The Indonesian Minister of Finance issued Minister of Finance Regulation No 192/PMK.03/2018 (MoF Regulation 192) on The Implementation of Tax Credit for Foreign Sourced Income with the aim of minimizing double taxation on foreign income. Several issues related to foreign income addressed in MoF Regulation 192 are:
- determination of sources of foreign income;
- calculation of taxable income;
- calculation of foreign income tax that could be credited.
The Indonesian government issued MoF Regulation 192 on December 31, 2018. The regulation came into force on the issuance date. Prior to this regulation, this issue was regulated under Decree of the Minister No. 164/KMK.03/2002 on Foreign Tax Credits (MoF Decree 164).
MoF Regulation 192 stipulates that income tax should be calculated based on income sourced from Indonesia and foreign income. If the taxpayer makes a payment of income tax on the foreign income in the country in which the income is sourced, the tax paid can be treated as tax credit.
However, taxes paid on dividend received from a controlled foreign company as referred to in Article 18 paragraph (2) of the Income Tax Law cannot be treated as tax credit. The Indonesian government has issued a specific regulation for dividend paid by a controlled foreign company.
An important note is that MoF Regulation 192 introduces the concept of “trust.” Under MoF Regulation 192, “trust” is defined as a scheme, arrangement or relation based on a written agreement between a person or an entity acting as a founder, and a person or an entity acting as the title holder of ownership of assets with obligations to manage the assets for the interests of the beneficiaries.
Calculation of Taxable Income
In calculating the taxable income, an Indonesian taxpayer is required to calculate the income received from Indonesia and foreign income.
To calculate the amount of payable income tax, a taxpayer must calculate the total income, both domestic and foreign. For business income and other income, the income is based on the net income. For income from a trust, the income is based on the net income or the taxpayer’s portion of the net income.
The foreign income must be calculated in the fiscal year when it is earned. However, for foreign income from a trust that is not taxed at the trust level, it must be calculated in the fiscal year when it is earned or received, whichever is earlier.
For calculation of taxable income, the following types of income are not included in the calculation:
- certain income that is subject to final income tax (e.g. income on lease of land and or building, fees on construction activities, sale of listed shares in the Indonesian stock exchange) under Article 4(2) of Law No. 36/2009 on Income Tax Law ("Income Tax Law");
- income that is subject to deemed profit margin calculation (e.g., domestic and foreign shipping companies, foreign oil and gas drilling service companies) under Article 15 of the Income Tax Law;
- separate income of a husband and a wife under Article 8(1) of the Income Tax Law.
If the Indonesian taxpayer suffers loss abroad, the foreign loss is not deductible for Indonesian tax purposes. However, MoF Regulation 192 stipulates that a foreign loss can be netted off if the income has an effective connection with an offshore branch or representative office.
Foreign Tax Credit Calculation
Similar to MoF Decree 164, MoF Regulation 192 stipulates that the maximum amount of foreign tax credit that can be credited in Indonesia is the amount of tax paid in the country in which the income is sourced or a certain amount as stipulated under MoF Regulation 192, whichever is lower.
The certain amount as stipulated under MoF Regulation 192 is calculated by the type of income from each country. This is different compared to MoF Decree 164, which only requires calculation for each country, and does not differentiate the type of income.
MoF Regulation 192 also takes into consideration the application of tax treaty. If under an applicable tax treaty it is stipulated that the income is taxable only in Indonesia, the foreign tax credit cannot be credited in Indonesia. This is different compared to MoF Decree 164, which does not take into consideration the application of tax treaty.
In the event that the amount of tax payable is lower than the amount of the allowed foreign tax credit, the maximum amount of foreign tax credit that can be calculated is the amount of tax payable.
Foreign Tax Credit Claim
Compared to MoF Decree 164, MoF Regulation 192 requires fewer documents to be provided. Under MoF Regulation 192, an Indonesian taxpayer must provide one of the following documents:
- a copy of tax payment slip or withholding tax slip; or
- a copy of proof of tax payment.
The provided document must contain information on the name of the Indonesian taxpayer and the amount of tax paid.
For income received from the trust, the above document can be replaced with the relevant corporate income tax return.
MoF Regulation 192 provides a more detailed explanation on foreign tax credit compared to MoF Decree 164, including detail on source of income and the fiscal year in which it is calculated as income. Another important point is that MoF Regulation 192 introduces the concept of trust, which had not been regulated under the previous regulation.
Due to the issuance of MoF Regulation 192, the uncertainty regarding trust should have been answered. Income that is acquired from a trust must be reported when it is received and the source of income is the country where the said trust is located and established. Thus, if the trust is required to pay foreign income tax on its income, then the income can be calculated as a foreign income tax that can be credited.
The issuance of MoF Regulation 192 should help Indonesian taxpayers that receive foreign income to claim their foreign tax credit.
- For Indonesian taxpayers that receive income from trusts or are planning to establish trusts, the calculation of foreign tax credit related to the trusts should refer to MoF Regulation 192.
- MoF Regulation 192 stipulates that a foreign loss can be netted off if the income has an effective connection with an offshore branch or representative office. Therefore, if Indonesian taxpayers would like to net off the foreign loss, the Indonesian taxpayers should collect relevant supporting documents and items of evidence to prove that the foreign loss is effectively connected to its offshore branch or representative office.
- Indonesian taxpayers should prepare tax payment slips or withholding tax slips as proof that they have paid taxes on the foreign income. If the tax payment slips or withholding tax slips are not available, the Indonesian taxpayers should prepare proof that the taxes have been paid.
Ponti Partogi is a Partner and Ria Muhariastuti is a Senior Tax Specialist at HHP Law Firm, Indonesia.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.