Further details on updated income tax law implementation.
In relation to the Income Tax provisions as stipulated under Law No. 7/2021 regarding Harmonisation of Tax Regulations (UU HPP), the Indonesian government has issued Government Regulation No. 55/2022 (GR-55) on 20 December 2022 which revokes GR-18/2009, GR-23/2018, GR-30/2020 and several Articles in GR-29/2020 & GR-9/2021.
Most of the Articles under these revoked GRs are consolidated into this GR-55, whilst other implementing regulations will remain valid if they do not contradict GR-55.
Below are the salient points of GR-55:
- GR-55 stipulates that if a permanent building or other intangible asset has a useful life of more than 20 years, the depreciation/amortisation can be carried out using:
- The Straight-Line method with a useful life of 20 years
- The actual useful life, based on the Taxpayer’s bookkeeping which in accordance with the applicable accounting principles
However, the above tax treatment is only applicable for permanent buildings or other intangible assets that:
- Is owned and used before Fiscal Year 2022
- Depreciated/amortised using the useful life of 20 years
If the Taxpayer wishes to depreciate/amortise using the actual useful life based on the Taxpayer’s bookkeeping, the Taxpayer needs to submit a notification to the Director General of Taxes at the latest by the end of Fiscal Year 2022.
- GR-55 mentions about regarding the depreciation rules for repairs of tangible assets, which have a useful life of more than one year. However, this matter will be specifically regulated through the Minister of Finance Regulation.
- The Benefits-in-kinds (BIK), that are excluded from the recipient’s taxable income are as follows:
- Food and beverages provided for all employees as regulated in MoF-167/2018. However, GR-55 adds food and/or beverage ingredients for all employees with a certain value limit to the scope of BIK (will be specifically regulated through MoF)
- BIK in certain areas as regulated in MoF-167/2018
- BIK necessary to carry out the employees’ work activities as regulated in Income Tax Law. However, GR-55 now adds BIK received in the context of handling endemics, pandemics, and national disasters to the scope of BIK.
- BIK sourced or financed from the regional/state revenue budget – relates to BIK provided by a government institution to their employees
- BIK of certain types and/or thresholds – will be specifically regulated through MoF
- Elucidation of Art. 28 explains that gifts in the framework of religious holidays for all employees and worship facilities at work locations that are used by all employees are included as BIK which are not subject to income tax
- The determination of taxable value for in-kind remuneration is based on market value, while the taxable value for benefits is the actual cost incurred (or what should have been incurred) by the employer
- The starting period of the tax treatment for BIK which is included in the recipient’s taxable income as referred to in Article 23 – Article 29 of GR-55 are as follows:
- For employers or providers of BIK who carry out the bookkeeping for the Fiscal Year 2022 before January 1, 2022. This treatment shall take effect from January 1, 2022; and
- For employers or providers of BIK who carry out the bookkeeping for the Fiscal Year 2022 on January 1, 2022, or thereafter. This treatment shall take effect when the Fiscal Year 2022 begins.
In addition, the starting period of withholding tax treatment for BIK which is included in the recipient’s taxable income as referred to in Article 23 – Article 29 of GR-55 is as follows:
- The obligation to withhold income tax for the BIK shall apply to income received or earned starting from January 1, 2023; and
- For income in the form of BIK received or earned since:
- January 1, 2022, to December 31, 2022, from employers or providers; or
- Beginning of the Fiscal Year 2022 up to December 31, 2022, from employers or providers, which has not been deducted by Income Tax in Fiscal Year 2022, the income tax payable must be calculated, paid, and reported by the recipient in the income tax return for the Fiscal Year 2022.
- GR-55 regulates regarding the prevention of tax avoidance practices. This prevention of tax avoidance is carried out by:
- Determining when dividends are received and the basis for calculating them by the local taxpayers for equity participation in business entities abroad other than business entities selling their shares on the stock exchange
- Redefining the amount of income and deductions as well as determining debt as capital to calculate the amount of taxable income which is carried out by the Director General of Tax by applying the Arm’s Length Principle
- Determine the party purchasing company shares or assets through another party or an entity established for such purposes as long as there is an irregularity in the pricing
- Determine the party conducting the sale or transfer of company shares between those established or domiciled in countries that provide tax protection
- Redefine the amount of income earned by local individual taxpayers from employers who transfer all or part of the income of that local individual taxpayers into fees or other expenses paid to companies that are not established and domiciled in Indonesia
- Recalculate the tax which should be payable based on a comparison of financial performance with Taxpayers in similar business activities against Taxpayers who report operating profits that are “too low” compared to the financial performance of other Taxpayers in similar business fields or report unreasonable business losses even though the Taxpayer has carried out commercial sales for 5 (five) years and report fiscal losses for 3 (three) consecutive years
- Set limits on the number of borrowing costs that can be deductible for tax calculation purposes
- Recalculating the amount of tax that should be payable by not imposing payments made by local Taxpayers to foreign Taxpayers as a deductible expense from the utilization of differences in the tax treatment of an instrument or entity that may have more than one characteristic in the country or jurisdiction in where the taxpayer is domiciled
The prevention mechanism as stated in points a – f above applies only to Taxpayers who has related party transactions. The Director General of Taxes can redefine the amount of tax that should be payable based on a substance-over-form principle in the case that tax avoidance cannot be prevented by the above mechanism.
- GR-55 adds an agreement to address the tax challenges arising from the digitalisation of the economy and/or other BEPS actions as new bilateral or multilateral tax agreements to end tax avoidance in the form of Base Erosion and Profit Shifting (BEPS)
Should you have any further queries on the above, please feel free to contact us.