In September 2019, the government of Indonesia stated that it was in the middle of drafting a new law on tax provisions and facilities to strengthen the economy. The government hopes that the new law will increase Indonesia’s competitiveness in the global economy and increase the amount of foreign investment.
The new law will be an omnibus law, in that it will regulate several types of taxes under one law. Based on the statement of the government, the omnibus law will stipulate tax incentives available for taxpayer. In addition, the omnibus law will also amend the current Income Tax Law, Value Added Tax Law, and General Tax Provisions and Procedures Law.
The government has stated that the omnibus law will provide additional explanation of the current tax regulations. In addition, the government will introduce new tax incentives in the omnibus law. There are no details yet on when the omnibus law will come into force, but it is expected it will come into force in fiscal year 2020.
Even though there are no details yet on the omnibus law, the government has stated that the law will stipulate the following:
- The corporate income tax rate will be lowered to 20%, effective in 2023.
- There will be no withholding tax on dividends paid to foreign and Indonesian taxpayers with share ownership of 25% or more. This will also be applicable for dividends paid to both Indonesian and foreign taxpayers with share ownership of less than 25%, as long as the dividend income is invested in Indonesia, subject to the re-investment in Indonesia.
- The government will change the tax regime into a territorial tax regime. Therefore, an Indonesian taxpayer that stays outside of Indonesia for more than 183 days and becomes a taxpayer of the state where they reside will no longer be an Indonesian taxpayer.
- The penalty for annual tax return and periodical tax return rectification will be lowered. The government proposes that the penalty will be based on the prorate calculation of the benchmark interest rate plus 5%, which will lead to an interest rate of around 1% per month.
- The penalty for failure to issue a tax invoice or for late filing of a tax invoice will be lowered. The government proposes that the penalty will be 1%.
- The types of input value-added tax (VAT) that can be credited by a VAT-registered entrepreneur will be added.
- The regulation will stipulate the existing tax incentives, and will be in line with the existing regulations.
- Foreign digital companies will be obliged to register to collect, pay and report VAT to the Indonesian tax authority to avoid tax evasion.
- The government will introduce a significant economic presence concept for the purpose of permanent establishment determination.
The government proposes reducing the corporate income tax rate to 22% in 2022, and to 20% in 2023. The government will also implement a lower corporate income tax rate for public companies. For five years, public companies will receive a 3% corporate income tax reduction. For example, if the corporate income tax rate is 20%, the applicable corporate income tax for a public company will be 17%.
The government is hoping that the lower corporate income tax rate will attract new investment into Indonesia.
It is not currently known what requirements taxpayers would need to meet to apply for the tax incentives under the new omnibus law. However, the government has stated that the new law is a priority, and the government is hoping that the law can be finalized soon.
Based on the statement made by the government, it seems that the government is planning to reduce taxes in order to increase foreign investment.
The proposed tax incentives, such as the abolition of withholding tax on dividends, may attract foreign investment. In addition, the government has actively promoted its plan to lower the corporate income tax rate, which is also in line with the request of Indonesian corporate taxpayers. With the lower tax rate, the corporate income tax rate of Indonesia will be closer to that of other countries, e.g. Singapore, so the government is hoping that it will attract foreign investors to set up companies in Indonesia.
In addition to the new tax incentives, the regulation may also impose taxes on foreign entities that are not required to pay taxes under the current laws and regulations. The introduction of the significant economic presence concept may affect foreign digital companies, as even without a physical presence in Indonesia the government may deem that a company has a permanent establishment in Indonesia if it has a significant economic presence in Indonesia.
The new omnibus law will also add a new tax obligation for foreign digital companies, as they will be required to collect, pay and report VAT for their transactions with Indonesian taxpayers.
Since there is no detailed explanation yet on the provisions of the new omnibus law, it is still unclear whether there will be specific requirements to apply for the new tax incentives set out in the regulation. In addition, the requirements for the additional tax obligations for foreign taxpayer are also not clear yet, including what constitutes a significant economic presence in order to determine a permanent establishment.
The omnibus law may also affect the proposed replacement of the current tax laws. The government has long been discussing the amendment of the current tax laws. It is unclear whether the proposed omnibus law will affect the plan to issue new tax laws to replace the current tax laws.
- For existing tax incentives (e.g., tax holiday, super deductible tax), the government has stated that the new omnibus law will be in line with the current regulations. Therefore, taxpayers that have already received tax incentives should not be affected by the new regulation as long as the incentive is still applicable.
- Foreign digital companies should prepare themselves to collect, pay and report VAT from their transactions with Indonesian taxpayers.
- Foreign taxpayers, especially foreign digital companies, should prepare themselves to register as a permanent establishment in Indonesia due to the introduction significant economic presence concept to determine a permanent establishment. There are no details yet on this, but once the law is in force it is expected that the government will deem foreign digital companies that conduct business in Indonesia as permanent establishments, whether or not they have a physical presence in Indonesia.
Ponti Partogi is a Partner, Ria Muhariastuti is a Senior Tax Specialist and Marvin Octavdio is a 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.