JAKARTA. The Job Creation Law (UU Cipta Kerja), whose discussion and ratification sparked controversy and are publicly opposed, also relaxed several clauses in the Income Tax Law (UU PPh). The relaxation includes changing the taxation system to be territorial-based, reducing tax objects, and adding the dividend criteria exempted from tax imposition.
With the issuance of the Job Creation Law, the Indonesian tax system changed from the one that was previously targeting all taxpayers' income regardless of its source - domestic and foreign (worldwide income) - to only taxing income earned in Indonesia (territorial income). It is related to the amendment to Article 2 paragraphs (3) and (4) of the Income Tax Law, which is the basis for determining individual tax subjects.
The point is Indonesian citizens (WNI) who stay abroad for more than 183 days in 12 months may be Non-Resident Tax Subjects (SPLN). Thus, their incomes may be taxed by the relevant authorities in the country where they stay.
On the contrary, expatriates (WNA) who work in Indonesia for more than 183 days in 12 months will be registered as Resident Tax Subjects (SPDN). In other words, the foreigners are obliged to pay taxes on incomes received while residing in Indonesia according to the applicable regulations.
This provision is further affirmed in Article 4 additional paragraph (1a-1c) of the Income Tax Law, which confirms that the foreign nationals who have certain expertise and have become SPDN are taxed only on incomes received or earned from Indonesia. However, this provision is only targeting foreigners who have certain expertise and valid for four years after confirmed as Resident Tax Subjects.
The income of foreign citizens that becomes the object of income tax is the one that is received or earned in connection with work, services, or activities in Indonesia under the name and any form paid outside Indonesia. However, this provision does not apply to foreign citizens who utilize a Double Taxation Avoidance Agreement.
Non-Object of Income Tax
Related to income tax objects, through the Job Creation Law the government removes and adds the types of incomes that are exempted from the imposition of income tax, i.e., by amending and adding several clauses in Article 4 of the Income Tax Law. The income criteria excluded from the imposition of income tax increased to 17 items from previously only 13 items. The following is the list of additional earnings that are not income tax objects:
- Share of profit or net income (SHU) of a cooperative;
- Funds for the cost of organizing the pilgrimage (BPIH) and developing hajj finance in certain financial instruments.
- Budget surplus was received by social and religious institutions used for the procurement of social and religious facilities and infrastructure for a maximum of four years since it was received.
The three types of incomes complete the list of incomes exempted from the Income Tax Law:
1. Aid or donation, including zakat;
4. Assets including cash deposits to replace shares or equity capital received by the entity;
5. Remuneration in respect of work or services enjoyed in the form of benefits in kind;
6. Claims of health insurance, life insurance, and scholarship insurance;
7. Dividend or other incomes determined;
8. Pension fund contributions;
9. Income from capital invested by pension funds;
10. Income received or earned by venture capital companies;
12. Budget surplus received by educational non-profit, research and development agencies or institutions; and
13. Aid or donation paid by BPJS.
It is still related to the tax object, especially concerning the exemption of income tax on dividends. The Job Creation Law amends the provision of Article 4 paragraph (3) letter f, namely regarding the exemption of tax on dividends originating locally and abroad, as well as other incomes from overseas.
Previously, dividends that were exempted from income tax only included:
- Dividends derived from retained earnings reserve;
- Dividends received by PT, BUMN (State-Owned Enterprise) or BUMD (Regional Government-Owned Enterprise) that has a stake of at least 25% of the total paid-up capital; and
- Dividends from capital that is a pension fund.
With the issuance of the Job Creation Law, the criteria for dividends that are exempted from tax objects are expanded to be as follows:
- Domestic dividends received by individuals as long as they are reinvested in Indonesia within a certain period of time;
- Domestic dividends received by domestic business entities;
- Dividends from overseas companies as long as they are reinvested at least 30% in Indonesia within a certain period of time. If the investment is less than 30%, the profit difference will be taxed according to applicable regulations.
- Dividends from Permanent Establishments (BUT) abroad whose shares are not traded on the stock exchange as long as they are invested in Indonesia before the issuance of a tax assessment letter (SKP);
Non-Permanent Establishment's foreign income invested in Indonesia is excluded from the imposition of income tax as long as it comes from active businesses and not from companies owned abroad. Taxes on dividends or other incomes that have been paid abroad cannot be credited or refunded. Any breach of the re-investment provisions in Indonesia automatically aborts tax exemption and the taxes paid abroad may be credited.
The Flexibility of Income Tax Rate Article 26
The Omnibus Law on Job Creation also provides discretion for the government to adjust the income tax rate for payment of salaries, interest, dividends, royalties, and so forth to Non-Resident Taxpayers, without having to change the Income Tax Law. The provision is stipulated in Article 26 of the Income Tax Law, which sets the income tax rate of 20% (final) on the gross amount of those incomes.
The tariff adjustment discretion is mandated by the Job Creation Law by adding paragraph (1b) in Article 26 of the Income Tax Law, which emphasizes that the final income tax rate is 20% of the gross amount by parties obliged to pay interest, including premiums, discounts, and rewards in connection with debt repayment guarantees, can be lowered by Government Regulation (PP).
The Income Tax Law Article 26 regulates the imposition of income tax on income earned on:
- Interest including premiums, discounts, and rewards on debt repayment guarantee
- Royalties, leases, and other incomes in connection with the use of property
- Rewards for services, work, and other activities
- Prizes, swap premiums, and hedging transactions
- Profit on debt relief
This article has changed due to adjustments to the latest draft of the Job Creation Law (812 pages) released by the House of Representatives (DPR) Legislation Body. All of the new policies written above may still change considering the possibility of review for the Job Creation Law in the Constitutional Court.