Indonesia’s omnibus law continues to impact the business, fiscal and regulatory landscape. In this article, we note new income tax exemptions for dividends and offshore income in Indonesia, as well as a reduced withholding tax rate on bond interest, foreigners taxation and VAT treatment. during the pre-production period.
Indonesia introduced Government Regulation 9 of 2021 (GR 9/2021) and its implementing regulation under Regulation 18 0f 2021 of the Ministry of Finance (PMK 18/2021) in February 2021 which amends the Law on country’s income tax and value added tax. law (VAT).
The two regulations aim to offer income tax relaxation and a more business-friendly approach to VAT, among other things, as the government continues to reform the tax system to make it easier to do business in Indonesia.
These regulations are part of some 76 amended regulations initiated by Indonesia’s Omnibus Law, which represents the first time in the country’s legal history where such significant changes have been made through a single legal instrument.
Tax under Indonesian omnibus law
Criteria for national tax matters
Under the old Indonesian income tax law, a natural person is considered to be liable for national tax if he has been present in the country for more than 183 days during a period of 12 months, or if he intends to stay in Indonesia.
PMK 18/2021 provided further clarification on the definition of “reside in Indonesia” and “intention to stay in Indonesia”.
“Reside in Indonesia” is defined as a person who:
- Lives in a place of residence in Indonesia which is available to them and accessible at all times, which they own, rent and is not a place of transit;
- Have their vital interests in Indonesia;
- Have their habitual residence in Indonesia.
An “intention to stay in Indonesia” must be justified by the following documents:
- A permanent residence permit;
- A limited stay visa;
- A limited residence permit; Where
- Other documents justifying their stay of more than 183 days in Indonesia.
Territorial taxation for foreigners
Foreigners who have become subject to national tax will only be taxed on Indonesian source income. This is only applicable if they meet the expertise requirements of Annex II of PMK-18.
Their expertise must however be supported by:
- A certificate issued by an institution authorized by the government, or have a minimum of five years of work experience in the field of science, technology and mathematics; and
- An obligation to transfer knowledge to an Indonesian citizen.
Territorial tax treatment is available for four years of residence. If the foreign natural person leaves Indonesia and re-enters Indonesia within the four-year period, territorial taxation will start from the moment they first become subject to national tax.
Foreigners wishing to benefit from the territorial tax regime must do so through the Directorate General of Taxes (DGS). Those who were already subject to national tax before the issuance of the PMK-18/2021 can also apply to the DGS for this tax treatment. If approved, territorial taxation will start from November 2, 2020.
Dividends and offshore income exempt from income tax
To increase investment in Indonesia’s financial markets and real estate sector, the government has granted income tax exemptions for foreign dividends received by domestic taxpayers. Reinvestment requirements are not required for domestic dividends received by domestic corporate taxpayers.
Such concessions will require reinvestment for a period of time from receipt of the dividend. PMK-18/2021 provides details on these reinvestment requirements:
Eligible reinvestments are as follows:
- Investment in financial market instruments such as:
- State bonds, including Sharia instruments;
- Bonds or sukuk issued by state enterprise, private enterprises;
- Financial investments in collecting banks, including Sharia banks; Where
- Other legal forms of investments.
Investments in financial instruments outside the money market include:
- Investment in the real sector;
- Investment in infrastructure through a public-private partnership;
- Equity cooperation in an already existing company domiciled in Indonesia;
- Cooperation with the Indonesian Sovereign Fund; Where
- Loans to small and medium enterprises in Indonesia.
The investment must be held for at least three years from receipt of the dividend or offshore income. The taxpayer must also invest dividends or offshore income in qualifying investments before the end of the third or fourth month following the end of the tax year. Finally, the investment can only be transferred to another eligible investment.
If the reinvestment requirement provides for a threshold of 30%, the taxpayer can benefit from the total exemption if this threshold is reached. However, if the reinvestment is below the 30 percent threshold, the taxpayer must pay income tax on the difference between the amount of the investment and the 30 percent threshold to qualify for the exemption.
Investors should note that the exemption does not apply to foreign citizens who use the Double Tax Avoidance Agreement (DTA) between Indonesia and the partner country / jurisdiction of the DTA.
Reduced withholding tax on bond interest
As part of GR 9/2021, the government reduced the withholding tax rate (WHT) for bond interest paid to non-residents from 20% to 10%.
This reduced rate applies to all types of income assimilated to bond interest, which includes capital gains and has been effective since August 2, 2021.
Value added tax under the Omnibus law
VAT during the pre-production period
Before the Omnibus Law, if an entity subject to VAT had not passed the pre-production stage (had not exported or delivered goods or services subject to VAT) for a certain period, then the entity is deemed to have failed to produce any “input VAT” which has already been credited and therefore can no longer be claimed.
PMK-18/2021 emphasizes this point and that an entity subject to VAT is considered not to have made a delivery if it has not exported or delivered services or goods subject to VAT. Deliveries made for the entity’s own use, or as a gift to customers, or deliveries from a head office or branch, are not considered deliveries for the purposes of assessing whether an entity has passed the stage of pre-production.
The pre-production stage is typically three years, which is extended for manufacturing and enterprise sectors under national strategic projects to five or six years, respectively.
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