A Comprehensive Guide to Indonesian Taxes for Foreign Business Owners
Are you contemplating the idea of launching a business in Bali as a foreigner but find yourself grappling with the intricacies of Indonesian tax laws? Or perhaps you’re already a business owner in Bali, seeking clarity amidst the complexities of Indonesian taxes? Understanding these tax laws is not just important; it’s critical for the success of your venture. Let’s delve into this comprehensive guide, which provides an in-depth exploration of the various taxes you may encounter when establishing and operating a business in Indonesia.
Let’s get into it —
Firstly, Choosing the Right Business Structure —
Choosing the right business structure is the first step toward tax compliance. Foreigners have several options, each with unique tax implications and requirements:
1. Limited Liability Company / Perseroan Terbatas (PT):
Requirements: A minimum of two shareholders, one commissioner, and one director. At least one of the directors must be an Indonesian resident.
Ownership: Shareholders can be individuals or legal entities, and foreign ownership is allowed.
Liability: Limited to the amount of their capital contribution.
Taxation: 22% Corporate Income Tax for domestic companies, 20% for foreign-owned companies (PT PMA).
Suitable for: Most types of businesses, including small to medium-sized enterprises (SMEs) and larger companies.
Advantages: Limited liability, flexible ownership, capital-raising ability through issuing shares, and credibility in the Indonesian market.
Considerations: Requires at least one Indonesian resident director and compliance with local governance.
2. Representative Office / Kantor Perwakilan Perusahaan Asing (KPPA):
Purpose: Used for market research, liaison, and business promotion. Revenue-generating activities are prohibited.
Requirements: Must be established by a foreign company operating for at least three years; must appoint an Indonesian chief representative.
Activities: Limited to representing the parent company, market research, and promoting products or services.
Taxation: Not subject to Indonesian corporate income tax but may incur other tax obligations.
Suitable for: Foreign companies looking to establish a presence in Indonesia for market research, liaison activities, and business promotion.
Advantages: Lower establishment costs, good for market exploration.
Considerations: Limited to non-revenue activities, requires an Indonesian chief representative, and has restrictions.
3. Foreign-Owned Company / Perseroan Terbatas Penanaman Modal Asing (PT PMA):
Requirements: Two shareholders, one commissioner, and one Indonesian-resident director.
Ownership: Allows full foreign ownership in most sectors, with restrictions in some.
Liability: Limited to capital contribution.
Taxation: 20%, with potential variations by industry or regions.
Suitable for: Foreign companies looking to establish a fully-owned subsidiary in Indonesia for revenue-generating activities.
Advantages: Full foreign ownership in most sectors, limited liability, allows full foreign ownership in most sectors, with restrictions in some.
Considerations: Must comply with foreign investment regulations and meet capital requirements. Requires an Indonesian resident director.
Secondly, Corporate Income Tax (CIT) —
Corporate Income Tax (CIT) in Indonesia applies to both domestic and foreign companies. Key points include:
Tax Rates: Standard rate is 22% for domestic companies, 20% for foreign-owned companies (PT PMA). Certain industries or regions may have different rates. Bali’s tax rate is the same as the standard.
Taxable Income: Based on net profit after allowable deductions.
Tax Treaties: Treaties with various countries, including Australia, help prevent double taxation. These treaties can affect the rate of CIT for foreign-owned companies.
Fiscal Year: Companies in Indonesia can choose their fiscal year, which may or may not coincide with the calendar year. The fiscal year must be consistent from one year to the next unless there are valid reasons for change.
Tax Incentives: Various incentives exist for specific industries or regions. These incentives may include reduced tax rates, tax holidays, or accelerated depreciation.
Tax Reporting and Payment: Annual return typically by the 25th day of the fourth month after fiscal year-end, with estimated payments throughout the year.
Transfer Pricing: Indonesian tax law has rules to prevent tax evasion by controlling prices in transactions between related companies. Businesses must follow these rules and keep detailed records to support their pricing policies.
Tax Audits and Penalties: Indonesian tax authorities can audit company records to check for compliance. Non-compliance may lead to penalties, including fines or imprisonment.
Thirdly, Value-Added Tax (VAT) —
VAT is applied at each stage of production and distribution, with businesses collecting it and consumers ultimately bearing the cost:
Registration: Required if turnover exceeds IDR 4.8 billion (~$470,000 AUD).
Rates: Standard 10%, with some exemptions and reduced rates to 5%.
Input VAT Credits: Can be applied against output VAT, with excess carried forward.
VAT Refunds: Available when input VAT exceeds output VAT, subject to verification.
VAT Calculation: VAT is a percentage added to the selling price of goods or services. This tax is included in the total price, but the VAT amount is listed separately on invoices.
VAT Returns and Payment: Businesses must file VAT reports either monthly or quarterly, based on their revenue. VAT payments are due at the same time as these reports.
Exemptions and Zero-Rating: Some items, like specific financial, healthcare, and education services, are exempt from VAT. Zero-rated items have a 0% VAT rate, making them tax-free.
VAT Invoicing and Record Keeping: Businesses must provide VAT invoices for all taxable sales and keep records of VAT transactions. Not issuing proper invoices or keeping accurate records may lead to penalties.
Next, Withholding Taxes —
Withholding taxes are amounts deducted from payments to non-residents before they receive the money, ensuring they pay taxes on income earned within Indonesia. Here’s a quick guide:
Types: Includes taxes on dividends (10%), interest (15%), royalties (15%), and services (2-20%).
Rates: Varies based on payment type and applicable tax treaties.
Obligations: Indonesian entities making payments must withhold and remit taxes to authorities.
Second to last, Social Security Contributions / Badan Penyelenggara Jaminan Sosial (BPJS)
BPJS covers Indonesian and foreign employees, providing healthcare, pensions, and work-related accident insurance:
Coverage: Required for all employees, including expatriates.
Contributions: Shared between employer and employee.
Compliance: Employers must remit contributions and report accurately to BPJS.
And lastly, other miscellaneous taxes —
Other Taxes
Property Taxes: Imposed on land and buildings, with rates varying by location and property value. The tax rate is typically between 0.1% and 0.3% of the assessed value.
Luxury Goods Sales Tax (PPnBM): Ranges from 10-50% for items like luxury vehicles and electronics.
Customs Duties: Applies to imports, with rates depending on goods and origin, which can be found in the Harmonized System (HS). Certain goods may be eligible for preferential treatment under free trade agreements or special customs regimes, such as bonded warehouses or free trade zones.
Community Contributions (Banjar)
Respecting the local community is essential. Understanding and meeting Banjar obligations can enhance harmony and respect with local residents, contributing positively to the community.
Starting a business in Bali as a foreigner is an exciting journey. Navigating Indonesian tax laws is crucial for long-term success. Given the complexities and nuances, seeking professional guidance can be immensely beneficial. Michaela Rankin of FRE.DM Wealth specialises in Indonesian tax law, offering the expertise and confidence you need to focus on building your dream business in this beautiful island paradise.
