Member Article

The new Income Tax Law is Law No. 36 of 2008. It intends to boost the competitiveness of Indonesia's economy and create a favorable investment climate.

Under the new law, income tax for corporations will be 28% flat in 2009, replacing the existing progressive system. The rate will be further reduced to 25% in 2010. The rate will be reduced by a further 50% if the company concerned is categorized as a micro, or small to medium sized enterprise (SME) or is a company earning less than Rp 50 billion per year. With a 14% rate in 2009 falling to 12.5% in 2010, SMEs are expected to increase their growth.

The tax rate of companies which have at least 40% of their shares listed on the Indonesia Stock Exchange will be cut by a further 5%.

The requirement for a company receiving an inter-company dividend to be exempt from income tax changes under the new law has changed. Now, a company is not required to have an active business so it is possible to have pure holding companies without the double taxation which previously applied in the absence of active income. 

Expenses indirectly related to business activities can now be deducted for a resident tax payer or PE. These include expenses for sales and marketing, administration; contributions to national disaster relief; expenditures on building social infrastructure; contributions to educational facilities and scholarships awarded to certain individuals.

The law contains provisions on taxes on foreign direct investments. First, the definition of a PE now also covers warehouses, computers, electronic agents or automatic apparatus owned, rented, or used by electronic transaction operators to conduct business activities through the internet. Secondly, there are provisions to counter perceived abuses of the tax law. An Indonesian taxpayer purchasing shares/assets assets at irregular prices through a special purpose company or another party may be deemed to be the purchaser if the Indonesian taxpayer has a special relationship with that company or party. Also, a sale or transfer of shares of a special purpose company established or domiciled in a tax haven country having a special relationship with an entity established or domiciled in Indonesia or a PE in Indonesia can be determined to be the sale or transfer of shares of an entity established or domiciled in Indonesia or a PE in Indonesia. Income paid to a resident individual taxpayer from an employer having a special relationship with another offshore company, can be re-determined if the employer is transferring all or part of the income of the resident taxpayer to another cost or expense paid to that offshore company. A special relationship may be deemed to exist if the taxpayer has a direct or indirect capital participation or relationship through participation of at least 25 % in another taxpayer; the taxpayer controls another taxpayer(s) under the same control both directly and indirectly, through managerial control, etc even though no ownership relationship exists; or if there is a certain family relationship by either blood or marriage.

The new tax law also lowers income tax rates for individuals. Taxable income is raised from Rp 13.2 million to be Rp 15.84 million per year and the rate will now be reduced to a flat 30%.

The Rp 1 million “fiscal” exit tax will also be eliminated in phases. Starting in 2009, all registered taxpayers with a Taxpayer Registration Number (NPWP) will no longer be required to pay the “fiscal” tax to go overseas. Fiscal taxes will be eliminated by 2010. 

 

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