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Currency Law: New Law on an Everlasting Issue

Years before the issuance of Law No. 7 Year 2011 on Currency (hereinafter referred to as “Currency Law”), provisions of currency had been part of Law No. 23 Year 1999 on Bank Indonesia (hereinafter referred to as “BI Law”) and its amendment. Carrying an important mission as to secure a national interest in general, what this Law differently offers to achieve the mission is interesting to find out.

Responding to the newly issued law, the sovereignty of the Republic of Indonesia is definitely the biggest concern to base its issuance. Majorly, both the Currency Law and the provisions of the BI Law regulate the same obligation to use Rupiah in transactions conducted in the area of the Republic of Indonesia. For business players, there are   different treatments to be noted, while some others need to be clearly determined. 

Obligation Imposition and Its Exclusion

As the highest legal tool used to regulate the use of the Indonesian currency and foreign currencies in transactions in the Indonesia’s territory, the Currency Law regulates the use of currency in a more specific manner than the provisions under the BI Law. Reading through the whole content of both the Currency Law and the provisions of the BI Law, some of the BI Law provisions remain and are developed into a wider scope, while some others are  eliminated.

1. Article 21 of the Currency Law

This Article emphasizes on the place of transactions made where the obligation is imposed. The place is determined as anywhere within the territory of the Unitary State of the Republic of Indonesia (NKRI). Exception is made for transactions as listed in its paragraph 2. The Article regulates Rupiah as the only currency to be used for the payments of the transaction regardless which currency is mentioned in an agreement. From this point, many believe that agreements involving domestic transactions are not necessarily set in Rupiah, and only the payment of the transactions must be in Rupiah.

2. Article 23 paragraph (2)

The exception regulated in Article 23 paragraph (2) is applied for any payment or transaction settlement in foreign currency initially agreed upon.  Among many arising from this Article, there are three interesting interpretations as set below

- Systematic and grammatical interpretation

The exception should only refer to Article 23 paragraph (1). In other words, Taxpayers may refuse Rupiah and only receive a foreign currency if the clause of the agreement related discloses the use of a foreign currency, either before or after the validation of the Currency Law.

- Interpretation according to the Parliament’s steering committee of the Currency Law

The exception only prevails for agreements made earlier than the validation of the Currency Law. For agreements made after it (after 28 June 2011), there is no prohibition in the use of foreign currency in the agreement, as long the payment is made in Rupiah as stated in Article 21 paragraph (1) of the Currency Law.

- Historical and Literal Interpretation

As tracing down the original provision in the BI Law where the obligation imposition and exception were regulated, the interpretation of Article 23 paragraph (2) of the Currency Law should also be in line with that of Article 21 paragraph (1). Thus, in can be concluded that for agreements made at the first place to use foreign currency in the transaction, at the payment time, the use of foreign currencies is allowed.

To make sure which interpretation is appropriate upon the absence of the articles’ elucidations, further         regulations are important to wait. In fact, the condition does not only occur on the two articles. Many other    articles desperately require more detailed explanation as well.

Categorization of Transaction

Upon the transactions which are excluded from the obligation to use Rupiah, many wonder about the exact definition or criteria for international transactions (financing and trading) in particular. Currently, there are a wide range of international transaction schemes to be determined whether they are excluded from the         obligation, among others:

- Transaction between two Indonesian Citizens in which one of them is in overseas;

- Transaction between an Indonesian Citizen and a Foreign Citizen or between two Foreign Citizens conducted in Indonesia;

- Payment from an Indonesian Citizen or a local entity to a Foreign Citizen or a foreign entity transferred to a bank account in overseas;

- Transaction between a foreign entity and a local entity conducted in Indonesia;

- Transaction between two foreign entities conducted in Indonesia;

- Payment to an expatriate or a local entity transferred to a bank account located overseas.

Sanction imposed

According to the BI Law, any violation against the obligation to use Rupiah was subject to one month       detention and IDR 2 million fine. Under the Currency Law, it is now subject to a maximum of 1 (one) year               imprisonment and IDR 200 million fine.

Impacts on Taxation Compliance

The main issue of the Currency Law is the use of Rupiah for transaction payments. In taxation, payment time is one of the determining points when a tax is payable.  Pursuant to its validation, transactions made under agreements previously made before it will comply to use Rupiah at the payment time even though other currency use has been determined, such as, expatriate salary payment, purchase payment, affiliated transactions, etc.  

1. Withholding of Income Tax 23 and 26

The above taxes shall be payable at the payment time, the time of accruals or the due time of payment, which of the three points of time firstly occurs.

Pursuant to the Currency Law, the issue will be the foreign exchange rate used for Rupiah conversion at whichever time firstly occurs as abovementioned. If the tax withholding is not at the payment time, it is definitely the exchange rate under the Finance Minister Decree (KMK rate) to be used. The problem takes place when the tax withholding is at the payment time. The question will be whether or not the KMK rate is used, since the Currency Law stipulates that the       payment realization of tax object shall no longer use foreign currency other than Rupiah.  

There are at least two approaches to answer the above question. First approach is to use the KMK rate. The reason is that the value stated in the agreement or the invoice is not in Rupiah, the tax withholding will therefore use the KMK rate. The second approach is to use the foreign exchange rate at the realization. It is believed that since the payment realization is in Rupiah, the tax withholding should use the Rupiah amount as the tax base and the KMK rate is not used. 

2. Collection of VAT and Sales Tax on Luxury Goods

Referring to the VAT Law (No. 42 Year 2008), the exchange rate used for VAT collection purpose is the KMK rate at the date when the tax invoice is made. In addition, if the VAT collection is not conducted at the payment date, no implication occurs since the realization of VAT Object payment requiring the use of Rupiah has not taken place. However, if the VAT collection occurs at the transaction payment date prior to the transfer of goods/service, the Tax Invoice shall be made at the payment date as well. As a consequence, difference of exchange rate from the difference between the KMK exchange rate used in the Tax Invoice and realization exchange rate for the payment purpose.

3. Tax Remittance and Tax Return Filing

Principally, tax payment is a transaction conducted in NKRI for the purpose of compliance to the State. The question is, whether the tax remittance or payment is also categorized as the transactions excluded from the obligation of the use of Rupiah. Article 21 paragraph (2) A of the Currency Law           categorizes such transactions as “certain transactions in the conduct of State Budgeting”. To ascertain about this matter, a regulation affirming the use of other currencies (USD) in the tax          remittance is truly required.

According to the Currency Law, the use of USD currency in the Tax Return filing does not result in any tax implication, since it is considered only a form of recording/reporting. The implication arising when it comes to tax payment, whether it shall be in Rupiah or it is applicable in USD?

From accounting perspective, the implication of the   Currency Law is considered low. The significant            implication is only from the functional currency recording for the domestic transaction which previously allows the use of other currencies than Rupiah. The transaction automatically makes the recording in Rupiah. On the other hand, referring to IFRS, there is no limitation on currency used in the functional currency recording.

From now on, watching over any latest progress related to the Currency Law, particularly the technical regulations as the lawful interpretation of its provisions, is a very careful measure to take.