Taxes are the main source of state revenue paid by people who qualify as taxpayers. In the process of imposition, there are several important elements and principles that must be understood by taxpayers and considered by the government as the designer and executor of taxation policies.
The obvious components are, in general, the best way to impose taxes. What are the tax objects? Who are the subjects and taxpayers? How much is the rate?
The tax object is usually attached to income or additional economic received by individuals or entities. On the other hand, those who are subject to tax are individuals or entities that receive income or additional economic which is deemed appropriate or obligatory to be taxed.
In the context of imposition of tax, the government and decision-makers must constantly make reference to the following taxation principles:
1. Domicile and Worldwide Income Principles
As the name implies, location or domicile will determine whether or not an individual or entity is taxed on the income they receives. Usually, the application of the domicile principle is also accompanied by the application of the worldwide income principle, in which the imposition of taxes overrides where the taxpayer's income comes from. In other words, both domestic and overseas income can be taxed.
2. The Source Principle (Territorial)
In addition to the domicile principle and worldwide income, there is also the source principle or territorial principle. In this case, the imposition of taxes also targets the income received by individuals and entities of any origin.
This principle does not question who earns income, whether it is a domestic taxpayer or a foreign taxpayer. As long as the income is received within the jurisdiction, the tax authority has the right to impose taxes.
3. Citizenship Principle
The principle of nationality is also known as the principle of nationality or citizenship. In this principle, the imposition of tax is only carried out based on citizenship status.
So, the State will not question where the income received by the taxpayer comes from. As long as the person or entity is a citizen of that country, any income will be taxed.
4. Hybrid Territorial Principle
According to J. Clifton Fleming, Robert J. Peroni, and Stephen E. Shay (2008) a country that applies the principle of territorial tax or a worldwide tax system does not mean that the country adopts the pure form of the two tax systems. Countries in the world generally combine the two, until the term hybrid territorial tax principle appears.
However, the application of the hybrid territorial principle in each country can be different. Some are more inclined to worldwide income, some are more inclined to the territorial principle.
Indonesia also applies a mixed or hybrid territorial principle. In essence, the Government of Indonesia can tax all income, both domestically and abroad, depending on citizenship status, domicile, and length of stay.
For domestic taxpayers, the imposition of taxes is based on the domicile principle. Meanwhile, foreign citizens who live and earn income in Indonesia for more than 183 days in 12 months may be subject to tax. Likewise, foreign taxpayers who live in Indonesia for a maximum of 183 days in 12 months, are only imposed on income earned in Indonesia.In its implementation, it must always consider or comply with the Double Taxation Avoidance Agreement (tax treaty).
However, since the enactment of Law (UU) Number 11 of 2020 on Job Creation, Indonesia's tax system has shifted from its prior inclination towards the worldwide income principle to a territorial tax system.
In the Income Tax Law, all income from abroad is designated as a tax object. This provision was revised by the Job Creation Law, in which dividends from abroad and after-tax income received by permanent establishments (PE) abroad are excluded from income tax objects or are not taxed in Indonesia. The condition is that at least 30% of the profit after tax on dividends and income from the PE is invested in Indonesia.