Omnibus law tax cluster: Income tax, VAT and general provisions.

The Indonesian government finally issued the long awaited implementing regulations on the omnibus law through the issuance of Government Regulation No. 9/2021 (GR-9) and Minister of Finance (MoF) Regulation No. 18/PMK.03/2021 (MoF-18).

The omnibus law provides several tax relaxations with the purpose of increasing investment funding, encourage voluntarily compliance, increase legal certainty and creating a judicious climate in doing business in Indonesia.

This is the first in a series of two articles. This article will highlight the key points explained in GR-9 and/or MoF-18 in relation to income tax general provisions and tax procedures which may affect day to day transactions:

Income tax

  • Art. 26 Withholding Tax (WHT) rate is reduced from 20% to 10% for bond interest (including sharia) received by foreign taxpayers, other than Permanent Establishments (PE). This 10% WHT rate takes into effect 6 months after the enactment of GR-9 which is on 2 February 2021 (i.e. 2 August 2021)
  • Clarity on the indicators used by the tax authority to determine an individual as a local taxpayer are similar to the indicators used in the tax treaty, i.e. permanent home, centre of vital interest and habitual abode. MoF-18 also explains the indicators of having intention to live in Indonesia, such as:
    1. Owns permanent stay permit
    2. Owns limited stay permit with validity period of more than 183 days accompanied with employment/business/activity contract in Indonesia for more than 183 days
    3. Existence of employment/business/activity contract in Indonesia for more than 183 days
    4. Existence of other documents (e.g. property lease agreement for more than 183 days or document which shows transfer of family members to Indonesia)
  • Indonesian citizens who do not reside in Indonesia for more than 183 days within 12 months period, can be considered as foreign taxpayer and will not be taxed in Indonesia as long as the respective individual does not generate any income in Indonesia.
  • Foreigners with certain skills who are working in Indonesia and considered as local taxpayer (i.e. having NPWP), can apply to be taxed only from income from Indonesia for the first 4 years since he/she registered for NPWP for the first time (i.e. not taxed on worldwide income basis). If a foreigner revokes the NPWP upon leaving Indonesia and reregisters for a new NPWP upon returning to Indonesia, the 4 years period is calculated from when he/she obtained the first NPWP. To qualify to be taxed on local income for the first 4 years, these foreigners must fulfil certain requirements, such as:
    1. Occupy certain positions and for foreign researchers which determined by the Minister in charge of government affairs in the manpower and research sectors
    2. Not Indonesian citizens
    3. Have expertise in science, technology and/or mathematics
    4. These are some of the examples of qualifying positions as stated in Attachment II of MoF-18: chemist, biologist, geologist; experts in civil engineering, mine engineering, electricity engineering, telecommunication engineering; Graphic and multimedia designer; university lecturer; software developer etc. This facility will not be applicable to foreigners who utilizes the Indonesia tax treaty for his/her overseas income.
  • Based on the Omnibus Law, certain income such as dividends and overseas income can be exempted from income tax in Indonesia, as long as the incomes is invested in Indonesia. Below are some of Investment instruments allowed by the government:
    1. Investment instruments available in financial markets, such as:
      1. Debt securities, including medium term notes
      2. Sharia bond (Sukuk)
      3. Shares/stock
      4. Mutual funds participation unit
      5. Asset-backed securities
      6. Units in real estate investment funds
      7. Time deposit
      8. Savings
      9. Current account (giro)
      10. Futures contracts that are traded in Indonesia future exchanges
      11. Other financial market investment instruments including insurance products linked to investment, financing companies, pension funds, or venture capital that have obtained OJK approval
    2. Investment instruments beyond financial markets, such as:
      1. Investment in infrastructure through government cooperation with business entities
      2. Sector investment based on priorities determined by the government (in the form of paid-up capital for limited liability companies). The priority sectors will be stipulated in the National Medium Term Development Plan
      3. Investment in property in the form of land and/or buildings built on it, excluding property subsidised by the government
      4. Direct investment in companies in the territory of the Republic of Indonesia (in the form of paid-up capital for limited liability companies)
      5. Precious metal in the form of gold bullion or bullion with 99.99% purity which is produced in Indonesia with SNI (Standar Nasional Indonesia) or LBMA (London Bullion Market Association)
      6. Cooperation with investment management institutions
      7. Use to support other business activities in the form of lending to micro and small businesses within the Republic of Indonesia
      8. Other forms of investment beyond financial markets in accordance with statutory provisions.
  • Investment requirements in order to have dividend and foreign sourced income treated as tax exempt:
    1. Deadline for investment is the end of third month for individual taxpayers and end of fourth month for corporate taxpayers after the fiscal year when the income is received
    2. Investment period is at least 3 years from the fiscal year when the income is received
    3. Investment cannot be transferred except to other investments allowed under MoF-18
    4. Taxpayers are who qualify for this exemption must submit an annual investment realisation report for three years. The submission deadline is the end of the third month for individual taxpayers and the end of the fourth month for corporate taxpayers after the fiscal year when the income is received
  • Exemption income (i.e. dividend and foreign sourced income) is done by declaring such income as “income not subject to tax” in the annual Corporate Income Tax Returns “(CITR”). Failure to fulfil the investment criteria, procedures and time period will cause the respective income to be subject to tax and the tax becomes payable when the income is received or obtained and therefore will be subject to late payment penalty.
  • Dividend received by individual taxpayers which does not fulfil the exemption criteria must be paid on a self-assessment basis using the progressive tax rates. The income tax must be paid at the latest by the 15th of the following month after the dividend is received or obtained.
  • Dividend received or obtained after the enactment of Omnibus Law which fulfils the requirement to be exempted from income tax but has been withheld can qualify for a refund.

VAT

Aside from the key points in relation with income tax and general provisions and tax procedures shared above, GR-9 and/or MoF-18 also provides further clarity on the Value Added Tax (“VAT”) regime. Salient points are as follows:

  • VAT-able entrepreneurs (Pengusaha Kena Pajak/”PKP”) are able to credit the input VAT received prior to the commencement of commercial operations. However, the credited input VAT can be cancelled if the PKP fails to start its commercial operations within:
    1. Three years since crediting the input VAT
    2. Five years since crediting the input VAT, for producing/manufacturing PKP
    3. Six years since crediting the input VAT, for defined business sectors in relation to accelerating the implementation of national strategic projects
  • Criteria for PKP which have not commenced commercial operations:
    1. Has not commenced delivery and/or export of taxable goods, in the case of trading PKPs
    2. Has not commenced delivery and/or export of taxable services, in the case of service oriented PKPs
    3. Has not commenced delivery and/or export of self-produced taxable goods, in the case of production/manufacturing PKPs
  • PKPs conducting only the below activities are considered as not having conducting any delivery:
    1. Self-use and/or free gift consumption of taxable goods and/or services (pemakaian sendiri atau pemberian cuma-cuma)
    2. Delivery from head office to branch office (vice versa) and/or delivery between branch offices
    3. Delivery of taxable goods in the form of fixed assets in which the initial purpose is not for sale
    4. Delivery of taxable goods and/or services which has no direct relation with the main business
  • For PKPs which changes its business activities, the credited input VAT (which has not been refunded) can still be credited as long as the taxable goods/services/intangible goods is also used for the new business activities. However, if the taxable goods/services/intangible goods is not used for the new business activities, the input VAT cannot be credited and if the input VAT has been refunded, the PKP must pay back the refunded amount to the government.
  • Tax invoices (Faktur Pajak) issued to individual PKPs can be credited as long as it consist the minimum information of name, address and ID number (Nomor Induk Kependudukan/NIK).
  • For taxpayers who are late in registering as PKPs, the input VAT paid before the taxpayer is eventually registered as a PKP can be credited based on the below provisions:
    1. The creditable input VAT applies for the tax period when the taxpayer should have been registered as PKP, until the period before the date of PKP registration approval
    2. The Input VAT is credited against the output VAT which supposedly collected by taxpayer since the taxpayer supposedly registered as PKP
    3. The maximum amount of input VAT credited is 80% from the output VAT which supposedly collected by taxpayer
    4. Must be in the form of standard VAT invoice (i.e. documents considered to be only similar with VAT invoices will not be creditable)
    5. PKPs using other amount as a VAT tax base (Dasar Pengenaan Pajak/DPP Nilai Lain) cannot use these provisions
  • Input VAT discovered in the tax audit process can be credited. This will be done by providing the supporting documents in the form of VAT invoices or other documents which has not been reported in the relevant VAT returns. Below are the provisions when claiming this input VAT:
    1. The PKP must agree with all the tax audit results in relation with the VAT assessment
    2. Settlements after the enactment of Omnibus Law is done by using tax payment slip (Surat Setoran Pajak/SSP), State revenue receipt (Bukti Penerimaan Negara/BPN) or other documents which is considered similar with SSP (e.g. overbooking document, etc.)
    3. Only the principal amount in the tax assessment letter can be credited
    4. PKP does not submit any legal action against the tax assessment letter (e.g. objection, appeal, judicial review, lawsuit, etc.)
    5. The input VAT is credited in accordance with the law
  • Exemptions from the obligation to issue VAT invoice for own use of taxable goods and/or services for productive purposes is abolished, meaning that PKPs must issue VAT invoices for these transactions.
  • VAT invoices must consist of the below information:
    1. Name, address and Tax ID (NPWP) of the seller or service provider
    2. Identity of the buyer or service recipient which covers:
      1. Name, address and NPWP for local corporate taxpayers and government institutions
      2. Name, address and NPWP or ID number (Nomor Induk Kependudukan/NIK) for local individual taxpayers
      3. Name, address and passport number for foreign individuals
      4. Name and address for foreign corporate taxpayers or non-tax subjects
  • VAT invoices are prepared and signed electronically using the e-Faktur application, except for delivery of taxable goods to foreign individuals (VAT refund), retail deliveries and delivery or export using certain documents considered similar with VAT invoices.
  • Updates on the criteria for retail VAT-able entrepreneurs are as follows:
    1. VAT-able entrepreneurs who perform delivery of taxable goods and/or services to buyers with end-customer characteristics, including delivery performed through electronic platforms/systems (Perdagangan Melalui Sistem Elektronik/PMSE) are considered as retail VAT-able entrepreneurs
    2. End-customer characteristics are mainly that the customer consumes the taxable goods and/or services directly and do not use the purchased taxable goods and/or services for business activities
    3. Retail VAT-able entrepreneurs can issue retail VAT invoices without the buyer information and without seller’s name and signature
    4. Retail VAT invoices can be in the form of cash bills, sales invoices, tickets, receipts, etc.
  • Criteria of retailer VAT-able entrepreneur regulated under the previous regulations is revoked
  • Retail VAT-able entrepreneurs are required to make complete VAT invoices when performing certain deliveries to end-customers, such as:
    1. Delivery and/or rental of land or water or air transportation (e.g. motor vehicles, yacht, cruise ship, helicopter, airplane, etc.)
    2. Delivery and/or rental of land and/or building
    3. Delivery of firearms including bullets

General provisions and tax procedures

  • For tax assessment letters, tax collection letters and disclosure of incorrectness (Pengungkapan Ketidakbenaran) issued on 2 November 2020 which consist interest sanctions for periods before 2 November 2020, the interest sanction rate used is based on the Minister of Finance rate for November 2020 period
  • For interest sanction charges for periods after November 2020, the interest sanction rate used is based on MoF rate issued in the month when the late payment occurs. For example, if a taxpayer is late in paying the withholding tax for January 2021 period which should be paid by 10 February 2021, the interest sanction will be calculated based on the rate issued for February 2021.
  • Penalty on the late issuance of VAT invoices is reduced from 2% to 1% of the tax base from 2 November 2020

If you have further queries on the above, please feel free to contact us at infoindonesia@acclime.com

Omnibus law tax cluster: Income tax, VAT and general provisions
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