(11 December 2020) The Indonesian Government recently passed Law No. 11 of 2020 regarding Job Creation (the “Omnibus Law”). The stated aim of the Omnibus Law is to bolster investment and create jobs by streamlining regulations and simplifying the licensing process to improve the ease of doing business in Indonesia.
The Omnibus Law, among other things, introduces and amends a number of provisions on taxation matters in Indonesia. Specifically, it amends provisions of:
- Law No. 7 of 1983 regarding Income Tax, as amended several times, most recently by Law No. 36 of 2008 (the “Income Tax Law”);
- Law No. 8 of 1983 on Value Added Tax (“VAT”) for Services and Goods and Sales Tax for Luxury Goods, as has been amended several times, lastly by Law No. 42 of 2009 (the “VAT Law”); and
- Law No. 6 of 1983 on General Provisions and Guidelines on Tax, as amended several times, most recently by Law No. 16 of 2009 (the “KUP Law”).
We highlight some of the key changes as follows:
Income Tax Law
1. Determination of Individual Tax Subjects:
- Indonesian citizens outside of Indonesia for more than 183 days can become foreign tax subjects - Under the Omnibus Law, Indonesian citizens who are outside of Indonesia for more than 183 days within a period of 12 months and meet certain other requirements will be determined as foreign tax subjects.
- Foreigners in Indonesia for more than 183 days will become domestic tax subjects - Foreign nationals who are in Indonesia for more than 183 days within a period of 12 months will automatically become Indonesian domestic tax subjects. To this existing provision, the Omnibus Law further stipulates that foreigners who become Indonesian domestic tax subjects will only be taxed for the income they receive or obtain in Indonesia. These provisions are intended for foreign nationals who have certain expertise, and such treatment will be valid for four years after they are determined as domestic tax subjects. This treatment, however, does not apply to foreigners who take advantage of a Double Taxation Avoidance Agreement.
2. Abolition of Income Tax on domestic dividends and foreign dividends re-invested domestically:
- Dividend from Domestic Companies - Under the Omnibus Law, if dividends are to be re-invested in Indonesia the tax provisions on dividends will be amended as follows: (i) for Individual Taxpayers the final income tax of 10% becomes 0%; (ii) for Domestic Corporate Taxpayers the final income tax of 15% becomes 0%; and (iii) for Foreign Taxpayers the final income tax remains 20%, subject to the prevailing Tax Treaty.
- Dividend from Overseas Companies - Similar to dividends from domestic companies, under the Omnibus Law if dividends from overseas companies are to be re-invested in Indonesia and meet stipulated conditions and requirements, they will be subject to 0% tax or not subject to tax. If the dividend remains abroad it will be taxed according to the applicable regulations.
3. Adjustments to Article 26 Income Tax rates on interest for Income Tax rates
Under the Omnibus Law the imposition of a 20% tariff from gross amount as referred to in Article 26(1)(b) of the Income Tax Law on the payment of interest, including premium, discount, and honorarium in relation to a debt repayment guarantee, may be lowered by a Government Regulation.
1. The transfer of Taxable Goods in the context of a business merger, consolidation, expansion, splitting or takeover, or for the purpose of capital replacement for shares, provided that the parties making and receiving the transfer are taxable entrepreneurs, is not included in the definition of delivery of Taxable Goods.
2. Under the Omnibus Law, mining products or drilling products taken directly from their source, excluding coal mining products, are included in the types of goods that are not subject to VAT.
3. The Omnibus Law also introduces several provisions regarding VAT Credit, namely:
- Input Tax that cannot be credited:
a. Must be paid back to the state treasury by the Taxable Entrepreneur in the event that the Taxable Entrepreneur: (i) has received a refund of the tax overpayment on the said Input Tax; and/or (ii) has credited the Input Tax referred to as Output Tax payable in a Tax Period; and/or
b. In the event the Taxable Entrepreneur is compensated for the excess tax payment, the Taxable Entrepreneur cannot be compensated in the next Tax Period and an application for refund cannot be submitted after the three-year period ends or at the time of business dissolution or the revocation of the Taxable Entrepreneur.
- The crediting requirements for Input Tax on taxable goods and/or taxable services that were obtained and/or imported taxable goods, as well as for the utilization of intangible taxable goods and/or taxable services from outside the customs area to inside the customs area, in accordance with the Omnibus Law, are as follows:
a. Before an entrepreneur is confirmed as a Taxable Entrepreneur it can use the guidelines for crediting Input Tax of 80% of the Output Tax that should be collected;
b. Taxable goods and/or services not reported in the VAT Periodic Report that are notified and/or discovered at the time of audit can be credited by the Taxable Entrepreneur as long as it meets the crediting requirements in accordance with the Omnibus Law; and
c. Invoiced with the issuance of a tax assessment can be credited by the Taxable Entrepreneur in the principal amount of VAT contained in the tax assessment, provided that said tax assessment has been paid in full and no legal remedies have been made and it complies with the crediting provisions in accordance with this law.
1. The rate for administrative sanctions for rectification or tax payment
The administrative sanction had been set at 2% interest rate. The Omnibus Law now says the amount will be further regulated by the Minister of Finance (“MOF”).
The interest rate stipulated by the MOF in the event Taxpayers correct the tax returns themselves, resulting in a bigger tax debt, shall be calculated based on the reference interest rate plus 5% and divided by 12, which is in effect from the date the calculation of the sanction begins. However, if the Director General of Tax (“DGT”) conducts an audit, on the condition that the DGT has not issued a tax assessment, based on a separate report by the Taxpayer regarding the incorrect filling of the Tax Return resulting in a bigger tax debt, the interest rate stipulated by the MOF shall be based on their preferred interest rate added by 10% and divided by 12.\
2. Return on interest for excess returns payment of taxes (overpayment)
The Omnibus Law provides that the interest rate shall be determined by the MOF and is calculated on the preferred interest rate divided by 12, applicable on the date that calculating the interest compensation commences.
3. Termination of investigation of criminal acts in the field of taxation
Under the Omnibus Law, at the request of the MOF, the Attorney General’s Office may stop an investigation into a criminal offense in the field of taxation within six months from the date of the request letter. Termination is only possible after the taxpayer has paid off the tax debt. The Omnibus Law notes that this will be further regulated by the MOF.
The above amendments to Indonesian tax laws and regulations under the Omnibus Law have a special focus on the rights and obligations of business actors, both domestic and foreign taxpayers. They also increase the attractiveness of Indonesia as an investment destination by decreasing corporate income tax and providing incentives as discussed above. Although technical regulations must still be issued to implement these changes, the amendments proposed by the Omnibus Law would have a significant impact on Indonesian taxation law, especially for business actors.
For more information, please contact:
Rusmaini Lenggogeni, Partner
Charvia Tjhai, Associate
This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK. The contents of this publication may change subject to the issuance of implementing regulations for the Omnibus Law.