are final. Founder shareholders must pay the 0.5% tax within one month after the shares are listed. Founder shareholders who do not pay the tax by the due date are subject to income tax on the gains at the ordinary income tax rates.
The base cost of property used in carrying on a business may be depreciated for tax purposes. For normal disposals, the depreciation base is deducted from proceeds. Any gain or loss relating to extraordinary disposals, for example, closing down a significant part of a business, should be separately identified.
Deductions
Deductible expenses. To determine the taxable income of regular employees, gross income is reduced by the following amounts:
- Standard deduction at a rate of 5% of gross income, up to a maximum of IDR 6 million a year
- Contributions to a pension fund approved by the Minister of Finance and to TASPEN (Pension Insurance Saving Agency), as well as old-age savings or old-age allowance contributions to TASPEN and to the Employees’ Social Guarantee Program (Jaminan Sosial Tenaga Kerja, or JAMSOSTEK), paid by employees
To determine the taxable income of a pensioner, the gross pension is reduced by a deduction of 5% of the gross pension, up to a maximum of IDR 2,400,000 a year.
Business deductions. A self-employed business person may deduct from gross income ordinary expenses connected with earning income, including costs of materials, employee remuneration, bad debts, insurance premiums and administrative costs. Taxes other than income tax are deductible. If employee income taxes are borne by an employer, a grossing-up calculation must be made to claim the expense as a deduction from gross profit.
A business may also deduct the following expenses:
- Depreciation and amortization, in accordance with specified rates
- Contributions to approved pension funds
- Losses from the sale of property or rights used in a business
- Foreign-exchange losses
- Costs of research and development performed in Indonesia
- Scholarship, apprenticeship and training costs
- Fifty percent of the cost of automobiles provided to employees
- Office refreshments provided to all employees
The following expenses may not be deducted:
- Provisions or reserves, with exceptions for certain industries
- Premiums for employees’ life and health insurance, unless paid by the employers and treated as income taxable to the employees
- Benefits in kind provided to employees, including housing
- Gifts, support and donations, with exceptions for certain donations
- Personal expenses
- Salary paid to a member of an association, partnership or a limited partnership whose capital is not divided into shares
- Income tax and administrative sanctions in the form of interest, fines and surcharges, and criminal sanctions in the form of fines in connection with provisions of the tax laws
Credits. If non-employment income is also taxed in the country in which it arises, a foreign tax credit is allowed in computing the Indonesian tax. The credit equals the lesser of the foreign tax or the Indonesian tax applicable to that income.
Relief for losses. In general, losses may be carried forward for up to five years. A spouse’s business losses may be offset against the business profits of the other spouse.
B. Land and buildings tax
Land and buildings tax is levied on the sales value of the property at a rate of 0.1% if the taxable sales value is IDR 1 billion or less and at a rate of 0.2% if the taxable sales value is greater than IDR 1 billion. The Minister of Finance determines the taxable sales value. Property valued at IDR 60 million or less is exempt from land and buildings tax.
C. Social security
No social security taxes are imposed other than for worker’s accident insurance and the provident fund, called JAMSOSTEK. Employees’ contributions for old-age pensions are deductible from taxable income, up to a maximum of 2% of income. Employers must contribute at least 3.7% of wages. JAMSOSTEK is mandatory only for companies with more than 10 employees or a payroll exceeding IDR 1 million per month. Contributions are also mandatory for expatriates, unless the expatriates already receive similar benefits and protection under a policy in their home country. To take advantage of this exemption, original insurance policies are required to prove that the expatriate is protected.
The following JAMSOSTEK contribution percentages of monthly salary are required of employers and employees. No ceiling applies to the amount of wages subject to contributions.
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We have been preparing US income tax returns for US Citizens and permanent residents living in Indonesia for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Indonesia and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Indonesia.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email