banseokReference Room

Tax Management (Q88-94)

2024-02-10 19:09

Q88. Please tell me about the withholding rate and reporting method for local earned income tax.

  1. tax resident
Individuals who meet the following conditions are considered residents under Indonesian tax law and must pay personal income tax.
  • Individuals domiciled in Indonesia
  • Individuals who have stayed in Indonesia for more than 183 days within 12 months
  • Individuals staying in Indonesia during the tax period and intending to reside in Indonesia
For reference, according to the Korean Income Tax Act, an individual who has an address in Korea or has resided in the country for more than 183 days is considered a resident, so in some cases, an individual may become a resident of both Korea and Indonesia. In this case, the status of the ultimate resident must be determined in accordance with the tax agreement, and according to the Korea-Indonesia tax agreement,

The status of the final resident is determined in the following order: ① permanent residence, ② center of important interests, ③ daily residence, and ④ mutual agreement.
  1. Annual income deduction amount (PTKP) - as of 2022
item amount
Taxpayer's basic deduction Rp 54,000,000
spousal deduction Rp 4,500,000
Dependent deduction (up to 3 people) Rp 4,500,000
Deduction of position allowance (5% of gross income, maximum Rp 500,000/month) Rp 6,000,000
Social Security System (BPJS Ketenagakerjaan) Old Age Pension

Savings contribution (2% of total income)
full amount
Social Security System (BPJS Ketenagakerjaan) Retirement Pension

Out-of-pocket portion (1% of total income)
full amount
  1. personal income tax rate
annual income tariff
Below Rp 60,000,000 5%
Above Rp 60,000,000 but below Rp 250,000,000 15%
Above Rp 250,000,000 but below Rp 500,000,000 25%
Above Rp 500,000,000 ~ below Rp 5,000,000,000 30%
Exceeding Rp 5,000,000,000 35%
  1. pay
Personal income tax on salary must be withheld and reported by the payer. In the case of income paid by an employer to an employee, the tax base is calculated by deducting the annual income deduction from the total taxable salary, and the tax amount calculated by applying the personal income tax rate to the tax base must be reported and paid as PPh 21. In the case of fees paid to individuals or professionals other than employees, 50% of the total payment is the tax base, and the tax amount calculated by applying the personal income tax rate to the tax base must be reported and paid as PPh 21.

Meanwhile, for income paid to non-residents, 20% of the total payment must be withheld and reported as PPh 26. However, the tax rate may be reduced depending on the tax agreement.
  1. Year-end tax settlement and final report
Similar to Korea's year-end tax settlement, employers must settle PPh 21 based on annual salary when paying salaries in December. If an individual has income other than salary income, he or she must file a final personal income tax return (Form 1770) by the end of March of the following year. The final report must report all income, including salary income, investment income, capital income, overseas income, and other income, and must include asset and liability status. The income of a married woman and a minor lineal ascendant must be included in the husband's personal income tax return, but the married woman's income is not related to the income of the husband or other family members, and the payer has already withheld PPh 21 and paid additional tax. If there is no tax due, it will not be added up.

Q89. Please tell me about paying corporate tax.

Information on Corporate Income Tax is as follows.
  1. Tax Rates
Indonesia's corporate tax rate is basically a single tax rate of 25% until 2019, and is being applied at 22% from 2020. Meanwhile, it was scheduled to be reduced to 20% from 2022, but has now been postponed indefinitely.

Meanwhile, for listed companies and small and medium-sized businesses, reduced tax rates can be applied as follows.
  • Listed corporation
In the case of listed companies that disclose more than 40% of the total issued shares and meet certain requirements, a corporate tax rate reduced by 3% from the above tax rate is applied.
  • small business
For companies with annual sales of less than 50 billion rupiah, the second level tax rate applies as follows:
  1. Tax base
  2. ii) Tax base It can be concluded.
  1. Tax Residence
Article 2, Paragraph 3 of the Income Tax Act defines a resident, and in the case of corporations, all corporations established or domiciled in Indonesia are defined as residents. However, there are exceptions for government agencies that meet certain requirements.

Meanwhile, taxpayers under Article 2, Paragraph 1 of the Income Tax Act include permanent establishments ('PE'). Accordingly, if a non-resident conducts business activities in Indonesia through a permanent establishment, he or she will be subject to tax obligations similar to those of a corporation.
  1. Tax Payments
Corporations and permanent establishments pay corporate tax in the following ways: withholding tax (PPh 22, PPh 23, PPh 4.(2)), monthly prepayment corporate tax (PPh 25), and PPh 29 when filing annual corporate tax returns.

Withholding tax is a method of paying taxes through withholding by a third party. PPh 22 is the tax paid in relation to the import and sale of specific goods, PPh 23 is the tax paid for specific domestic transactions, and PPh 4. ( 2) is the tax paid in the form of final separate taxation for specific transactions.

Monthly prepaid corporate tax (PPh 25) and PPh 29 are taxes reported and paid directly by the taxpayer. PPh25 is calculated based on the corporate tax return of the previous year and is an interim prepaid tax amount paid every month. PPh 29 is taxable by taxpayers such as corporations.

After the end of the period, corporate tax is calculated based on the tax base, and PPh 25, PPh 22, PPh 23, etc. are deducted as prepaid tax amount and the difference is paid as tax.

For your reference, income from Indonesian sources attributable to a foreign company without a permanent establishment in Indonesia is taxed through withholding tax from the counterparty in Indonesia (PPh 26).

Q90. Can I receive tax and tax treaty benefits when delivering and installing software solutions from Korea to Indonesia?

Software transactions may in some cases be classified as purchases of goods, business income, or payments of royalties. If the software transaction constitutes a purchase of goods, there is no income tax payable in Indonesia, and if it is classified as business income or royalties, when income is paid by an Indonesian resident to a non-resident, 20% of the payment is withheld as a withholding tax (PPh 26). You must report and pay.

However, in accordance with the Korea-Indonesia tax treaty, in the case of business income, the withholding tax amount can be exempted if the Korean company did not provide the relevant service through a permanent establishment in Indonesia. In the case of royalties, the withholding tax amount can be exempted. It can be reduced to 15%. Meanwhile, in order to benefit from the Korea-Indonesia tax treaty, Korean companies must fill out and submit the DGT Form.

Examples of permanent establishments are as follows:
  • Fixed business location: office, factory, workshop, etc.
  • Building, construction, assembly, and equipment work exceeding 6 months
  • Providing service for more than 3 months
  • Specific agent (those who have the authority to enter into contracts on behalf of the company or have inventory to ensure regular delivery of the company's goods or products, etc.)
If software installation/construction services are provided through a permanent establishment, such as being performed in Indonesia for more than 3 months, in principle, you must establish a corporation in Indonesia and report and pay income tax, but in practice, 20% of the payment amount is withheld. If you pay with taxes, the Indonesian tax authorities will not have any problems.

Whether a software-related transaction constitutes a purchase of goods, business income, or a royalty transaction requires a separate review of the transaction details and contract, so we recommend that you consult with an expert.

Q91. Please explain the conditions and procedures for tax refund in Indonesia. Tax refunds in Indonesia, like in Korea, are possible if the amount of tax already paid or prepaid is greater than the amount of tax to be paid. However, the actual refund is paid after the refund amount is determined through a tax audit, and the tax audit results are determined within 12 months from the date of application for refund. In Indonesia, the intensity of tax audits is high, and as a result of the tax audit, there are cases where the tax is notified for the tax amount to be paid rather than a refund. Therefore, before applying for a refund, care must be taken to ensure that the tax return and payment have been completed properly and that there are no other tax problems.

The above tax refund is only available to Indonesian residents (taxpayers), and in the case of foreign companies without a permanent establishment or Indonesian corporation, taxes are paid on Indonesian income in the form of withholding tax, so the concept of tax refund does not apply and overpayment is due. If there is any tax, it must be refunded through a request for rectification.

If you are a Korean company that is not a resident of Indonesia, you can deduct Indonesian tax by deducting foreign tax when reporting corporate tax in Korea. However, 100% deduction may be difficult depending on the foreign tax deduction limit calculation. Since the proof of foreign tax deduction is displayed in Indonesian, tax office officials in Korea may request proof in English.

Q92. It is a simple service export, but is it reasonable for the Indonesian company to request the preparation of DGT to benefit from the double taxation avoidance agreement? How to write it?

According to the Indonesian Income Tax Act, when an Indonesian resident remits service fees overseas (non-Indonesian residents), 20% of the service fee must be withheld by default (PPh 26), and the Korea-Indonesia Double Taxation Prevention Agreement (Tax Agreement) In order to be exempted from or receive a reduction in withholding tax, you must complete and submit DGT documents. Therefore, the Indonesian company's request seems reasonable. Part 2 of the DGT Form verifies from the tax office in charge of the country of residence whether the person receiving the income is a resident of a country that has concluded a tax agreement with Indonesia.

This is the part that requires the signature of the person in charge and the stamp of the tax office. Between countries with which a tax agreement has been concluded, the documents of the other country required to benefit from the tax agreement must be verified by the competent tax office. However, if it is difficult to visit or verify the documents at the competent tax office, an English resident certificate must be submitted through the online civil service service or home tax.

You can replace Part 2 by obtaining a (Certificate of Domicile/Residence). According to Indonesia Tax Agency Ordinance PER 25/PJ/2018, it stipulates requirements to prevent abuse of tax conventions and requirements for those who benefit from tax conventions, and the requirements can be met by completing Parts IV, V, and VI of the DGT Form. We are trying to describe whether it is met. For reference, if the answer to questions 2 to 4 in Part IV is “Yes,” if the answer to questions 5 to 10 in Part V is “No,” or if the answer to question 11 is “Yes,” If the answer to questions 2 to 4 of VI is “No,” or if the answer to questions 1 or 5 is “Yes,” it may be difficult to receive the benefits of the tax convention, so you need to be careful when writing it.

Q93. What is the upper limit of annual sales exempt from value-added tax reporting?

A general taxable person refers to a person who supplies (including exports) taxable goods or services and whose total annual sales are more than 4.8 billion rupees. A small business (Pengusaha Kecil) with a turnover of less than 4.8 billion rupiah is not required to be a general taxer, but can register as a general taxer at the taxpayer's option. In order to register as a general taxpayer, you must apply for registration as a general taxpayer at the tax office. To be able to issue an electronic tax invoice later, you must receive a tax invoice serial number from the tax office and install the electronic tax invoice program (E Faktur).

Small business owners who choose general tax payer status have the same obligations as regular tax payers. You must file a VAT return by the end of each month, and if the sales tax is greater than the input tax, you must pay the VAT first before filing a VAT return. Among small businesses, if their annual sales exceed Rp 4.8 billion and they meet the requirements for general taxation, they must register as a taxable business by the end of the month following the relevant month.

If there is no business details report, the tax authorities may ex officio designate the business as a general taxpayer and impose value-added tax. The subject of taxation is the value-added tax amount to be paid from the time sales exceed 4.8 billion rupees until the time a tax audit is conducted.

Q94. I expanded into a branch office, but the Indonesian tax office considers it a permanent establishment and requires me to pay taxes. Is there any countermeasure in this case?

There are several types of branches in Indonesia, including pure liaison offices, trade branches, and construction branches. In the case of a pure liaison office, it cannot carry out business activities and therefore does not bear income tax. However, a trade branch or construction branch can carry out business activities and is required to file an income tax return. Therefore, if the Indonesian tax office considers a branch as a permanent establishment and wants to impose income tax on it, it is necessary to first review what type of branch the company was established as.

Meanwhile, even if a pure liaison office is established, if it meets the definition of a permanent establishment under Indonesian tax law, there will be an obligation to pay income tax, so care must be taken to ensure that it does not fall under a permanent establishment, and it is necessary to actively explain this.

To determine whether a permanent establishment has been established, it will be reviewed whether business activities have actually taken place. The number of Korean expatriates and cost execution details are the basis for practical judgment, and if the cost execution is high compared to the number of personnel, there is a high risk that it will be considered as execution for business purposes.

Looking at cases where permanent establishment taxation was resolved, there were cases where three main points were explained and the tax authorities recognized them and resolved the problem.
  1. Since the representative office only has a small number of employees, it is impossible to conduct business equivalent to the total income claimed by the Indonesian tax authorities.
  1. The total cost of the representative office is too small to be considered as an active sales activity.
  1. When looking at the communication situation with the headquarters, such as monthly market trend reports, it is clear that it only performed market research and liaison office roles, not sales.
Meanwhile, taxation of trading branches is based on Article 15 of the Income Tax Act and Minister of Finance Decree No.634/KMK.04/1994. According to these regulations, in case of a trade transaction, 1% of the total transaction amount is considered profit. It is allowed to be taxed. It is stipulated that deemed profits are subject to corporate tax and dividend tax on net profit after tax at a total of 0.44%, which is 30% corporate tax rate at the time and 20% withholding tax rate on dividends before the reduced tax rate according to the tax agreement is applied. This is the result of applying . Depending on the tax office, the current corporate tax rate and the withholding tax rate reduced according to the tax agreement may be applied at 0.298%.

If a company has entered Indonesia in the form of a trading branch, there is a high risk of being taxed regardless of whether actual business activities have been performed. Therefore, in order to more fundamentally solve the problem, methods such as establishing a liaison office or converting to a corporation must be sought. I will do it.