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CONSOLIDATION OF LAW OF THE REPUBLIC OF INDONESIA NUMBER 7 OF 1983

CONCERNING INCOME TAX AS LASTLY AMENDED BY LAW NUMBER 17 OF 2000

CHAPTER 1

GENERAL PROVISION

Article 1

 

Income tax shall be imposed on any taxable person in respect of income during a taxable year.

 

Elucidation Article 1

This Law regulates income tax imposition on Taxable Persons in relation to income received or accrued in a taxable year. Taxable Person will be subject to tax if that person receives or accrues income. A Taxable Person who derives income is called a Taxpayer under this law. A Taxpayer is taxed on the income received or accrued during a taxable year or a fraction of a taxable year, if the tax obligations commence or end in a taxable year.

The term a taxable year under this law means a calendar year. However, a Taxpayer may use an accounting year which is different from the calendar year insofar as the accounting year has the period of 12 (twelve) months.

 

 

CHAPTER II

TAXABLE PERSON

Article 2

 

(1)

Taxable person consists of:

 

a.

1)

an individual;

2)

an undivided inheritance as a unit in lieu of the beneficiaries;

 

b.

an entity;

 

c.

a permanent establishment.

(2)

Taxable person comprises of resident and non-resident Taxpayer.

(3)

The term “resident Taxpayer” means:

 

a.

an individual who resides in Indonesia or is present in Indonesia for more than 183 (one hundred and eighty-three) days within any 12 (twelve) month period, or an individual who in particular taxable year is present and intends to reside in Indonesia;

 

b.

an entity established or domiciled in Indonesia;

 

c.

an undivided inheritance as a unit in lieu of the beneficiaries.

(4)

The term “non-resident tax payer” means:

 

a.

an individual who does not reside in Indonesia or is present in Indonesia for not more than 183 (one hundred and eighty-three) days within any 12 (twelve) month period, and an entity which is not established or domiciled in Indonesia conducting business or carrying out activities through a permanent establishment;

 

b.

an individual who does not reside in Indonesia or is present in Indonesia for not more than 183 (one hundred and eighty-three) days within any 12 (twelve) month period, and an entity which is not established or domiciled in Indonesia deriving income from Indonesia other than from conducting business or carrying out activities through a permanent establishment.

(5)

A permanent establishment shall be an establishment used by an individual who does not reside or is present in Indonesia for not more than 183 (one hundred and eighty-three) days within any 12 (twelve) month period, or by an entity which is not established or domiciled in Indonesia in the form of, among others:

a.

a place of management;

b.

a branch;

c.

a representative office;

d.

an office;

e.

a factory;

f.

a workshop;

g.

a mining and extraction of natural resources, drilling used for mining exploration;

h.

a fishery, animal husbandry, farm, plantation or forestry;

i.

a construction, installation or assembly project;

j.

the furnishing of services through employees or other personnel, if conducted for more than 60 (sixty) days within 12 (twelve) month period;

k.

an individual or an entity acting as a dependent agent;

l.

an agent or employee of an insurance company that is not established or domiciled in Indonesia if it collects premiums or insures risk in Indonesia.

(6)

The residence of an individual or the domicile of an entity shall be determined by the Director General of Taxes according to the real situation.

 

Elucidation Article 2

Paragraph (1)

The term “Taxable Person” includes an individual, an undivided inheritance as a unity, an entity, and a permanent establishment.

Subparagraph a

An individual as a Taxable Person may reside or stay in Indonesia or outside Indonesia. An undivided inheritance as a unity constitutes substitute to Taxable Person, substituting those who have the right thereof, namely the heirs/heiresses. The purpose of designating an undivided inheritance as a substitute Taxable Person is to allow DGT to collect tax originating therefrom.

Subparagraph b

As provided in Law on General Provisions and Tax Procedures, the term entity is defined as a group of persons and/or capital as a unity whether or not it conducts business or activity, including limited companies, limited partnerships, other types of companies, state-owned or local government-owned enterprises in whatever name, firma, kongsi, cooperative, pension fund, partnership, association, foundation, public organization, social-political organization or similar organization, institution, permanent establishment and other forms of entities including investment fund. Under this law (see sub-paragraph c), permanent establishment is treated as a special taxable person, separated from an entity. Therefore, despite the similarity of its treatment with an entity, for Income tax purposes, a permanent establishment has a special status and is not included in the term of an entity.

State or local government-owned enterprises constitute Taxable Persons irrespective of the name and the form, thus any unit within the government organizations, such as an institution and an entity owned by the government, which conducts businesses or activities to derive income, constitutes a Taxable Person.

Particular units of government organizations do not constitute Taxable Persons if the following criteria are met:

1)

They are established based on regulating laws.

2)

Their funding is from State or Local Government Budget.

3)

Their earnings are included in State or Municipal Budget; and

4)

Their books are audited by Government’s Auditor.

As a Taxable Person, an investment fund, established as limited company or other forms, is included in the term of an entity.

The term “association” includes commercial association, union, society, or association of parties having the same interests.

Subparagraph c

See the provision in paragraph (5) and the elucidation thereof.

Paragraph (2)

The term Taxable Person comprises Resident Taxable Person and Non-resident Taxable Person. A Resident Taxable Person constitutes a Taxpayer if he derives income that exceeds personal exemption, whereas a Non-resident Taxable Person promptly constitutes a Taxpayer due to the income derived from sources in Indonesia, or through a permanent establishment in Indonesia. In other words, a Taxpayer shall be an individual or an entity who/which has already met subjective and objective obligations. In connection with the Taxpayer Identification Number, an Individual Taxpayer receiving income less than personal exemption is not necessary to register himself to obtain a Taxpayer Identification Number.

Principal differences between Resident and Nonresident Taxpayers are in the manner they fulfill their tax obligations, among others are as follows:

a.

A Resident Taxpayer is taxed on his income derived from Indonesia and abroad, whereas a Non-resident Taxpayer is taxed only on the income originating from sources in Indonesia.

b.

A Resident Taxpayer is taxed based on the net income with a general rate, whereas a Non-resident Taxpayer is taxed based on the gross income with an appropriate rate.

c.

A Resident Taxpayer is obliged to submit an Annual Tax Return as a means to assess his tax obligation in a taxable year, whereas a Non-resident Taxpayer is not, because his tax obligation are fulfilled through withholding tax, which is final in nature.

Non-resident Taxpayers doing business or conducting activities through a permanent establishment in Indonesia are equivalent with Resident Taxpayers in the manner of the fulfillment of their taxation as regulated in this Law and The Law on General Provisions and Tax Procedures.

Paragraph (3)

Subparagraph a

In principle, an individual who constitutes a Resident Taxpayer is an individual residing or staying in Indonesia. Included in the term “individuals residing in Indonesia” are those who have the intention to reside in Indonesia, the determination of which shall be considered based on the facts and circumstances.

To meet the criterion of “present in Indonesia for more than 183 (one hundred and eighty-three) days”, an individual does not have to be consecutively present. It shall be determined by the total number of days the said individual is in Indonesia within a period of 12 (twelve) months since his/her arrival in Indonesia.

Subparagraph b

Sufficiently clear.

Subparagraph c

An undivided inheritance inherited by an individual as a Resident Taxable Person shall be assumed as a Resident Taxable Person under this Law. To meet the taxation obligations thereof, the said undivided inheritance substitutes the obligations of the heirs/heiresses who have the right thereof. If the said undivided inheritance has already been distributed, than the taxation obligation thereof shall be transferred to the heir/heiresses.

An undivided inheritance inherited by an individual as a Non-resident Taxable Person not doing business or conducting activities through a permanent establishment in Indonesia is not assumed as a substitute to the Taxable Person because the tax imposition on income derived by the said individual shall be inherent to the object

Paragraph (4)

Subparagraphs a and b

A Nonresident Taxable Person is an individual or entity residing or domiciled outside Indonesia, who derives income from Indonesia, through or not trough a permanent establishment. An individual not residing in Indonesia, but staying in Indonesia for less than 183 (one hundred and eighty-three) days within a period of 12 (twelve) months, is a Nonresident Taxable Person.

If the income is derived through a permanent establishment, the individual or entity is taxed through the permanent establishment with respect to the income derived and the individual or entity shall maintain the status of Nonresident Taxable Person. Therefore the permanent establishment substitutes the individual or entity as Nonresident Taxable Person in fulfilling the taxation obligation in Indonesia.

In the case that the income is derived not through a permanent establishment, the tax is imposed directly to the Nonresident Taxable Person.

Paragraph (5)

A permanent establishment contains the concept of the existence of place of business, namely facilities that may be in the form of lands and buildings, including machinery and equipment.

The place of business is permanent in nature and used to carry out the business or to conduct the activities of an individual not residing or an entity not established and domiciled In Indonesia.

The concept of permanent establishment also includes individuals or entities as agents the positions of which are not independent, acting for and on behalf of an individual or entity not residing or domiciled in Indonesia. An individual not residing or an entity not established and not domiciled in Indonesia can not be assumed to have a permanent establishment in Indonesia if the individual or the entity, in conducting his/its business or activities in Indonesia uses an agent, broker or intermediary who have independent status, provided that the agent, broker or intermediary in reality fully acts in the framework of carrying out his own business/activities.

An insurance company established or domiciled outside Indonesia is deemed to have a permanent establishment in Indonesia, if it collects insurance premium in Indonesia or bears risk in Indonesia through employees, representatives or agents in Indonesia. Bearing risk in Indonesia shall not mean that the event causing the risk occurs in Indonesia. Due regard being had to the fact that the insured party shall reside, stay or domicile in Indonesia.

Paragraph (6)

The determination of an individual’s residence or an entity’s domicile is important to ascertain which Tax District Office shall have the taxation jurisdiction on the income derived by the individual or entity.

Basically, an individual’s residence or an entity’s domicile shall be determined based on the facts and the circumstances. Therefore the determination of a residence or a domicile shall not only be based on formal condition, but shall also on the reality.

Several matters necessarily considered by the Director General of Taxes in determining the residence of an individual or the domicile of an entity among others are the domicile, residential address, residence of the family, the place to conduct the main business, or other essential matters to facilitate the implementation of the tax obligation fulfillment.

 

 

Article 2A

 

(1) Tax obligations of an individual referred to in paragraph (3) subparagraph a of Article 2, shall commence at the time the individual is born, is present, or intends to reside in Indonesia and shall cease at the time such person passes away or leaves Indonesia permanently.

(2) Tax obligations of an entity referred to in paragraph (3) subparagraph b of Article 2, shall commence at the time the entity is established or domiciled in Indonesia and shall cease at the time the entity is dissolved or is no longer domiciled in Indonesia.

(3) Tax obligations of an individual or an entity referred to in paragraph (4) subparagraph a of Article 2, shall commence at the time the individual or the entity starts its business or engages in activities referred to in paragraph (5) of Article 2 and shall cease at the time the businesses or activities through a permanent establishment are terminated.

(4) Tax obligations of an individual or an entity referred to in paragraph (4) subparagraph b of Article 2, shall commence at the time the individual or the entity derives income from Indonesia and shall cease at the time the individual or the entity no longer derives such income.

(5) Tax obligations of an undivided inheritance referred to in paragraph (1) subparagraph a. point 2) of Article 2, shall commence at the time the undivided inheritance starts to exist and shall cease at the time the inheritance is divided.

(6) In case tax obligations of an individual who resides or is present in Indonesia consist only a fraction of a taxable year, such fraction shall be treated as a taxable year.

 

Elucidation Article 2A

Income Tax constitutes a subjective tax the obligation of which is inherent to the Taxable Person concerned, which means that the said tax obligation is intended not to be shifted to another Taxable Person. Therefore, in the framework of providing legal certainty, the stipulation of the starting and ending moment of subjective tax obligation is important.

Paragraph (1)

The subjective tax obligations of an individual residing in Indonesia shall commence at the time he is born in Indonesia. For an individual staying in Indonesia for more than 183 (one hundred and eighty-three) days within a 12 (twelve) months, his tax obligation commences on the first day he is in Indonesia. The subjective tax obligation ends at the time he passes away or permanently leaves Indonesia.

The term “permanently leaves Indonesia” is based on real facts at the moment the said individual leaves Indonesia. If at the time he leaves Indonesia, there is a strong fact evidencing his wish to leave Indonesia forever, at that moment he is no longer a Resident Taxable Person.

Paragraph (2)

Sufficiently clear.

Paragraph (3)

For individuals not residing in Indonesia and staying in Indonesia for no longer than 183 (one hundred and eighty-three) days, and entities not established and not domiciled in Indonesia, but doing business or carrying out activities in Indonesia through a permanent establishment, the subjective tax obligations shall commence at the time the permanent establishment exists in Indonesia and ends at the time the permanent establishment is no longer in Indonesia.

Paragraph (4)

An individual not residing in Indonesia or staying in Indonesia for no longer than 183 (one hundred and eighty-three) days, and an entity not established or domiciled in Indonesia and not doing business or conducting activities through a permanent establishment in Indonesia shall be a Nonresident Taxable Person as far as the individual or the entity has an economic relationship with Indonesia. An economic relationship with Indonesia is assumed to exist if the individual or entity derives income originating from sources in Indonesia.

The subjective tax obligations of the said individual or entity shall commence at the time the individual or entity has an economic relationship with Indonesia, namely deriving income from sources in Indonesia, and shall end at the time the individual or entity no longer has any economic relationship with Indonesia.

Paragraph (5)

The subjective tax obligation of an undivided inheritance shall commence at the time of the emergence of the undivided inheritance, namely at the time the predecessor passes away. Afterwards, the fulfillment of the taxation obligation thereof shall be inherent to the said undivided inheritance. The subjective tax obligation of the said undivided inheritance should end at the time the undivided inheritance is distributed to the heirs. Subsequently, the fulfillment of the tax obligations thereof shall be transferred to the heirs.

Paragraph (6)

It may occur, that an individual becomes a Taxable Person not for a full one taxable year, for instance an individual who commences to become a Taxable Person in the middle of a taxable year, or who permanently leaves Indonesia in the middle of a taxable year. The period which is less than one taxable year is called a fraction of a taxable year, which substitutes the taxable year.

 

Article 3

 

Taxable person referred to in Article 2 does not include the following:

a.

A diplomatic mission;

b.

The officials of diplomatic and consular mission or other foreign officials and individuals who work for and stay with them at their official residence, provided they are not Indonesian citizens, nor receive or accrue income other than from the performance of their official duty in Indonesia, and the foreign state grants reciprocal treatment;

c.

International organizations as determined by Minister of Finance Decree provided that:

 

1)

Indonesia is a member of the international organization;

2)

they do not conduct business or engage in other activities to derive income in Indonesia, except providing loan to government the fund of which comes from member contribution;

d.

The officials of the international organization representative as determined by Minister of Finance Decree, provided they are not Indonesian citizens and do not conduct business or engage in activities or other employment to derive income in Indonesia.

 

Elucidation Article 3

Subparagraphs a and b

In accordance with the international custom, a foreign representative organizations, as well as diplomatic, consular and other officials, shall be exempted from the definition of a Taxable Person at the place where they represent their country.

The exemption of those officials as Taxable Persons shall not be in affect if they earn income outside from their official duties, or if they are Indonesian citizens.

Therefore, if a foreign representative official earns income in Indonesia other than income from normal duties, then he shall be a Taxable Person, who can be taxed on the said other income.

Subparagraph c.

Sufficiently clear.

Subparagraph d.

Sufficiently clear.

 

 

CHAPTER III

TAXABLE OBJECT

Article 4

 

(1)

Taxable Object is income, defined as any increase in economic capability received or accrued by a Taxpayer, originating from Indonesia as well as from offshore, in whatever name or form, that can be used to consume or to increase the wealth of the Taxpayer, including:

a.

compensation or other remuneration received or accrued in respect of employment or service such as salary, wage, allowance, honorarium, commission, bonus, gratuity, pension or other remuneration, except where stipulated otherwise in this law;

b.

lottery prizes or gifts in respect of employment or other activities and awards;

c.

business profit;

d.

gains from the sale or transfer of property, including:

 

1)

gains from the transfer of property to a corporation, a partnership, and other entities in exchange for shares or capital contribution;

 

2)

gains accrued by a corporation, a partnership or other entities from the transfer of property to its shareholders, partners or members;

 

3)

gains from a liquidation, merger, consolidation, expansion, split-up or acquisition;

 

4)

gains from the transfer of property in the form of grant, aid or donation, except when given to relatives within one degree of direct lineage, or to religious, educational or other social entities or to small businesses including cooperatives as determined by Minister of Finance, provided that two parties do not have any business relation, ownership nor control;

e.

refunds of tax payments already deducted as expenses;

f.

interest, including premiums, discounts and compensation for loan repayment guarantees;

g.

dividends, in whatever name and form, including dividends paid by an insurance company to policyholders and the distribution of net income by a cooperative;

h.

royalties;

i.

rents and other income from the use of property;

j.

annuities;

k.

gains from discharge of indebtedness, except up to a certain amount stipulated by Government Regulation;

l.

gains from foreign exchange;

m.

gains from revaluation of assets;

n.

insurance premiums;

o.

contribution received or accrued by an association from its members who are Taxpayers engaged in business or independent services;

p.

an increase in net wealth from income which has not been taxed.

(2)

The imposition tax on interest income on deposits and other savings, on income from transaction of shares and other securities at the stock exchange, and on income from the alienation of property in the form of land and or buildings and other specific income shall be stipulated by Government Regulation.

(3)

There shall be excluded from taxable object:

 

a.

1)

aid, donation, including zakat received by amil zakat board or other amil zakat institutions established or approved by the government and eligible zakat recipients;

 

 

2)

gifts received by relatives within one degree of direct lineage and by religious, educational or social organizations, or by small businesses including cooperatives determined by the Minister of Finance;

 

 

provided that there is not any business, work, ownership nor control relationship between the parties concerned;

 

b.

inheritances;

 

c.

assets including cash received by an entity referred to in paragraph (1) subparagraph b of Article 2, in exchange for shares or capital contribution;

 

d.

consideration or remuneration in the form of benefits in kinds in respect of employment or services received or accrued from a Taxpayer or the Government;

 

e.

payments by an insurance company to an individual in connection with health, accident, life, or education insurance;

 

f.

dividends or distribution of profit received or accrued by resident limited corporations, cooperatives, state-owned companies, or local state-owned companies through ownership in enterprises established and domiciled in Indonesia, provided that:

 

 

1)

dividends are paid out from retained earnings;

 

 

2)

limited corporations and state owned companies and local state-owned companies receiving the dividends must own at least 25% of the total paid-in capital and must have an active business in addition to the ownership;

 

g.

contribution received or accrued by a pension fund approved by the Minister of Finance either paid by an employer or an employee;

 

h.

income from capital investment of the pension fund referred to in sub paragraph g in certain sectors as determined by the Minister of Finance Decree;

 

i.

distribution of profit received or accrued by a member of a limited partnership whose capital does not consists of shares, partnership, association, firma, or kongsi;

 

j.

interest on bonds received or accrued by an investment fund company for the first five years beginning from the establishment of the company or the granting of business license;

 

k.

income received or accrued by a venture-capital company in the form of profit distribution of a joint-venture company established and conducting business or engaged in activities in Indonesia, provided that:

 

 

1)

the investee is a small or medium-sized enterprise or engaged in activities in business sectors determined by the Minister of Finance Decree; and

 

 

2)

the investee’s shares are not traded in the stock exchange in Indonesia.

 

Elucidation Article 4

Paragraph (1)

This law adheres to the principle of taxation on income in a broad meaning, in a sense that the tax shall be imposed on any increase in economic capability received or earned by a Taxpayer from whatever source and which can be used for consumption or for increasing the wealth of the Taxpayer.

The meaning of income in this Law shall not be concerned about whether the income exists from certain source, but whether the increase of economic capability exists. The said increase received or earned by a Taxpayer constitutes the best measure of the capability of the Taxpayer to participate in sharing the burden of expenditure needed by the government for routine and development activities.

From the standpoint of flow of the increasing of economic capability to the Taxpayer, income could be classified into:

-

income from work in connection with employment and independent work, such as salary, honorarium, income derived by a physician, notary, actuary, accountant, lawyer, et cetera

-

income from conducting business and activities

-

income from capital in the form of movable or immovable property, such as interest, dividend, royalty, rent, gain on sales of property, or rights not used for the business, et cetera

-

other income, such as discharge of indebtedness, gift, et cetera.

From the standpoint of the utilization thereof, income may be used for consumption or put into savings to increase the wealth of a Taxpayer.

Because this Law adheres to the concept of income in a broad meaning, all types of income received or earned in a taxable year shall be combined to establish a basis for tax imposition. Therefore, if in a taxable year a business or an entity suffers a loss, the said loss may be compensated with other income (horizontal compensation), except if the loss is incurred abroad. However, if a type of income is taxed with a rate which is final in nature or is exempted as a Taxable Income, then the said income shall not be combined with other income, which are imposed with the general tax rate.

The examples of income referred to in these provisions are intended to clarify the concept of income in a broad meaning, which is not limited to the examples.

Subparagraph a.

All considerations or remuneration in connection with employment, such as wages, salaries, life insurance and health insurance premium paid by an employer, or compensation in any other form, shall be Taxable Income.

The term “compensation in another form” shall include benefit in kind, which essentially constitutes an income.

Subparagraph b.

The term “gift” shall include prizes from lotteries, work, and activities, such as the prize in a saving lottery, the prize of sport competition, et cetera.

Referred to as awards shall be compensation granted in connection with certain activities, such as compensation received in connection with archaeological founding.

Subparagraph c.

Sufficiently clear.

Subparagraph d

If a Taxpayer sells property at a price higher than the book value, or at a price higher than the acquisition cost or value, the difference in price is regarded as profit. If the sale of such property occurs between a company and its shareholders, the sale price shall be used as the basis for calculation of profit is the market price.

Example: PT 'S' owns a car used for business activities with a book value of Rp40,000,000.00 (forty million rupiahs). The car is sold based on the market price of Rp60,000,000.00 (sixty million rupiahs). The profit earned by PT 'S" on the sale of the car is Rp20,000,000.00 (twenty million rupiahs). If the car is sold to one of the shareholders for Rp50,000,000.00 (fifty million rupiahs), the sale value of the car shall still be calculated on the basis of market price of Rp60,000,000.00 (sixty million rupiahs). The Rp20,000,000.00 (twenty million rupiahs) difference is profit to PT 'S', while for the shareholder purchasing the car, the difference of Rpl0,000,000.00 (ten million rupiahs) counts as income.

If an entity is liquidated, profit from the sale of property, namely the difference between the sale price based on market price and the book value, will be regarded as taxable income. Similarly, the positive difference between market price and book value in the case of a liquidation, merger, consolidation, expansion, split up or acquisition constitute income.

If there is a transfer of property in exchange for shares or capital participation, any profit in the form of difference between the market price of the property transferred and the book value constitutes income.

Profit, in the form of the difference between the market price and the purchase price or book value on a transfer of property in the form of gifts, aid or donation is considered income to the party undertaking the transfer, unless the property is transferred to a blood relative in direct lineage of one degree, or to religious organizations or educational and social institutions, including foundations or small businesses including cooperatives which are specified by the Minister of Finance, provided there is no business, work, ownership or control relationship between parties concerned.

Subparagraph e

A tax refund accounted for as an expense at the time of calculating Taxable Income, is considered taxable income.

For example, if Tax on Land and Buildings which has been paid and accounted for as an expense is subsequently refunded for whatever reason, the total amount of the refund is regarded as income.

Subparagraph f

The term ‘interest’ includes premiums, discounts and compensation in connection with guarantees loan.

A premium occurs if, for example, a bond is sold above its par value while a discount occurs if a bond is purchased below the par value. The premium is income for the issuer of the bond while discount is income for the purchaser.

Subparagraph g

Dividend is the share of profit received by shareholders or insurance policyholders, or the distribution of net income of a cooperative received by members of the cooperative. The term dividend shall include:

1)

distribution of profit, directly or indirectly and under whatever name or form;

2)

refund in a liquidation in excess of the paid-up capital;

3)

bonus shares received without payment, including bonus shares derived from the capitalization of premiums on new shares;

4)

distribution of profit in the form of shares;

5)

records of additional capital without payment;

6)

the sum exceeding the amount of paid-in capital received or accrued by shareholders on a buyback shares by the company concerned;

7)

whole or partial refund of paid-in capital, if in previous years profits have been made, except where the refund is caused by a legal reduction in the statutory capital;

8)

payment related to rights of profit, including that received as redemption of the rights;

9)

a share of profit in connection with bond ownership;

10)

a share of profit received by policy holders;

11)

distribution of net income to members of a cooperative;

12)

company expenditures for the personal benefit of shareholders, which are charged as company expenses.

In practice, it often happens that distribution or payment of dividend is not transparent, for instance, where shareholders, who have fully paid-in capital, grant a loan to the company which is repaid with a rate of interest higher than appropriate. In such a case, the positive difference between the interest paid and the market rate will be treated as dividend. The portion of interest treated as dividend cannot be charged as an expense by the company concerned.

Subparagraph h

In principle, compensation in the form of royalties comprises three types, namely payment for the use of:

1)

rights over intangible property, such as copyrights, patents, trademarks, formulas and company trade secrets;

2)

rights over tangible property, such as rights over industrial, commercial, and scientific equipment. The meaning of industrial, commercial and scientific equipment includes any equipment which has intellectual value, for instance, equipment used in specialized industries such as oil; drilling rigs and others;

3)

information which has not been publicly disclosed, although it may not yet have been patented, such as experience in industry or other business sectors. The character of such information is that the information is available so that the owner no longer needs to conduct research to produce it. Excluded from the definition of information in this subparagraph is information provided by, for example, public accountants, lawyers or engineers in accordance with their expertise and which can be provided by anyone having learned the same discipline.

Subparagraph i

Rent includes compensation received or obtained in whatever name or form in connection with the use of movable or immovable property, such as rent of a car, rent of an office, rent of a house or rent of a building.

Subparagraph j

Receipts in the form of periodic payments such as alimony or a lifetime allowance paid regularly at certain times.

Subparagraph k

Discharge of indebtedness by a creditor is considered income to the debtor, while it can be charged as an expense by the creditor. However, as determined by the Government Regulations, discharge of indebtedness for small debtors, such as for Business loan for low income family (Kredit Usaha Keluarga Prasejahtera, Kukesra), Farmer Business Loan (Kredit Usaha Tani, KUT), Loans for small housing, and other small loans up to certain amount, are exempted from Taxable income.

Subparagraph l

Gain in foreign currency can arise from fluctuations in the currency markets or due to Government policy in the monetary field. Gain from a fluctuation in foreign currency is taxed in line with the accounting system adopted by the Taxpayer provided the principles have been complied with consistently.

Subparagraph m

A gain due to the revaluation of property as meant in Article 19 constitutes income.

Subparagraph n

Insurance premiums include reinsurance premiums.

Subparagraph o

Sufficiently clear.

Subparagraph p

An increasing in the net wealth is basically the accumulation of income, whether it has already been taxed, or it is not a taxable object, or it has not yet been taxed. If it is found that there is an increasing in the net wealth that exceeds the accumulation of income whether it has been taxed or it is not a taxable object, the increase is regarded as income.

Paragraph (2)

In accordance with the provisions of paragraph (1), income in the form of interest on time deposits and other savings accounts, income from shares and other securities transactions in the stock market, income from a transfer of property in the form of land and/or buildings, and other specific income constitute taxable object. The public savings and the stock market are the source of funds for the implementation of economic development. Therefore it is necessary to give a special tax treatment on income from the public savings.

There are many considerations of granting a special tax treatment on those income, among others simplicity of tax collection, fairness and equality of tax imposition, and economic and monetary developments. Based on the same considerations, it is necessary to give a special tax treatment on income from the transfer of property in the form of land and/or buildings, and other kinds of particular income. Consequently, the imposition of income tax on those types of income, including the nature, amount and procedure of payment, withholding and collection, are governed by a Government Regulation.

To facilitate the implementation of tax imposition and to avoid the additional administrative burden for the Taxpayer as well as the Directorate General of Taxes, the imposition of income tax under this provision may be treated as final.

Paragraph (3)

Subparagraph a

Aid and donations are not taxable object to the recipient provided they are not received in connection of a work, business, ownership, or control relationship between the parties concerned. Zakat received by amil zakat board or other amil zakat institutions established or approved by the government and eligible zakat recipients is treated the same as aids or donations. The term zakat shall be referred to in Law Number 38 Year 1999 on Management of Zakat.

A business relationship may occur between a donor and a recipient. For example, PT 'A' is a producer of a type of goods, the main raw materials from which are produced by PT 'B'. If PT 'B' makes a donation of raw material as a gift to PT A, then the donation is a taxable income.

Gifts do not constitute taxable income to the recipient if they are received by a blood relative in direct lineage of one degree, or by a religious or by an educational or social entity, including a foundation or small sized enterprises, including a cooperative, as determined by the Minister of Finance, provided such gifts are not received in the context of a work, business, ownership or control relationship between the parties concerned.

Subparagraph b

Sufficiently clear.

Subparagraph c

In principle, property including cash deposits-received by an entity constitutes an increase in the economic capability of that entity. Under this provision, however, since the property is received as a consideration for shares or capital participation, it is not treated as a taxable income.

Subparagraph d

Payment or compensation in kind or benefit related to work or services constitutes a non- cash increase in economic capability. Payment or compensation in kind such as rice, sugar, etc. and in benefit such as the use of a car, house, medical facilities etc., is not regarded as taxable income.

If the provider of compensation in kind or benefit is not a Taxpayer or a Taxpayer who is subject to final Income Tax and subject to Income Tax based on certain calculation norms (deemed profit), then such compensation in kind or benefit is income for the recipient.

For example, an Indonesian citizen becomes an employee at a foreign diplomatic representative office in Jakarta. The employee obtains benefits in the form of accommodation provided by the foreign representative office or other benefits. These benefits are regarded as income to the employee since the representative diplomatic office concerned is not a Taxpayer.

Subparagraph e

Consideration or reimbursement received by an individual from an insurance company related to a medical, accident, life, dual purpose or educational insurance policy does not constitute a taxable income. This is in line with the provisions of Article 9 paragraph (1) Subparagraph d, under which insurance premiums paid by an individual Taxpayer for his own benefit are not deductible in the calculation of taxable income.

Subparagraph f

In accordance with this provision, dividend originating from profits after deducted by tax and received or accrued by a limited corporation as a resident Taxpayer, a cooperative, and a state-owned company or local state-owned company, as a result of its participation in other companies established and domiciled in Indonesia, with the participation at least 25% (twenty- five percent), and the recipient of the dividend derived income from business profit other than the income from the participation, are not considered as a taxable income. The term a state-owned company and a local state-owned company in this paragraph includes, among others, limited companies (Persero), government banks, local development banks and Pertamina.

It should be noted, however, that if the recipient of the dividends or share of profits is a Taxpayer other than the a-fore mentioned entities, such as an individual resident and non- resident Taxpayer, a firma, a limited partnership, a foundation and other similar organizations, income in the form of dividends or share of profits remains as taxable object.

Subparagraph g

The exemption from taxable object referred to in this paragraph only applies to pension funds whose establishment has been approved by the Minister of Finance.

Exempted from taxable income is contribution received from pension members, either by self-payment or paid by the employer. Basically, the contributions received by the pension fund belong to the pension members, which will be refunded at a certain time. Tax imposition on the contribution will reduce the right of the pensioner. Therefore, the contribution is exempted from taxable object.

Subparagraph h

As mentioned in Subparagraph g, the exemption from taxable object referred to in this provision is only valid for pension fund whose establishment has been approved by the Minister of Finance. Exempted from taxable object under this circumstance is income from capital invested in certain sectors stipulated by decree of the Minister of Finance. The purpose of capital investment by pension fund is to accumulate fund for repayment to the pension members in the future; therefore, the capital investment needs to be directed to non-speculative or high risks sectors. Therefore, the determination of the certain sectors shall be stipulated by decree of the Minister of Finance.

Subparagraph i

For the purpose of tax imposition, an entity referred to in this provision, which constitutes a group of members is subject to tax as a unit, namely on the level of the entity itself. Therefore, the share of profit received by each member is not regarded as a taxable object.

Subparagraph j

An investment fund is a company whose main activities are doing investments, reinvestments, or selling and buying securities. For the investor, especially the small investor, an investment fund is one of the safest alternatives to invest its capital.

In order to encourage the growth of investment fund, interest on bonds received by investment fund is exempted from taxable object for the first five years since the establishment or the accruing of business license.

Subparagraph k

A venture capital company is a company whose main business is financing of business enterprise (as a joint-venture) in the form of capital participation for a certain period. Under this provision, the share of profits received or accrued from the join-venture is not treated as a taxable object, provided such joint-venture is a small or medium-sized enterprises, or is engaged in business or activities in certain sectors as determined by the Minister of Finance, and the shares of the company concerned are not traded on the Indonesian stock market.

If the business partner of the venture capital company meets the provisions of paragraph (3) Subparagraph f, the dividends received or accrued by the venture capital company will not be treated as taxable object.

In order to direct a venture capital company toward sectors of economic activity, which has the priority in development, such as increasing non-oil and gas exports, the business or activities of a joint-venture company shall be determined by the Minister of Finance.

Since a venture capital company represents alternative financing in the form of capital participation, such participation by a venture capital company should be directed toward companies not having access to the stock market.

 

 

Article 5

 

(1)

Taxable object of a permanent establishment consists of:

a.

income from its businesses or activities and from its owned or controlled properties;

b.

income of the head office from businesses or activities, sales of goods, or furnishing services in Indonesia which are similar to those undertaken by the permanent establishment in Indonesia;

c.

income referred to in Article 26 received or accrued by the head office provided that the properties or activities giving rise to the aforesaid income is effectively connected with a permanent establishment.

(2)

Expenses related to gross income referred to in paragraph (1) subparagraph b and subparagraph c may be deducted from the permanent establishment’s income.

(3)

In calculating the profit of a permanent establishment:

 

a.

administrative expenses incurred by the head office for the purpose of the permanent establishment is deductible subject to limitations regulated by the Director General of Taxes;

b.

the following payments to its head office are not deductible:

 

1)

royalties or other payments paid in respect of the use of properties, patents, or other rights;

2)

payments in respect of management services or other services;

3)

interest, except in banking business;

c.

payments referred to in subparagraph b received or accrued from the head office shall not be included in taxable object, except interest in banking business.

 

Elucidation Article 5

Any individual not residing in Indonesia, or any entity neither established nor domiciled in Indonesia, yet conducting business or engaged in activities through a permanent establishment in Indonesia, is subject to tax in Indonesia through that permanent establishment.

Paragraph (1)

Subparagraph a

A permanent establishment will be taxed on income from its business or activities and from its owned or controlled property. Accordingly, all income concerned is subject to tax in Indonesia

Subparagraph b

In accordance with this provision, income derived by a head office from business or activities, sale of goods or furnishing services which are similar to those undertaken by the permanent establishment is considered income of the permanent establishment because such business or activities fall within the scope of, and could be undertaken by, the permanent establishment.

Example: Business or activities similar to those of a permanent establishment occurs where a foreign bank with a permanent establishment in Indonesia directly provides a loan to a company in Indonesia and not through its permanent establishment.

Sale of goods similar to those sold by a permanent establishment occurs where an overseas head office having a permanent establishment in Indonesia directly sells products similar to those sold by its permanent establishment to Indonesian buyers. Furnishing services similar to those furnished by a permanent establishment occurs where a head office of an offshore consultant company directly provides consultancy services similar to those provided by the permanent establishment to clients in Indonesia.

Subparagraph c

income referred to in Article 26 received or accrued by the head office is treated as income of a permanent establishment if the properties or activities giving rise to the aforesaid income is effectively connected with a permanent establishment.

For example, "X" Inc. concludes a license agreement with PT "Y" for the use the trademark of -X- Inc. Upon the use of that right, "X" Inc. receives compensation in the form of royalties from PT "Y".

In connection with this agreement, "X" Inc. also provides management services to PT "Y" through a permanent establishment in Indonesia in the course of marketing products of PT Y" bearing the trademark.

In this case, the use of the "X" Inc. trademark by PT "Y" has an effective connection with the permanent establishment in Indonesia, consequently, X Inc.'s income in the form of royalties is treated as income to the permanent establishment.

Paragraph (2)

Sufficiently clear.

Paragraph (3)

Subparagraph a

Administration expenses incurred by a head office to support the business or activities of a permanent establishment in Indonesia may be deducted from the income of the permanent establishment. The type and amount of expenses that may be deducted are stipulated by the Director General of Taxes.

Subparagraphs b and c

Basically a permanent establishment and its head office are considered as a single unit, therefore, payments made by the permanent establishment to its head office, such as royalties on the use of head office property, are considered as a flow of funds within one company. Therefore, under this provision, payments made by a permanent establishment to its head office, such as royalties, compensation for services and interest is not deductible from the income of the permanent establishment. Where, however, the head office and the permanent establishment are engaged in a banking business, payments in the form of interest loan may be charged as an expense.

As a consequence of the foregoing, payments of a similar type received by a permanent establishment from its head office are not considered as taxable income, except for interest received by a permanent establishment from its head office related to a banking business.

 

 

Article 6

 

(1)

Resident Taxpayers and permanent establishments are entitled to claim the following deductions from their gross income:

 

a.

expenses to earn, to collect and to secure income, including cost of materials, costs in connection with employment or services including wages, salaries, honoraria, bonuses, gratuities and remuneration in the form of money, interest, rents, royalties, travel expenses, waste processing expenses, insurance premiums, administrative expenses and taxes other than income tax;

 

b.

depreciation of tangible asset and amortization of rights and other expenditures which have useful life of more than 1 (one) year referred to in Article 11 and Article 11A;

 

c.

contributions to a pension fund approved by the Minister of Finance;

 

d.

losses incurred from the sale or transfer of properties owned and used in business or used for the purpose of earning, collecting and securing income;

 

e.

losses from foreign exchange;

 

f.

costs related to research and development carried out in Indonesia;

 

g.

scholarships, apprenticeships and training expenses;

 

h.

debts which are actually uncollectible, provided that:

 

 

1)

it has been charged to commercial financial statement;

 

 

2)

the case has been filed to court or BUPLN or there is a written agreement on the discharge of indebtedness between debtor and creditor;

 

 

3)

it has been published in media; and

 

 

4)

the Taxpayer shall submit the list of bad debt to the Directorate General of Taxes, the procedure of which shall be stipulated further by the Director General of Taxes Decree.

(2)

The loss incurred, after deducting deductions referred to in paragraph 1 from gross income, shall be carried forward for a maximum of five successive years.

(3)

An individual who is a resident Taxpayer is entitled to claim personal exemptions referred to in Article 7 of this law.

 

Elucidation Article 6

Paragraph (1)

Charges which may be deducted from gross income are divided into 2 (two) categories, namely charges or expenses which have a useful life of not more than 1 (one) year and which have a useful life of more than 1 (one) year. Charges having a useful life of one year or less are treated as expenses for the year concerned, for example, salaries, administrative interest, routine expenses for waste disposal, etc. Whereas, expenditures which have a useful life of more than one year will be deducted through depreciation or amortization. In addition, if within a taxable year there are losses with respect to a disposition of property or fluctuation in exchange rates, such losses may be deducted from gross income.

Subparagraph a

Expenses referred to in this subparagraph are commonly called daily expenditures, which can be deducted as expenses in the year of disbursement. In order to be deducted as expenses, the expenditures must be connected with the business or activities for earning, collecting and securing income as a taxable object.

Therefore, expenditures for earning, collecting and securing income, which does not constitute a taxable object may not be deducted as expenses.

Example:

Pension Fund "A", whose establishment has been approved by the Minister of Finance, derives gross income comprising as follows:

a.

income which is not treated as a taxable object

under paragraph (3) h of Article 4

Rp 100.000.000,00

b.

other gross income

Rp 300.000.000,00

 

Total gross income

Rp 400.000.000,00

If the total expenditures are Rp200,000,000.00, the expense which may be deducted in respect of earning, collecting and securing income is ¾ x Rp200,000,000.00 = Rp150,000,000.00.

Similarly, interest on loans used to buy stocks may not be deducted as an expense, provided that the dividends derived do not constitute a taxable object as described in paragraph (3) f of Article 4. That interest which cannot be deducted may be capitalized to add the acquisition cost of the stocks.

Expenditures which does not connect with the activities of earning, collecting and securing income, such as expenditures for the personal benefits of shareholders, interest payment in respect of loans which is used for the personal benefit of debtors, and insurance premium payment for personal benefit, may not be deducted as expenses.

A payment of insurance premium by an employer for the benefit of its employee may be deducted as a company expense; however, for the employee, the premiums constitute an income.

In order to be able to be deducted, expenditures with respect to employment must be made in cash. Expenditures in kind or benefit, such as free accommodation, cannot be deducted as expenses, and for the recipient they are not treated as income. However, certain expenditures in kind or benefit as provided in paragraph (1) e of Article 9 may be deducted as expenses, and for the recipient they are not treated as income.

Expenditures which may be deducted shall be made in the ordinary course of a business. Therefore, if such expenditures exceed the limits of fairness because of dealing with a related person, the amount in excess of the fair limit may not be deducted from gross income.

See also the provisions of paragraph (1) f of Article 9 and Article 18 and their respective elucidations.

Tax expenses for business purposes other than income tax, such as tax on land and building (PBB), stamp duty (BM), tax on hotel and restaurant, may be deducted as expenses.

With respect to expenditures for advertisement, it is necessary to distinguish between expenses which are actually paid for advertisement and those which substantially constitute a donation. Expenses which are actually paid for advertisement may be deducted from gross income.

Subparagraph b

Expenditures to acquire tangible property and intangible property and other expenditures which have a useful life of more than one year shall be deducted through depreciation or amortization.

See also the provisions of paragraph (2) of Article 9, Article 11, and Article 11A and their respective elucidations.

Expenditures which by their nature constitute advance payments, such as rental payment for several years which is paid in advance, shall be expensed through allocation.

Subparagraph c

Contributions to a pension fund whose establishment has been approved by the Minister of Finance may be deducted as expenses, whereas contributions paid to a pension fund whose establishment has not been or has not yet been so approved may not be deducted as expenses.

Subparagraph d

Losses due to a sale or disposition of property which, according to its initial purpose, was not intended to be sold or disposed and which was owned and used for a business or held for earning, collecting and securing income, may be deducted from gross income.

Losses due to the sale or disposition of property which is owned by a company but not used for its business or which is not used for earning, collecting and securing income may not be deducted from gross income.

Subparagraph e

Losses due to differences in foreign exchange rates may be caused by daily fluctuations or by Government monetary policy. Losses caused by the exchange rate fluctuations shall be expensed under the accounting system adopted and shall be calculated consistently. If a Taxpayer adopts an accounting system based on fixed exchange rates (historical rates), the losses are expensed at the time of realization on the foreign currency account. If a Taxpayer adopts an accounting system based on the Bank Indonesia middle rates or the actual rate at the yearend, the losses are expensed at each of the yearend based on Bank Indonesia middle rates or the actual rate at the yearend.

Losses arising from exchange rates due to Government monetary policy should be taken into a temporary account of the balance sheet and amortized based on the realization of the foreign currency account.

Subparagraph f

Research and development expenditures incurred by a company which are carried out in Indonesia in reasonably sizeable amounts to discover new technology or new systems for the development of the company, may be expensed.

Subparagraph g

Expenditures on scholarships, apprenticeships, and training for the purpose of enhancing the quality of human resources may be expensed, by taking into consideration the fairness and the purposes of the company.

Subparagraph h

Debts which are actually uncollectible may be deducted as an expense to the extent that the Taxpayer has already taken into account such expense in its commercial income statement and the Taxpayer has already made a maximum or last effort to collect it.

The term “publication” does not only mean national scope publication but also internal publication of association and its similarity.

The procedures to apply the conditions described in paragraph (1) h shall be determined by Director General of Taxes.

Paragraph (2)

If a loss is incurred after the expenditures allowed under paragraph (1) have been deducted from gross income, the loss may be offset against net income or taxable profit over 5 (five) successive years starting from the year following that in which the loss is incurred.

Example:

In 1995, PT "A" suffers a tax loss of Rp1,200,000,000.00. In the following 5 (five) years, the taxable profit/loss of PT "A" is as follows:

1996: tax profit

Rp 200.000.000,00

1997: tax loss

(Rp 300.000.000,00)

1988: tax profit

—nil—

1999: tax profit

Rp 100.000.000,00

2000: tax profit

Rp 800.000.000,00

Calculation of the loss is as follows:

Tax loss in 1995

(Rp1.200.000.000,00)

Tax profit in 1996

Rp 200.000.000,00 (+)

Balance of tax loss from 1995

(Rp1.000.000.000,00)

Tax loss in 1997

(Rp 300.000.000,00)

Balance of tax loss from 1995

(Rp1.000.000.000,00)

Tax profit in 1998

Nil (+)

Balance of tax loss from 1995

(Rp1.000.000.000,00)

Tax profit in 1999

Rp 100.000.000,00 (+)

Balance of tax loss from 1995

(Rp 900.000.000,00)

Tax profit in 2000

Rp 800.000.000,00 (+)

Balance of tax loss from 1995

(Rp 100.000.000,00)

The balance of tax loss from 1995 amounting to Rp100,000,000.00 in the year 2000 may not be offset against tax profit in year 2001 since the 5 year period has already expired; however, the tax loss 1997 amounting to Rp300,000,000.00 may be offset against tax profit in 2001 and 2002, because the 5 year period for this loss commences in 1998 and finishes at the end of year 2002.

Paragraph (3)

In determining the taxable income of a resident individual Taxpayer, a deduction is given in the form of personal exemption (PTKP) under the provisions of Article 7.

 

 

Article 7

 

(1)

The amount of personal exemptions is as follows:

 

a.

Rp2,880,000.00 (two million, eight hundred, eighty thousand rupiahs) for an individual Taxpayer;

 

b.

additional Rp1,440,000.00 (one million, four hundred, forty thousand rupiahs) for a married Taxpayer;

 

c.

additional Rp2,880,000.00 (two million, eight hundred, eighty thousand rupiahs) for married Taxpayers’ spouse provided they file a joint tax return referred to in paragraph (1) of article 8;

 

d.

additional Rp1,440,000.00 (one million, four hundred, forty thousand rupiahs) for each dependent family member related by blood and by marriage in direct lineage, and adopted child with maximum of three dependents;

(2)

The application of paragraph (1) is based on facts and circumstances at the beginning of a tax year or fraction of a taxable year;

(3)

The Ministry of Finance shall stipulate the adjustment of personal exemptions.

 

Elucidation Article 7

Paragraph (1)

In determining the taxable income of a resident individual Taxpayer, personal exemption is deducted from the net income. In spite of personal exemption for a Taxpayer himself, an additional amount of personal exemption is available to a married Taxpayer.

A Taxpayer whose wife receives or derives income which is combined with his own income is given an additional personal exemption in respect of his wife amounting to Rp2,880,000.00.

A Taxpayer whose relatives through blood or marriage in direct lineage are fully dependent on the Taxpayer, such as parents, parents-in-law, children or adopted children, is granted an additional personal exemption for up to a maximum of 3 (three) people. Family members who are fully dependent means family members who have no income and whose entire living expenses are borne by the Taxpayer.

Example:

Taxpayer "A" has a wife and 4 (four) dependent children. If his wife has income from an employer who has withheld income tax under Article 21 and the employment has no relationship to the business of her husband or other members of the family, the non-taxable income of Taxpayer "A" is Rp8,640,000.00 i.e. Rp2,880,000.00 + Rp1,440,000.00 + (3 x Rp1,440,000.00). Whereas for the wife, at the time of Article 21 tax withheld by her employer, there is a personal exemption of Rp2,880,000.00. If the wife's income is combined with that of her husband, the non-taxable income granted to Taxpayer "A" would be Rp11,520,000.00 i.e. Rp8,640,000.00 + Rp2,880,000.00.

Paragraph (2)

The computation of personal exemption under paragraph (1) is determined by the status of the Taxpayer at the beginning of a taxable year or at the beginning of part of a taxable year.

For instance, on January 1, 2001, Taxpayer "B" is married and has 1 (one) child. If a second child is born after January 1, 2001, the personal exemption of Taxpayer "B" for taxable year 2001 remains based on the marital status with 1 (one) child.

Paragraph (3)

Under this provision, the Minister of Finance is given an authority to adjust the personal exemption as described in paragraph (1) by taking into consideration economic and monetary developments as well as developments in the annual cost of living index.

 

 

Article 8

 

(1)

Income or losses of a married woman at the beginning of a taxable year or fraction of a taxable year, including losses originating from previous years that have not been offset referred to in paragraph (2) of Article 6, shall be deemed as income or losses of her husband, except where the income is received or accrued exclusively from one employer and from which tax has been withheld in accordance with Article 21 and the employment is not related to the business or independent personal service of husband or any other relative.

(2)

Income of a married individual shall be taxed separately if:

a.

they live separately;

b.

it is requested in writing by both the husband and wife on the basis of an agreement for the separation of property and income.

(3)

The net income of a married individual referred to in paragraph (2) subparagraph b shall be taxed on aggregate net income of the married individual, and the amount of tax to be paid by each of them shall be in proportion to their respective net income.

(4)

The income of a minor child shall be added up to the income of the parent, except in case of employment income that is not related to the business of the related parties referred to in paragraph (4) subparagraph c of Article 18.

 

Elucidation Article 8

Taxation system under this tax law construes a family as a single economic unit which means that the income or loss of all family members is combined into one taxable unit and the fulfillment of the tax obligations is carried out by the head of the family. In certain cases, however, the fulfillment of tax obligations is conducted separately.

Paragraph (1)

Income or loss for a married woman at the beginning of a taxable year or at the beginning of a fraction of a taxable year is regarded as her husband’s income or loss and taxed as a single unit. Such aggregation shall not be made if the income of the wife is from employment and has been subjected to withholding tax by the employer, provided that:

a.

the wife's income is solely obtained from one employer; and

b.

the wife's income is derived from employment which has no relationship with the business or independent personal service of the husband or any other member of the family.

Example: Taxpayer "A", who derives income from business amounting to Rp100,000,000.00, has a wife who is an employee with Rp50,000,000.00 of income. If the wife's income is derived from one employer and tax on it has already been withheld by her employer and such work has no relationship with the business of her husband or any other member of the family, her income amounting Rp50,000,000.00 is not combined with that of Taxpayer "A" and the tax imposed on the income of the wife is final.

If, in addition to being employed, the wife of Taxpayer "A" runs a business, for example a beauty salon with Rp75,000,000.00 of income, her entire income of Rp125,000,000.00 (Rp50,000,000.00 + Rp75,000,000.00) is combined with the income of Taxpayer "A". As a result, Taxpayer "A" will be taxed on his income of Rp225,000,000.00 (Rp100,000,000.00 + Rp50,000,000.00 + Rp75,000,000.00). The tax withheld on his wife's income is not final, meaning that it may be credited against the tax due on the total income of Rp225,000,000.00 which will be reported in the husband's annual tax return.

Paragraphs (2) & (3)

If a husband and his wife lives separately, taxable income and tax payable are determined separately. However, if a husband and his wife have a written agreement for separation of property and income, the tax is determined based on the sum of their net income and each of them bears the tax in proportion to his/her respective net income.

Example:

The determination of tax for a husband and his wife who have a written agreement for separation of income is as follows:

If in the example in paragraph (1) the wife owns a beauty salon, the tax on the total income is determined based on the income amounting of Rp225,000,000.00.

If the tax on it is Rp56,250,000.00, then the tax for the husband and his wife is determined as follows:

-

Husband :

100.000.000,00

x Rp 56.250.000,00 = Rp 25.000.000,00

225.000.000,00

-

Wife :

125.000.000,00

x Rp 56.250.000,00 = Rp 31.250.000,00

225.000.000,00

Paragraph (4)

Income of a minor which is not combined with that of the parents is only the income derived from employment which has no relationship with the business or activities of the person having a special relationship with the minor.

The term “minor” means a person under the age of 18 (eighteen) who has never been married.

If a minor, whose parents are separated, derives income, the tax is imposed by combining such income with that of the father or mother based on actual circumstances.

 

 

Article 9

 

(1)

In determining the taxable income of a resident Taxpayer and a permanent establishment, the following are not deductible:

 

a.

distribution of profit in whatever name or form, such as dividends, including dividends paid by an insurance company to policyholders, and any distribution of the surplus by a cooperative;

 

b.

expenses charged or incurred for the personal benefit of shareholders, partners or members;

 

c.

formation or accumulation of reserves, except for reserve for bad debt of a bank or a finance lease, reserves in an insurance business, and reserves for reclamation costs in general mining, the terms and conditions of which shall be stipulated by the Minister of Finance Decree;

 

d.

insurance premiums for health, accident, life, dual purpose, and education insurance which are paid by an individual Taxpayer, except those paid by an employer where premiums are treated as income of the Taxpayer;

 

e.

consideration or remuneration related to employment or services given in the form of a benefit in kind, except provision of food and beverages for employees or consideration or remuneration given in the form of a benefit in kind in certain regions and in connection with employment as stipulated by the Minister of Finance Decree;

 

f.

excessive compensation paid to shareholders or other associated parties as a consideration for work performed;

 

g.

gifts, aid or donations, and inheritances referred to in Article 4 paragraph (3) subparagraph a and subparagraph b, except zakat on income actually paid by a Moslem individual Taxpayer and or a resident Taxpayer other than individual owned by a Moslem to an amil zakat board or other amil zakat institutions established or approved by the government;

 

h.

income tax;

 

i.

costs incurred for the personal benefit of a Taxpayer or his dependents;

 

j.

salaries paid to a member of an association, firma, or limited partnership the capital of which does not consist of stocks;

 

k.

administrative penalties in the form of interest, fines, and surcharges, as well as criminal penalties in the form of fines imposed pursuant to the tax laws.

(2)

Expenditures for earning, collecting, and securing of income having a useful life of more than one year, shall not be charged directly to income but shall be deducted through depreciation or amortization referred to in Article 11 or Article 11A.

 

Elucidation Article 9

Paragraph (1)

Expenditures incurred by a Taxpayer can be divided into deductible expenses and non-deductible expenses. Basically, deductible expenses are those having a direct relationship with the business or activities for earning, collecting and securing income which constitute a taxable income, the expensing of which may be made in the year of disbursement or over the useful life of the expenditure. Non-deductible expenses comprise those constituting consumption of income, or those which exceed fairness.

Subparagraph a

Distribution of profits in whatever name or form, including dividend payments to shareholders, distribution of net income of a cooperative to its members, and dividend payments by an insurance company to its policyholders, may not be deducted from the income of the distributing entity since the profit distributed is part of the entity's income which will be taxed under this law.

Subparagraph b

There shall not be allowed as deduction expenses incurred or charged by a company for personal benefit of shareholders, partners, or members, such as renovation of personally owned houses, travel expenses, or insurance premiums paid by the company for the personal benefit of the shareholders or their families.

Subparagraph c

The formation or accumulation of reserve funds, basically, cannot be deducted as expenses in calculating taxable income. However, in certain businesses, reserved funds which are really needed to cover expenses or losses which may occur in the future, but limited to non-performing loan in a banking and leasing business, reserves in an insurance business, and reserves for reclamation costs in the mining industry, may be formed subject to regulations and conditions specified by the Minister of Finance.

Subparagraph d

Premiums for health, accident, life, dual purpose, and educational insurance paid by an individual Taxpayer himself may not be deducted from gross income, and any reimbursement or compensation paid by insurance company received by the individual does not constitute a taxable income.

If the insurance premiums are paid or borne by the employer, such payments may be deducted as expenses by employer and for the employee the payments are considered as a component of taxable income.

Subparagraph e

Consideration or compensation in kind or benefit as described in the elucidation of paragraph (3) d of Article 4 is not considered a taxable income. Consequently, such consideration or compensation cannot be deducted as an expense by the employer. However, in line with the Government policy for stimulating development in certain remote regions, under the Minister of Finance decree, consideration or compensation in kind or benefit provided in connection with work carried out in such regions may be deducted from the gross income of the employer.

Where an employer provides all employees with food and drink in their place of work collectively or with necessities for the implementation of work as means for safety work or with, because of the nature of the work, something required, such as safety equipment, uniforms for security guard, transportation to and from office, and accommodation for a ship’s crew and the like, such benefits do not constitute as income but may be deducted as expenses by the employer.

Subparagraph f

In respect of an employment, there is the possibility of compensation being paid to an employee who is also a shareholder. Since deductible expenses to earn, collect and secure income are limited to a fair amount in accordance with common business practice, then on the basis of this provision any amount exceeding fairness may not be charged as an expense.

As an example is an expert who happens to be a shareholder of a corporate provides some services to that corporate for compensation of Rp5,000,000.00 (five million rupiahs). Where for the same services rendered by another expert of equal ability, the payment is only Rp2,000,000.00 (two million rupiahs), the difference of Rp3,000,000.00 (three million rupiahs) may not be charged as an expense. For the expert who is also a shareholder, the Rp3,000,000.00 (three million rupiahs) is deemed as dividend.

Subparagraph g

Unlike a transfer of gift, aid, donations and inheritances referred to in Article 4 paragraph (3) a and b, which can not be deducted from taxable income, zakat (tithe) on income, may be deducted from taxable income. The zakat on income, which may be deducted from taxable income concerned, should be actually paid by a Moslem individual Taxpayer and or a resident Taxpayer other than individual owned by a Moslem to an amil zakat board or other amil zakat institutions established or approved by the government referred to in Law Number 38 Year 1999 on Zakat Management, and as long as related to income which becomes taxable income, can be deducted in calculating the amount of taxable income at the year of the zakat is paid.

Subparagraph h

The term of Income Tax in this provision is Income Tax due by the relevant Taxpayer.

Subparagraph i

Cost incurred for the personal benefit of a Taxpayer or his dependents are personal consumption by the Taxpayer. Therefore such expenditure may not be deducted from the gross income of a firm.

Subparagraph j

An association, firma, or limited partnership the capital of which does not consist of stock are treated as a single unit, so that there is no payment of salaries. Therefore any salaries received by the members do not constitute payments that are deductible from the gross income of the entity.

Subparagraph k

Sufficiently clear.

Paragraph (2)

In accordance with common business practice, expenditure related to flow of income for several years should be charged over the number of years in which such expenditure has contribution to the income. In line with the principle of matching cost with revenue, in this provision, expenditure to earn, collect and secure income which has a useful life of more than 1 (one) year cannot be deducted in one lump sum as an expense of the company in the year the expenditure is disbursed but must be charged through depreciation or amortization over its useful life as provided for in Article 11 and Article 11A.

 

 

Article 10

 

(1)

Acquisition cost or selling price in an arm’s length transaction referred to in paragraph (4) of Article 18 shall be the amount actually paid or actually received; whereas, in a transaction between related Taxpayers, is the amount which should have been paid or received.

(2)

Acquisition value or selling value in the case of an exchange of assets shall be the amount which should be paid or received on the basis of the market price.

(3)

Acquisition value or transfer value of transferred asset in the case of liquidation, merger, split-up, spin-off, split-off, or taking over of a business shall be the amount which should be paid or received in accordance with the market price except the Minister of Finance otherwise determines.

(4)

In case of a transfer of asset:

 

a.

that qualifies for paragraph (3) subparagraph a and subparagraph b of Article 4, the basis of the asset in the hands of the transferee shall be the book value in the hands of the transferor or other value determined by the Director General of Taxes;

 

b.

that does not qualify for paragraph (3) subparagraph a of Article 4, then the basis of the asset in the hands of the transferee shall be the market value of the assets.

(5)

In case of a transfer of asset referred to in paragraph (3) c of Article 4, the basis of the transferred asset in the hands of the transferee shall be the market value of the asset.

(6)

Inventories and the use of inventories for the calculation of the cost of goods sold shall be valued at cost under weighted average or first-in first-out method.

 

Elucidation Article 10

This provision regulates the methods for valuing property, including inventories, in order to calculate income related to the use of property by a company, profit or loss on a sale or transfer of property, and income from a sale of inventory.

Paragraph (1)

Generally in the sale and purchase of property, the acquisition price to the purchaser is the price actually paid and the selling price to the seller is the price actually received. Included in the acquisition price are the purchase price and expenses incurred to obtain the asset, such as import duty, transportation expenses and installation costs.

Therefore, in a sale and purchase between parties having a special relationship referred to in Article 18 paragraph (4), for the buyer the acquisition value is the amount that would have been paid if the parties were dealing at arms' length. A special relationship between a buyer and a seller may cause the acquisition price to be greater or less than that in an arm’s length transaction. Consequently, this provisions regulate that acquisition value or purchase value of property of those parties is the amount that would have been paid or the sale price which should have been received.

Paragraph (2)

For property acquired through an exchange for other property, the acquisition value or sale value is the amount which would be paid or received if the transaction were based on market price.

Example:

 

PT A

(Prop.X)

PT B

(Prop. Y)

Book Value

Rp 10.000.000,00

Rp 12.000.000,00

Market Price

Rp 20.000.000,00

Rp 20.000.000,00

There is an exchange of property between PT "A" and PT "B". Although there is no payment between the parties concerned, since the market price of the property exchanged is Rp20,000,000.00, then this amount of Rp20,000,000.00 will be regarded as the acquisition price which should have been paid or the sale price which should have been received.

The difference between the market price and the book value of the property exchanged constitutes profit which is subject to tax. PT "A" obtained a profit of Rp10,000,000.00 (Rp20,000,000.00 - Rp10,000,000.00) and PT "B" obtained a profit of Rp8,000,000.00 (Rp20,000,000.00 - Rp12,000,000.00).

Paragraph (3)

In principle, if there is a transfer of property, the valuation of the property transferred should be based on market price. A transfer of property may be carried out in a business expansion by way of merger, consolidation, expansion, separation or take-over. Alternatively, a transfer may take place be in the context of liquidation of business, or for other reasons. The difference between the market price and the book value of the property being transferred is regarded as Taxable Income.

Example:

PT "A" and PT "B" merge and form a new company, PT "C". The book value and market price of the property of the two companies are as follows:

 

PT A

PT B

Book Value

Rp 200.000.000,00

Rp 300.000.000,00

Market Price

Rp 300.000.000,00

Rp 450.000.000,00

The value of property contributed by PT "A" and PT "B" in the formation of PT "C" is the market price. On this basis, PT "A" derives a profit of Rpl00,000,000.00 (Rp300,000,000.00 – Rp200,000,000.00) and PT "B" derives a profit of Rp150,000,000.00 (Rp450,000,000.00 – Rp300,000,000.00). Meanwhile, PT "C" records all the property as having a book value of Rp750,000,000.00 (Rp300,000,000.00 + Rp450,000,000.00).

In order, however, to reflect policies in the social, economic, investment, monetary and other fields, the Minister of Finance is authorized to determine a value other than the market price, that is, on the basis of book value (“pooling of interest"). In this instance, PT "C" would record the book value of property received from PT "A" and PT "B” as Rp500,000,000.00 (Rp200,000,000.00 + Rp300,000,000.00).

Paragraph (4)

In the event of a transfer of property through gift, aid or donation which meets the requirements of paragraph (3) a of Article 4, or inheritance, the acquisition value to the transferee is the book value of the properly from the transferor.
If a Taxpayer does not keep books so that the book value cannot be known, the acquisition value will be specified by the Director General of Taxes. In the case of a transfer by gift, aid or donation which does not fulfill the conditions of paragraph (3) a of Article 4 the acquisition value for the transferor is the market price.

Paragraph (5)

Participation by a Taxpayer in the capital of an entity may be achieved through a cash deposit of a transfer of property. This provision regulates the method for valuation of property delivered in exchange for shares or capital participation, that is, valuation based on the market price of the property transferred.

Example:

Taxpayer “X" delivers 20 units of lathes with a book value of Rp25,000,000.00 to PT "Y" in place of capital participation with par value of Rp20,000,000.00. The market price of the machines is Rp40,000,000.00. In this case PT "Y" records the lathes as property valued at Rp40,000,000.00 which is not regarded as income for PT "Y". The difference between the par value of the shares and the market value of the property, which amounts to Rp20,000,000.00 (Rp40,000,000.00 – Rp20,000,000.00) is recorded as additional paid-in capital (agio). For Taxpayer “X” the difference of Rpl5,000,000.00 (Rp40,000,000.00 – Rp25,000,000.00) is considered as a Taxable income.

Paragraph (6)

In general, there are 3 (three) categories of inventories: finished goods or goods for sale, work in process, and raw materials and supplies.

The provisions of this section stipulate that the valuation of inventory may only be at acquisition cost. Valuation of inventory to calculate the cost of goods sold may only be on the basis of the average method or the "first-in-fist-out" method. In accordance with common practice, this method of valuation also applies to securities.

Example:

1.

Initial Inventory 100 units @ Rp9.00

2.

Purchase 100 units @ Rp12.00

3.

Purchase 100 units @ Rp11.25

4.

Sold/ used 100 units

5.

Sold/ used 100 units

The calculation of the cost of goods sold and inventory value using the average method is as follows:

No.

Purchased

Used

Balance of inventory

1

 

 

100 @ Rp 9.00 = Rp 900.00

2

100 @ Rp12.00 = Rp1,200.00

 

200 @ Rp10.50 = Rp2,100.00

3

100 @ Rp11.25 = Rp1,125.00

 

300 @ Rp10.75 = Rp3,225.00

4

 

100 @ Rp10.75 = Rp1,075.00

200 @ Rp10.75 = Rp2,150.00

5

 

100 @ Rp10.75 = Rp1,075.00

100 @ Rp10.75 = Rp1,075.00

Calculation of the cost of goods sold and the inventory value using the “FIFO” method is, for instance, as follows:

No.

Purchased

Used

Balance of Inventory

1

 

 

100 @ Rp 9.00 = Rp 900.00

2

100 @ Rp12.00 =Rp1,200.00

 

100 @ Rp 9.00 = Rp 900.00

100 @ Rp12.00 = Rp1.200.00

3

100 @ Rp11.25 = Rp1,125

 

100 @ Rp 9.00 = Rp 900.00

100 @ Rp12.00 = Rp1,200.00

100 @ Rp11.25 = Rp1,125.00

4

 

100 @ Rp 9.00 = Rp 900.00

100 @ Rp12.00 = Rp1,200.00

100 @ Rp11.25 = Rp1,125.00

5

 

100 @ Rp12.00 = Rp1,200.00

100 @ Rp11.25 = Rp1,125.00

Once a Taxpayer has selected one of the methods of valuation for goods used to calculate the cost, the same method must be used for the following years.

 

 

Article 11

 

(1)

Depreciation with respect to cost of purchasing, erecting, expanding, improving, or replacing tangible assets, except land that bears ownership right, a right to build, a right to cultivate, and a right to use that is held for earning, collecting, and securing of income that has a useful life of more than one year, shall be calculated on a straight line basis over the useful life stipulated for the assets.

(2)

Depreciation with respect to tangible assets referred to in paragraph (1), other than building, may also be calculated under the declining balance method over the useful life of the asset by applying the rate of depreciation to the book value, and at the end of the useful life the remaining of the book value shall be fully depreciated, provided that the method is adopted consistently.

(3)

Depreciation shall commence in the month expenditures are incurred; except for the asset still in progress, the depreciation shall commence in the month when the process is completed.

(4)

Subject to the approval of the Director General of Taxes, a Taxpayer may start to claim depreciation at the beginning of the month the asset is used to earn, to collect and to secure income or of the month the asset produces income.

(5)

If a Taxpayer revalues the asset referred to in Article 19, then the basis of depreciation for the asset shall be the value resulting from the revaluation.

(6)

For the purpose of calculating depreciation, the useful life and the rate of depreciation for tangible asset shall be as follows:

 

Group of Tangible Assets

Useful Life

Rate of Depreciation under

Paragraph (1)

Paragraph (2)

I.

Non Building Class:

 

Group 1

 

Group 2

 

Group 3

 

Group 4


4 years
8 years
16 years
20 years


25 %
12,5 %
6.25 %
5 %


50 %
25 %
12.5 %
10 %

II.

Building Class:

 

Permanent

 

Non Permanent


20 years
10 years


5 %
10 %

 

(7)

Notwithstanding the provisions of paragraph (1), regulations concerning the depreciation of tangible asset held and used for certain businesses shall be determined by the Minister of Finance Decree.

(8)

If there is a transfer or withdrawal of asset referred to in paragraph (1) subparagraph d of Article 4 or a withdrawal of asset for other reasons, then the remaining book value of the asset shall be deducted as a loss and the selling price or insurance payment received or accrued shall be treated as income in the year the asset is withdrawn.

(9)

If the insurance payment can only be identified at a later date, then subject to the approval of the Director General of Taxes the amount of the loss referred to in paragraph (8) shall be deducted at such later date.

(10)

If there is a transfer of tangible assets which qualifies for paragraph (3) subparagraph a and subparagraph b of Article 4, then the remaining book value of the asset may not be treated as a loss by the transferor.

(11)

The classification of tangible assets according to their useful life referred to in paragraph (6) shall be determined by the Minister of Finance Decree.

 

Elucidation Article 11

Paragraphs (1) & (2)

Expenditures to acquire tangible property which have a useful life of more than 1 (one) year must be charged as expenses to earn, collect and secure income by allocating the expenditures during the useful life of the property through depreciation. Initial expenses to acquire land that bears ownership rights, including land with rights to build status, rights to cultivate and rights to use shall not be depreciated except if the land is used by the company or owned to earn income provided that the value of the land decreases through the business activities, for instance, the land is used by a roof tile manufacturer, ceramics manufacturer or a brick manufacturer.

The term initial expenses to acquire rights to build, rights to cultivate and rights to use means acquisition cost and administrative expenses initially paid to authorized agencies, whereas expenses to extent rights to build, rights to cultivate and rights to use shall be amortized over the useful life of those rights.

The methods of depreciation allowed under this provision are:

a.

in equal amounts over the useful life of the property (the straight line method); or

b.

in decreasing amounts, by applying the appropriate deprecation rate to the balance of the book value (declining balance method).

Methods of depreciation of property must be applied consistently.

Tangible property in the form of buildings can only be depreciated using the straight-line method. Property other than buildings may be depreciated using the straight-line method or the declining balance method.

If a Taxpayer chooses the declining balance method, the book value must be fully depreciated by the end of the useful life.

In accordance with the bookkeeping system used by a Taxpayer, small tools of the same kind or a similar kind may be depreciated in one class.

Example of the straight-line method:

A building is acquired for Rp100,000,000.00 and with a useful life of 20 (twenty) years, depreciation each year is Rp5,000,000.00 (Rp100,000,000.00 : 20).

Example of the use of the declining balance method:

A machine is bought and installed in January 2000 for Rp150,000,000.00. Its useful life is 4 (four) years. If, for example, the depreciation rate is 50% (fifty percent), depreciation will be as follows:

Year

Rate

Depreciation

Book Value

Acquisition cost

150,000,000.00

2000

50%

75,000,000.00

75,000,000.00

2001

50%

37,500,000.00

37,500,000.00

2002

50%

18,750,000.00

18,750,000.00

2003

Fully amortized

18,750,000.00

0

Paragraphs (3) & (4)

Depreciation commences in the month the expense is incurred, or the property is completely finished, so that the depreciation of the first year is calculated on pro-rate basis. However, based on the approval from the Director General of Taxes, depreciation may commence in the month the property is used to earn, collect or secure income or in the month the property yields.

Example 1

Expenditures to build a building is Rp100,000,000.00. The development starts in October 2000 and is finished in March 2001. The depreciation of the acquisition cost starts in March of taxable year of 2001.

Example 2

A machine is bought and installed in July 2000 for Rp100,000,000.00. Its useful life is 4 (four) years. If, for example, the depreciation rate is 50% (fifty percent), depreciation for tax year 2000 shall be as follows:

Year

Rate

Depreciation

Book Value

Acquisition cost

100,000,000.00

2000

½ x 50%

25,000,000.00

75,000,000.00

2001

50%

37,500,000.00

37,500,000.00

2002

50%

18,750,000.00

18,750,000.00

2003

50%

9,375,000.00

9,375,000.00

2004

Fully amortized

9,375,000.00

0

Example 3:

PT “X”, which operates plantation, buys a tractor in 1999. The plantation begins to yield harvest in 2000. With the approval of the Director General of Taxes, depreciation of the tractor commences in the year 2000.

Paragraph (5)

Sufficiently clear.

Paragraph (6)

To provide legal certainty for the Taxpayer in the depreciation of expenditure on tangible assets, this provision regulates groups of assets on the basis of period of utility and the depreciation rate, both for the straight line method and for the declining balance method.

The term a non-permanent building means a building that is a temporary in nature and constructed of materials which do not last long, or a movable building with a useful life of not more than 10 (ten) years; for example, barracks and dormitories made of wood and used by employees.

Paragraph (7)

In the context of recognising the specific characteristics of certain business sector, such as oil and gas drilling and hardwood plantations, special arrangements are required for the depreciation of tangible assets used by such business, the provisions of which shall be determined by the Minister of Finance Decree.

Paragraphs (8) and (9)

In general, profit or loss on a transfer of property is taxed in the year of the transaction. If property is sold or lost due to fire, the net income from such property, namely the difference between the sale price and expenses incurred related to the sale and/or any insurance compensation, is recorded as income for the year the transaction occurs or the year the insurance compensation is received and the book value of the assets is charged as loss in the taxable year concerned.

If the certain amount of insurance compensation can only be certain out later, a Taxpayer may submit a request to the Director General of Taxes to have an amount equal to the loss expensed in the year the insurance compensation is received.

Paragraph (10)

Notwithstanding the provisions of paragraph (8), for a transfer of a tangible asset that meet the requirements referred to in paragraph (3) a and b of Article 4, the book value may not be expensed as loss by the transferor.

Paragraph (11)

To provide uniformity for Taxpayer in effecting depreciation, the Minister of Finance is authorised to determine the types of property included in each group of useful life which must be followed by Taxpayers.

 

 

Article 11A

 

(1)

Amortization with respect to cost of acquiring intangible asset and other costs including cost of extending right to build, right to cultivates, and right to use that has a useful life of more than one year which is used to earn, to collect and to secure income shall be calculated under straight line method or declining balance method by applying the amortization rate to the costs or the book value and at the end of the useful life the remaining of the book value shall be fully amortized provided that the method is adopted consistently.

(2)

For the purpose of calculating amortization, the useful life and the rate of amortization shall be as follows:

 

Group of Intangible Assets

Useful Life

Rate of Amortization under

Straight Line Method

Declining Balance Method

 

Group 1

Group 2

Group 3

Group 4

 

4 years

8 years

16 years

20 years

 

25%

12,5%

6,25%

5%

 

50%

25%

12,5%

10%

(3)

Expenditures incurred prior to the establishment and the capital expansion of an entity shall be deducted in the year the expenditures are incurred or amortized as stipulated in paragraph (2).

(4)

Amortization of expenditures to acquire rights and other expenditures that have a useful life of more than one year in oil and gas industry shall be calculated under the unit of production method.

(5)

Amortization of expenditures to acquire mining rights other than referred to in paragraph (4), rights on forestry concession and rights on the exploitation of natural resources and other natural products that have a useful life of more than one year, shall be calculated using the unit of production method, up to a maximum of 20% (twenty percent) per year.

(6)

Expenditures incurred prior to commercial operations, which have useful life of more than one year, shall be capitalized and amortized as stipulated in paragraph (2).

(7)

In case of transfer of intangible asset or rights referred to in paragraph (1), paragraph (4) and paragraph (5), the book value of the asset or the rights shall be deducted as a loss and the payment received shall be treated as income in the year the transfer occurred.

(8)

In case of a transfer of intangible asset that complies with the conditions referred to in paragraph (3) subparagraph a and subparagraph b of article 4, the book value of such asset shall not be treated as a loss by the transferor.

 

Elucidation Article 11A

Paragraph (1)

The acquisition cost of intangible asset and other expenditure including cost of extending rights on land (such as rights to cultivate, rights to use of a building, and rights to utilize) that has a useful life of more than one year shall be amortised with the following method:

a. in equal amounts every year in its useful life, or;

b. in decreasing amount every year by applying amortization rate to its book value.

For amortization of intangible assets using the declining balance method, the book value of the asset shall be fully amortized by the end of the useful life.

Paragraph (2)

The determination of useful life and amortization rate for intangible assets is intended to provide uniformity for Taxpayers in conducting amortization.

A Taxpayer may amortize in accordance with the method selected referred to in paragraph (1) based on the actual useful life of each intangible assets

The applicable amortization rate is based on the group of useful life as set out in this provision. Where the useful life of an intangible asset does not correspond with any of those listed, the Taxpayer should use the nearest useful life group. For example, an intangible asset with an actual useful life of 6 (six) years may use the listed group of useful life 4 (four) years or that of 8 (eight) years. If the actual useful life is 5 (five) years, the asset is amortized using the rate applicable to the 4 (four) years group of useful life.

Paragraph (3)

Sufficiently clear.

Paragraph (4)

The unit of production method is implemented by applying an amortization rate equivalent to the ratio of oil and gas production in the relevant year to the estimated total reserves of oil and gas in that location.

If the amount of actual production is less than their estimated reserves, so that there is unamortized expenditure to acquire rights or any other expenditure, the whole remaining balance may be expensed in the tax able year concerned.

Paragraph (5)

Expenditures to acquire mining rights other than for oil and gas, forestry concessions or other natural products such as concessions over sea products, are amortized based on the unit of production method up to maximum of 20% (twenty percent) per year.

Example:

Expenditure amounting to Rp500,000,000.00 to acquire a forestry concession with a potential of 10,000,000.00 (ten million) tons of wood is amortized in accordance with the percentage of production units actually produced in the relevant year. If, in any taxable year, the production is 3,000,000.00 (three million) tons, i.e. 30% (thirty percent) of the available potential, then despite the 30% (thirty percent) production, the maximum amount of amortization deductible from gross income in that year is 20% (twenty percent) of the expenditure, or Rp100,000,000.00.

Paragraph (6)

Pre-operating expenditures are expenses incurred before commercial operation begins, for example feasibility studies and cost of trial production, but not including routine operational expenses such as employee salaries, electricity, telephone and other office expenses. Routine operational expenditures may not be capitalized but must be expensed immediately in the year of disbursement.

Paragraph (7)

Example:

Expenditure by PT “X” to acquire oil and natural gas exploration right at a given location amounts to Rp500,000,000.00. The estimated petroleum content in the area is 200,000,000 (two hundred million) barrels. After oil and gas production has reached 100,000,000 (one hundred million) barrels, PT “X” sells the exploration mining rights to another party for Rp300,000,000.00.

Calculation of profit and loss from the transfer of the right is as follows:

Acquisition cost

Rp 500.000.000,00

Amortization expensed

100,000,000/200,000,000 barrels (50%)

Rp 250.000.000,00

Book value of asset

Rp 250.000.000,00

Transfer price

Rp 300.000.000,00

Therefore, the book value of Rp250,000,000.00 is charged as loss, and Rp300,000,000.00 is recorded as income.

Paragraph (8)

Sufficiently clear.

 

 

Article 12

 

Deleted

 

Elucidation Article 12

Sufficiently clear.

 

 

Article 13

 

Deleted

 

Elucidation Article 13

Sufficiently clear.

 

 

Article 14

 

(1)

Deemed profit to determine net income, shall be formulated and adjusted from time to time, and issued by the Director General of Taxes.

(2)

An individual Taxpayer whose gross income in one year is less than some Rp600,000,000.00 (six hundred million rupiahs), may calculate his net income by applying deemed profit referred to in paragraph (1), provided that it is communicated to the Director General of Taxes within the first three months of the taxable year concerned.

(3)

A Taxpayer who calculates net income using deemed profit referred to in paragraph (2), shall be obliged to keep records pursuant to the provisions of the Law on General Rules and Procedures of Taxation.

(4)

A Taxpayer who fails to inform Director General of Taxes to choose deemed profit referred to in paragraph (2) is deemed to choose to keep books of account.

(5)

A Taxpayer who is obliged to keep books of account, including a Taxpayer referred to in paragraphs (3) and (4), but fails to keep or completely keep records or books of account, or fails to reveal records or books of account or supporting evidence, in such case the net income will be calculated using deemed profit or other basis as stipulated by the Minister of Finance Decree.

(6)

Deleted.

(7)

The amount of gross income referred to in paragraph (2) may be adjusted by the Minister of Finance Decree.

 

Elucidation Article 14

Correct and complete information concerning a Taxpayer’s income is very important to impose a fair and appropriate amount of tax in accordance with economic capability of the Taxpayer. To provide such information, a Taxpayer must keep proper books of account. It is apparent, however, that not all Taxpayer are capable of keeping of books of account.

All non-individual Taxpayer and permanent establishment are obliged to keeps of account. Individual Taxpayers conducting business or performing independent work within a specified turnover are not obliged to keep books of account. To facilitate calculation of the net income for such Taxpayers, Director General of Taxes is authorised to issue a deemed profit.

Paragraph (1)

Deemed profit is a guideline to determine net income, issued by the Director General of Taxes and continuously adjusted. The use of deemed profit is mainly applied under the following conditions:

a.

there is no better basis for calculation, i.e. complete books, or

b.

the books or records on gross income performed by the Taxpayer appear to be untrue.

The deemed profit shall be formulated on the basis of research or other data and by having regard to fairness.

For Taxpayer who is not capable to keep books of account, the deemed profit is expected to be helpful in computing net income.

Paragraphs (2), (3) and (4)

The deemed profit may only be used by an individual Taxpayer whose gross income does not exceed Rp600,000,000.00 (six hundred million rupiahs). For this purpose, the Taxpayer shall communicate to the Director General of Taxes within the first 3 (three) months of the taxable year concerned. An individual Taxpayer who uses deemed profit is obliged to keep records on gross income as regulated in the Law on General Rules and Procedures on Taxation. The records are intended to facilitate applying the deemed profit.

An individual Taxpayer entitled to use the deemed profit but failing to notify the Director General of Taxes within the prescribed duration of time, is deemed to choose to keep books of account.

Paragraph (5)

Taxpayer who is obliged to keep books of account and or is obliged to keep records and or deemed to choose to keep books of account but:

a.

fails to or not fully keep complete books of account or record;

b.

fails to reveal the books of account or record or their supporting evidence during the audit;

so that the real gross income is unknown, his net income will be calculated on the basis of deemed profit or other base stipulated by the Minister of Finance.

Paragraph (6)

Sufficiently clear.

Paragraph (7)

The Minister of Finance may adjust the limit of gross income referred to in paragraph (2), having regard to economical development and the capability of Taxpayers to keep books of account.

 

 

Article 15

 

Specific deemed profit for calculating net income of certain Taxpayer whose income cannot be calculated by the provision of paragraph (1) or paragraph (3) of Article 16 shall be determined by the Minister of Finance.

 

Elucidation Article 15

This provision regulates the Special Deemed Profit for certain Taxpayer, among others are international shipping or aircraft companies, gas and geothermal drilling companies, foreign trading companies and companies investing in the form of “build, operate and transfer”.

To avoid difficulties in calculating Taxable Income for such Taxpayer, and having regard to practical considerations, or in accordance to normal practice for tax imposition in such business sectors, the Minister of Finance is authorised to stipulate a specific deemed profit to be applied in calculating the net income for such Taxpayer.

 

 

CHAPTER IV

METHODS OF TAX CALCULATION

Article 16

 

(1)

Taxable income of a resident Taxpayer in a taxable year shall be income referred to in paragraph (1) of article 4 reduced by allowable deductions referred to in paragraph (1) and (2) of article 6, paragraph (1) of article 7 and paragraph (1) subparagraph c, subparagraph d and subparagraph e of article 9.

(2)

Taxable income of Taxpayers referred to in Article 14, shall be calculated by applying deemed profit stipulated in that article, and in case of an individual Taxpayer the amount as calculated by applying the deemed profit is deducted with personal exemptions referred to in paragraph (1) of article 7.

(3)

Taxable income of a non resident Taxpayer conducting business or engaged in activities through a permanent establishment in Indonesia in a taxable year, shall be income referred to in paragraph (1) of article 5 with regard to paragraph (1) of Article 4 reduced by allowable deductions referred to in paragraph (2) and (3) of article 5, paragraph (1) and (2) of article 6, and paragraph (1) subparagraph c, subparagraph d and subparagraph e of article 9.

(4)

In case the tax obligation of an individual resident Taxpayer covers only a fraction of a taxable year referred to in paragraph 6 of Article 2A, his taxable income is calculated by multiplying the net income therefrom with a fraction which would arrive at a full year net income.

 

Elucidation Article 16

Taxable Income is the basis for calculating the amount of income tax payable. In this Law, there are two classes of Taxpayer, namely resident Taxpayer and non-resident Taxpayer.

For resident Taxpayer, there are basically two methods for determining the amount of Taxable Income, namely the common calculation method and application of deemed profit method. In addition, there is a Special Deemed Profit which is applied to certain Taxpayers based on the Minister of Finance Decree.

For non-resident Taxpayer, determination of Taxable Income can be differentiated between:

1.

non-resident Taxpayers conducting business or engaged in activities through a permanent establishment in Indonesia;

2.

other non-resident Taxpayers.

Paragraph (1)

For resident Taxpayers who keep books of account and records, Taxable Income is calculated by using the common method, as in the following example:

-

Gross Income

Rp300.000.000,00

 

-

Expenses to earn, collect and secure income

Rp255.000.000,00(-)

 

-

Profit (net business income)

 

Rp 45.000.000,00

-

Other income

Rp 5.000.000,00

 

-

Expenses to earn, recover and secure other income

(Rp 3.000.000,00)

 

 

 

 

Rp 2.000.000,00 (+)

-

Total net income

 

Rp 47.000.000,00

-

Compensation for loss

 

(Rp 2.000.000,00)

-

Taxable Income (for entity Taxpayer)

 

Rp 45.000.000,00

-

Personal exemption for individual Taxpayer

(wife + 3 children)

 

Rp 5.184.000,00(-)

-

Taxable Income (for individual Taxpayer)

 

Rp 39.816.000,00

Paragraph (2)

For individual Taxpayers who are not obliged to keep books, Taxable Income is calculated using the deemed profit, as in the following example:

-

Gross Income

 

Rp300.000.000,00

-

Net Income (in accordance with deemed

profit) for instance 20%

Rp 60.000.000,00

 

-

Other Net Income

Rp 5.000.000,00

 

-

Total Net Income

 

Rp 65.000.000 00

-

Personal exemption (wife + 3 children)

 

(Rp 5.184.000,00)

-

Taxable Income

 

Rp 59.816.000,00

Paragraph (3)

For a non-resident Taxpayer which conducts business or engage in activities through a permanent establishment in Indonesia, the method of calculating Taxable Income is basically the same as for an entity resident Taxpayer. Since a permanent establishment is obliged to keep books, Taxable Income is calculated by the common method.

Example:

-

Gross Income

Rp 400.000.000,00

 

-

Expenses to earn, collect and secure income

Rp 275.000.000,00(-)

 

 

 

 

Rp 125.000.000,00

-

Income from interest

 

Rp 5.000.000,00

-

Income derived by head office from sale of goods

of the same kind as those sold through the

permanent establishment

Rp 200.000.000,00

 

-

Expenses to earn, collect & secure income

Rp 150.000.000,00 (-)

 

 

 

 

Rp 50.000.000,00

-

Dividend derived by head office, which is effectively

connected with the permanent establishment

 

Rp 2.000.000,00 (+)

 

 

 

Rp 182.000.000,00

-

Expenses referred to in paragraph (3) of Article 5

 

Rp 7.000.000,00 (-)

-

Taxable Income

 

Rp 175.000.000,00

Paragraph (4)

Example:

An individual who is not married and whose tax obligations as a resident Taxpayer covers only 3 (three) months derives income of Rp10,000,000.00 within such period. His/her taxable income shall be computed as follows:

Income within 3 (three) months

Rp 10.000.000.00

Income within a year:

360 / (3 x 30) x Rp10,000,000.00

Rp 40.000.000,00

Personal exemption(1 wife + 3 children)

Rp 5.184.000,00 (-)

Taxable Income

Rp 34.816.000,00

 

 

 

Article 17

 

(1)

The tax rate applicable to each taxable income brackets is as follow:

 

a.

Individual Taxpayers:

 

Taxable income brackets

Tax Rate

Rp25,000,000.00 (twenty five million rupiahs) or less

5% (five percent)

Over Rp25,000,000.00 (twenty five million and one rupiahs) - Rp50,000,000.00 (fifty million rupiahs)

10% (ten percent)

Over Rp50,000,000.00 (fifty million and one rupiahs) - Rp100,000,000.00 (one hundred million rupiahs)

15% (fifteen percent)

Over Rp100,000,000.00 (one hundred million and one rupiahs) – Rp200,000,000.00 (two hundred million rupiahs)

25% (twenty five percent)

Over Rp200,000,000.00 (two hundred million rupiahs)

35% (thirty five percent)

 

b.

Tax rate applicable to entities as resident Taxpayers and permanent establishment:

 

Taxable income brackets

Tax Rate

Rp50,000,000.00 (fifty million rupiahs) or less.

10% (ten percent)

Over Rp50,000,000.00 (fifty million and one rupiahs) – Rp100,000,000.00 (one hundred million rupiahs)

15% (fifteen percent)

Over Rp100,000,000.00 (one hundred million rupiahs)

30% (thirty percent)

(2)

By virtue of a government regulation the highest marginal rate referred to in paragraph (1) subparagraph b may be lowered but shall not be lower than 25 (twenty five) percent.

(3)

The amount of taxable income bracket referred to in paragraph (1) may be adjusted by the Minister of Finance Decree.

(4)

For the purposes of the application of tax rates referred to in paragraph (1), the amount of taxable income shall be rounded down in thousands.

(5)

Where an individual resident Taxpayer’s obligation covers only a fraction of a taxable year referred to in paragraph (4) of Article 16, his tax payable is calculated by a fraction of the number of days divided by 360 and multiplied by the amount of the tax payable for one full year.

(6)

For the purpose of the calculation of tax payable referred to in paragraph (5), one month is deemed to be 30 ( thirty )days.

(7)

A special rate on income referred to in paragraph (2) of Article 4 may be applied by virtue of a government regulation provided that it does not exceed the highest marginal rate referred to in paragraph (1).

 

Elucidation Article 17

Paragraph (1)

Subparagraph a

An example of computation of tax payable of individual Taxpayers is as follows:

Taxable Income Rp250,000,000.00

Income Tax Payable:

5% x Rp 25.000.000,00

=

Rp 1.250.000,00

10% x Rp 25.000.000,00

=

Rp 2.500.000,00

15% x Rp 50.000.000,00

=

Rp 7.500.000,00

25% x Rp100.000.000,00

=

Rp 25.000.000,00

35% x Rp 50.000.000,00

=

Rp 17.500.000,00 (+)

 

 

Rp 53.750.000,00

Subparagraph b

An example of computation of tax payable of corporate Taxpayers and permanent establishments are as follows:

Taxable Income Rp250,000,000.00

Income Tax Payable:

10% x Rp 50.000.000,00

=

Rp 5.000.000,00

15% x Rp 50.000.000,00

=

Rp 7.500.000,00

30% x Rp 150.000.000,00

=

Rp 45.000.000,00 (+)

 

 

Rp 57.500.000,00

Paragraph (2)

The adjustment of marginal rate referred to in this paragraph shall nationally have an effect on January 1st and be published no later than 2 months before the adjusted rate is effective, and it shall be presented by the government to the Parliaments in the proposed national budget arrangement discussion.

Paragraph (3)

The amount of taxable income brackets referred to in paragraph (1) shall be adjusted to the adjustment factor, such as inflation rate. The Minister of Finance is authorized to issue a decree concerning the adjustment factor concerned.

Paragraph (4)

Example:

For the implementation of tax rate, the taxable income of Rp5,050,900.00 shall be rounded down into Rp5,050,000.00.

Paragraphs (5) and (6)

Example:

Taxable Income of one year (computed in accordance with paragraph (4) of Article 16) Rp34,816,000.00

Income tax of one year:

5% x Rp 25.000.000,00

=

Rp 1.250.000,00

10% x Rp 9.816.000,00

=

Rp 981.600,00(+)

 

 

Rp 2.231.600,00

Income tax payable of a fraction of taxable year (3 months):

(3 x 30) : 360 x Rp2,231,600.00 = Rp557,900.00

Paragraph (7)

This provision authorizes the government to determine a special rate of certain types of income referred to in paragraph (2) of Article 4, which shall be treated as final, provided that it does not exceed the highest marginal rate referred to in paragraph (1). The determination of a special rate shall be based on the principle of simplicity, fairness and equal tax treatment.

 

 

Article 18

 

(1)

The Minister of Finance is authorized to issue a regulation on debt equity ratio for the purposes of computing tax payable in accordance with this law.

(2)

The Minister of Finance is authorized to determine as when dividends accrued by a resident Taxpayer on participation in an offshore company other than public companies, provided that one of the following condition is met:

 

a.

the Taxpayer owns at least 50% of the voting stock of the company; or

 

b.

the Taxpayer together with other resident Taxpayers own at least 50% of the voting stock of the corporation.

(3)

Director General of Taxes is authorized to reallocate income and deductions between related parties and to characterize debt as equity for the purposes of the computation of taxable income to assure that the transaction are those which would have been made between independent parties.

(3a)

Director General of Taxes is authorized to conclude an agreement with a Taxpayer and with tax authority from other countries on transfer pricing method between related Taxpayers referred to in paragraph (4) which may cover a certain period and to evaluate it as well as to renegotiate after the agreement is expired.

(4)

The term “related Taxpayers” referred to in paragraphs (3), (3a), and (4) of Article 8, paragraph (1) (f) of Article 9, and paragraph (1) of Article 10 means:

 

a.

a Taxpayer who owns directly or indirectly at least 25% of equity of the other Taxpayers or a relationship between Taxpayers through ownership of at least 25% of equity of two or more Taxpayers, as well as relationship between two or more Taxpayers concerned;

 

b.

a Taxpayer who controls other Taxpayers; or two or more Taxpayers are directly or indirectly under the same control;

 

c.

a family relationship either through blood or through marriage within one degree of direct or indirect lineage.

(5)

Deleted.

 

Elucidation Article 18

Paragraph (1)

This law authorizes the Minister of Finance to prescribe the ratio of the company’s liabilities to the company’s equity, which shall be valid for tax purposes. In a commercial business, there is a certain level of arm’s length debt equity ratio. If debt equity ratio of a company is higher than the arm’s length debt equity ratio, in general the company is economically not in good condition. In such case, this law considers it as disguise equity for the purpose of computation of taxable income.

The term “equity” shall be referred to the term equity in accordance with the general accounting principles, and the term arm’s length or ordinary business means fairly engage in business activities.

Paragraph (2)

In line with the globalization and the enhancement of economic and international trade, resident Taxpayers may invest in an offshore company. To minimize tax avoidance, the Minister of finance is authorized to determine as when dividends accrued by a resident Taxpayer on participation in an offshore company other than public company.

Example:

PT. A and PT. B respectively own share of 40% and 20% in X Ltd. which is domiciled in country Q. X Ltd. is not a public company. In 2000, X Ltd’s net income after tax is Rp100,000,000.00. In such case, the Minister of Finance is authorized to determine as when dividend is accrued and the basis of computation.

Paragraph (3)

The purpose of this provision is to prevent tax avoidance due to the existence of special relationship. When special relationship exists, there is a possibility that income or expense may be understated or overstated. In such case, the Director General of taxes is authorized to reallocate income or expense to assure that the transactions are those which would have been made between independent parties. There are some methods of reallocation of income or expense, such as comparable data, profit allocation based on function or participation of related Taxpayer and other methods.

There is also a possibility that equity is stated as debt, namely disguised equity. In such case, the Director General of Taxes is authorized to characterize debt as equity. This recharacterization may be made by comparing the ratio of the company’s liabilities to the company’s equity of independent parties, or based on other data.

As a result, interest paid with respect to that debt is not deductible and in the hands of shareholders the payment is considered as dividend which is subject to tax.

Paragraph (3a)

The term ”Advance Pricing Agreement” (APA) means an agreement between Taxpayer and the Director General of Taxes on transfer pricing methodology for transactions between related parties. The purpose of APA is to reduce a mistreatment of transfer pricing practice by multinational enterprises. APA may cover prices of goods, amounts of royalty etc. depending on the agreement. The benefit of APA is, in addition providing a legal certainty of treatment to the Taxpayers and easier tax calculation, tax authority does not have to adjust selling price and profits of products sold by a Taxpayer to another Taxpayer in the same group. APA may be done unilaterally whereby the APA is concluded between Taxpayer and Director General of Taxes, or bilaterally whereby the APA is concluded with a competent authority of a treaty country concerning the Taxpayers of that country.

Paragraph (4)

A special relationship between Taxpayers may result from the dependency or the relationship of the following condition between those parties:

a.

An ownership or share of equity

b.

A participation in management or technology.

In addition, related parties between individual Taxpayers may also result from their relationship by blood or by marriage.

Subparagraph a

A special relationship is deemed to exist if there is a direct or indirect ownership of at least 25% of equity.

For instance, PT. A owns 50% of PT. B’s shares. Such ownership is categorized as direct ownership. Further, PT. B owns 50% of PT. C’s shares, accordingly PT. A as a shareholder of PT. B indirectly owns 25% of PT. C’s shares. In such case, PT. A, PT. B, and PT. C are related parties. If PT. A also owns 25% of PT. D’s shares, PT. B, PT. C, and PT. D are also related parties.

The ownership may also exist between individual and entity.

Subparagraph b

A special relationship between Taxpayers may also result from a participation in management or technology even though there is no ownership.

A special relationship is deemed to exist if one or more enterprises are controlled by the same persons, or the relationship between enterprises controlled by the same person.

Subparagraph c

The term “relationship by blood in one degree of direct lineage vertically” means parents, and son or daughter. The term “relationship by blood in one degree of direct lineage horizontally” means relatives.

The term “relationship by marriage in one degree of direct lineage vertically” means parents in law, and stepson or stepdaughter. The term “relationship by marriage in one degree of direct lineage horizontally” means relatives in law.

Paragraph (5)

Sufficiently clear.

 

 

Article 19

 

(1)

The Minister of Finance is authorized to issue a regulation concerning revaluation of assets and adjustment factor when elements of income and expenditure are inappropriate due to inflation.

(2)

By virtue of the Minister of Finance Decree, a certain tax rate shall be applied to the excess value of revaluation of asset referred to in paragraph (1) of Article 17

 

Elucidation Article 19

Paragraph (1)

A sharp increase in price and an alteration in monetary policy may cause a disparity between expenditure and income, which may result in an improper tax payable. In such case, The Minister of Finance is authorized to prescribe a regulation concerning revaluation of asset or adjustment of income and expenditure.

Paragraph (2)

Sufficiently clear.

 

 

CHAPTER V

TAX PAYMENT DURING THE CURRENT YEAR

Article 20

 

(1)

The income tax payable in any taxable year shall be paid up by way of withholding by other persons and self payment by the Taxpayer.

(2)

The tax payment referred to in paragraph (1) shall be carried out on a monthly basis or other period to be prescribed by the Minister of Finance.

(3)

The tax payment referred to in paragraph (1) shall be treated as an tax installment which may be credited against income tax payable at the end of taxable year concerned, except for final tax which is applicable to a certain type of income.

 

Elucidation Article 20

Paragraph (1)

To make a tax payment in a taxable year close to a tax payable in a year concerned, the payment shall be carried out by way of as follows:

a.

Withholding tax by other persons on income derived by Taxpayers from employment, services or any activities referred to in Article 21; withholding tax on business income referred to in Article 22; and withholding tax on income from equity, services and certain activities referred to in Article 23.

b.

Self-payment by Taxpayer referred to in Article 25.

Paragraph (2)

Generally, tax payment in a current year is carried out on a monthly basis, however the Minister of Finance can determine other period, such as at the time the transaction is done or at the time income is received or accrued so that the tax payment is carried out in a proper way.

Paragraph (3)

The tax payment in a taxable year shall be treated as an installment of tax payment, which may be credited against income tax payable at the end of a taxable year concerned.

Base on the principle of easiness, simplicity, certainty, timeliness of tax imposition, and other consideration, there shall be a regulation concerning tax payment in a current year which is final and it shall be applicable to certain types of income referred to in Paragraph (2) of Article 4, Article 21, Article 22, and Article 23. The final tax cannot be credited against income tax payable.

 

 

Article 21

 

(1)

The following persons are obliged to withhold, to make a deposit, and to report tax on remuneration in whatever form derived by individual resident Taxpayers in respect of employment, services rendered, or any other similar activities:

 

a.

an employer who pays salaries, wages, honoraria, allowances, and other similar remuneration in respect of an employment exercised either by permanent employees or non-permanent employees;

 

b.

a government treasurer who pays salaries, wages, honoraria, allowances, and other similar remuneration in respect of an employment, services, and any other similar activities;

 

c.

pension fund or other entity that pays pension and any other similar remuneration in whatever form in consideration of past employment;

 

d.

an entity that pays honoraria or other similar remuneration in respect of services rendered including professional services or any other activities of an independent character;

 

e.

a person who organizes an activity and pays remuneration in respect of services connected therewith.

(2)

Notwithstanding the preceding provisions, a diplomatic agent and international organization referred to in Article 3 are not obliged to withhold, to make a deposit, and to report tax referred to in paragraph (1) subparagraph a.

(3)

An income to be withheld monthly derived by permanent employee or a retired person shall be the amount of gross income after deducted by an official expenditure, pension expenditure stipulated by the Minister of Finance Decree, pension contribution, and personal exemption.

(4)

An income to be withheld derived by daily wage earner, weekly wage earner, and other non permanent employee shall be the amount of gross income after deducted by a portion of income which is exempt from withholding tax as stipulated by the Minister of Finance Decree.

(5)

A rate applicable to income referred to in paragraph (1) shall be the rate under paragraph (1) of article 17 except otherwise stipulated by the government regulation.

(6)

Deleted.

(7)

Deleted.

(8)

Guidelines concerning withholding, payment and reporting of tax on income in connection with any employment, service, or activity shall be stipulated by the Director General of Taxes.

 

Elucidation Article 21

Paragraph (1)

This provision governs tax payment in a current year by way of withholding tax on income derived by individual Taxpayer in respect of employment, services and other activities. The persons who are obliged to withhold, to make deposit and to report tax are employers, government treasurers, pension funds, entities, and event organizers.

Subparagraph a

An employer who is obliged to withhold, make deposit and report tax is an individual or an entity, including a head office, a branch, a representative office or a unit of an entity who pays salaries, wages, allowances, honorariums, and other remuneration in whatever form to a board of director, a permanent employee or non-permanent employee in consideration of employment, services, or any other activities. The term employer shall also include an international organization, which is not exempted from the obligation to withhold taxes.

The term “other remuneration” means remuneration in whatever form other than salaries, wages, allowances, and honorariums or other remuneration such as bonus, gratuity, profits share.

The term non-permanent employee means an individual who derives income from his/her employer in respect of non-permanent employment, such as artist who derives honorarium from an employer.

Subparagraph b

A government treasurer includes central governments, local governments, government institutions, statutory bodies, and Indonesian embassies in an offshore who pay salaries, wages, allowances, honorarium, and other remuneration in consideration of employment, services, or any other activities.

Subparagraph c

A pension fund or other entities such as an Institution of Social Security who pays pension, annuity, and other similar remuneration in whatever form.

The term pension or other similar remuneration shall include allowance whether it is payable periodically or not and which is paid to recipient of pension, annuity, and other similar remuneration.

Subparagraph d

The term entity shall include international organization that is not treated as a non-taxable person referred to paragraph (2). It shall also include professional services, such as physicians, lawyers, accountants who perform any independent activities.

Subparagraph e

A person organizing activities is obliged to withhold tax on prizes or award in whatever form derived by an individual resident Taxpayer in consideration of activities. It shall also include entities, government institutions, and organizations including international organization, institution, individual or any other institution organizing activities. The term activities include sports, religious activities, arts, and other activities.

Paragraph (2)

Sufficiently clear.

Paragraph (3)

A taxable income of permanent employee shall be gross income deducted by an official expenditure, pension expenditure, and personal and dependent allowances. The term pension expenditure shall also include annuity contribution which is contributed by an employee.

A taxable income of a pensioner shall be gross income deducted by pension expenditure and personal and dependent allowances. The term pensioner shall also include recipient of annuity.

Paragraph (4)

A taxable income of daily wage earner, weekly wage earner, other non-permanent employee shall be gross income deducted by a portion of income which is exempt from withholding tax prescribed under the decree of the Minister of Finance and it shall be subject to the applicable personal and dependent allowances.

Paragraph (5)

Sufficiently clear.

Paragraph (6)

Sufficiently clear.

Paragraph (7)

Sufficiently clear.

Paragraph (8)

Sufficiently clear.

 

 

Article 22

 

(1)

Minister of Finance may designate government treasurers to withhold taxes in connection with payment for supply of goods, as well as certain entities to withhold tax from Taxpayers who conduct in import activities or other business activities.

(2)

Regulations governing the tax base for withholding purposes, the characteristic and amount of withholding, and procedures of payment and reporting of taxes referred to in paragraph (1), shall be determined by the Minister of Finance.

 

Elucidation Article 22

Paragraphs (1) and (2)

Pursuant to this provision a person who is appointed as a withholding agent shall be:

-

Government treasurers either for central or local governments, government institutions or any other statutory bodies in respect of the payment for supply of goods.

-

Certain institutions either government or private entities that carry out import activities, or any other business activities.

The purpose of withholding tax accorded to this provision is to enhance public participation in collecting of fund by way of tax payment system and to achieve the principle of easiness, simplicity, and timely tax imposition.

In this respect, The Minister of Finance shall determine the nature of withholding tax, which is final in nature. The application of this provision shall be prescribed by the Minister of Finance, which shall take into account the following considerations:

-

selective withholding agent election for efficiency and effectiveness;

-

not interfering goods transportation;

-

simplified withholding, payment and reporting procedures.

 

 

Article 23

 

(1)

The following income, in whatever name and form, paid or owed by a government institution, a resident taxable entity, a person who organizes an activity, a permanent establishment or a representative of any other non-resident enterprises to a resident Taxpayer or permanent establishment, shall be subject to withholding tax of:

 

a.

15% (fifteen percent) of the gross amount of:

 

1)

dividends, referred to in paragraph (1) subparagraph g of Article 4;

 

2)

interest referred to in paragraph (1) subparagraph f of Article 4;

 

3)

royalties;

 

4)

gifts and rewards, other than those that have been withhold under paragraph (1) subparagraph e of Article 21;

b.

15% (fifteen percent) of gross amount of savings interest paid by a cooperative as a final tax;

c.

15% (fifteen percent) of deemed profit on:

 

1)

rent and other income in connection with the use of property;

 

2)

compensation in connection with technical, management, construction, consultation and other services, except those that have been withheld under Article 21.

(2)

Deemed profit and other services referred to in paragraph (1) subparagraph c, shall be stipulated by the Director General of Taxes.

(3)

An individual who is resident Taxpayer may be appointed by the Director General of Taxes as withholding agent referred to in paragraph (1).

(4)

Withholding tax referred to in paragraph (1) shall not apply to:

a.

income paid or owed to a bank;

b.

lease payment in finance lease agreements;

c.

dividends referred to in paragraph (3) subparagraph f of Article 4;

d.

interest on bonds referred to in paragraph (3) subparagraph i of Article 4;

e.

distributed profit referred to in paragraph (3) subparagraph j of Article 4;

f.

profit which is distributed by a cooperative to its members;

g.

interest on savings paid by a cooperative to its member provided it does not exceed a limit as stipulated by the Minister of Finance Decree.

 

Elucidation Article 23

Paragraph (1)

This article governs withholding tax on resident Taxpayers and permanent establishment's income derived or received from capital, furnishing services, or other activities in which not being withheld under paragraph (1) e of Article 21, paid or payable to government institution or resident taxable person, event organizer, permanent establishment, or other representative of foreign company.

The withholding tax base under this provision varies between gross income and estimated net income. The withholding tax base for income in the form dividend, interest, royalty, gift, and prize are gross income. The withholding tax base for rent and other income related to the use of properties are estimated net income.

Income from furnishing services such as technical, management, construction, consultant, and other services except regulated under article 21, are subject to withholding tax.

Interest on saving paid by cooperative is subject to withholding tax at rate of 15% (fifty percent). Interest on saving paid by cooperative to its members more than certain level regulated under Ministry of Finance's decree is not subject to income tax of Article 23.

Paragraph (2)

In applying this provision suitably and dynamically in line with business developments, the Director General of Taxes is authorized to determine the types of other services and the amount of estimated net income. Director General of Taxes may consider the opinion and information from related party aside from utilize internal data and information in determining the amount of estimated net income.

Paragraph (3)

Sufficiently clear.

Paragraph (4)

Sufficiently clear.

 

 

Article 24

 

(1)

Tax paid or tax payable in foreign countries on offshore income derived by a resident Taxpayer, may be credited in the same taxable year against tax payable under this Law.

(2)

The amount of allowable tax credit referred to in paragraph (1) shall be equal to the amount of foreign tax, but shall not exceed the tax payable calculated under this Law.

(3)

In calculating the limit of allowable tax credit, the source of income shall be determined as follows:

a.

the source of income from shares and other securities is the country where the company issuing the shares and other securities is a resident;

b.

the source of income in the form of interest, royalty or rent for the use of movable assets is the country where the payer or the party who claims the deductions there from is a resident;

c.

the source of income in the form of rent in connection with the use of immovable assets is the country where the assets are located;

d.

the source of income in the form of compensation for services, employment and other activities is the country where the payer or the party who claims deductions there from is a resident;

e.

the source of income of a permanent establishment is the country where the permanent establishment conducts business or is engaged in activities.

(4)

The determination of the sources of any income other than income referred to in paragraph (3), shall adopt the same principles contained therein.

(5)

If foreign tax on offshore income that has been credited is later either reduced or refunded, the amount of tax payable pursuant to this Law shall be adjusted by such amount for the year in which the reduction or refund is made.

(6)

Regulations on the implementation of foreign tax credits in respect of offshore income shall be determined by the Minister of Finance Decree.

 

Elucidation Article 24

Basically, resident Taxpayers are payable for the total income, include income from offshore. To lessen the possibility of double tax burden due to imposition of tax upon income earned offshore, this provision provides the determination of income tax paid or payable in foreign countries, which is creditable against the tax payable on total income of a resident Taxpayer.

Paragraph (1)

Tax on income paid or payable in foreign countries, which is creditable against tax payable in Indonesia is only tax imposed directly on income derived by a Taxpayer.

Example:

PT. A in Indonesia is a sole shareholder of Z Inc. In country X, in 1995 Z Inc gains profit of US $100,000.00. The applicable tax rate in country X is 48% for income tax and 38% for dividends. The tax on dividends is calculated as follows:

Profit of Z Inc

US$ 100,000.00

Corporate income tax (48%)

US$ 48,000.00 (-)

 

US$ 52,000.00

Tax on dividends

US$ 19,760.00 (-)

Dividends transfer to Indonesia

US$ 32,240.00

The creditable income tax is a tax imposed directly on income derived abroad. In the above example is US$19,760.00.

The corporate income tax of Z Inc of US$48,000.00 may not be credited against Income tax of PT. A because that tax is not imposed directly on the income derived in that country instead of tax on profit of Z Inc in country X.

Paragraph (2)

In order to give an equal treatment between income derived from Indonesia and income derived from offshore, the tax paid or payable in abroad may be credited against tax payable in Indonesia, but the allowable tax credit shall not exceed the tax determined under this Law.

The method of calculation of allowable tax credit shall be determined by the Minister of Finance pursuant to Paragraph (6).

Paragraphs (3) and (4)

The determination of source of income will be an important issue in calculating allowable tax credit on income paid or payable offshore under this law. Further, this provision rules the source of income in calculating tax credit.

Having regard to the broad definition of income under this law, in accordance with the provision of Paragraph (4) the determination of source of income other than mentioned in Paragraph (3) applies similar principal as stated in Paragraph (3), for example, “A “ a resident Taxpayer owns a house in Singapore and in 1995 the house was sold. Gain from the alienation of house is an income whose source is in Singapore.

Paragraph (5)

If there is a tax reduction or refund on income paid abroad, so that the amount of allowable tax credit in Indonesia becomes lesser than that in previous calculation, the difference amount shall be added to income tax payable under this law.

For example, in 1996 Taxpayer get a reduction of Rp5,000,000.00 (five million rupiahs) on offshore income for taxable year of 1995, which has been included in tax credit against income tax for taxable year of 1995, therefore the amount of Rp5,000,000.00 shall be added to Income tax payable in 1996.

Paragraph (6)

Sufficiently clear.

 

 

Article 25

 

(1)

Monthly tax installment during the current taxable year that must be paid by Taxpayers, shall be equal to the tax payable according to the tax return of the preceding year, less the following:

a.

tax withheld referred to in Article 21, Article 23 and Article 22; and

b.

foreign tax paid or payable that is allowable for tax credit referred to in Article 24, divided by 12 (twelve) or the number of months of a fraction of the taxable year.

(2)

The monthly tax installment for periods prior to the due date of income tax return lodgment is equal to the monthly installment of the latest month of the preceding taxable year.

(3)

Deleted.

(4)

If during a current taxable year an assessment notice of the preceding taxable year is issued, the monthly tax installment shall be recalculated according to the notice and shall commence from the following month after the issuance of the notice.

(5)

Deleted.

(6)

The Director General of Taxes is authorized to stipulate the calculation of monthly tax installment during the current taxable year in the following circumstances:

a.

a Taxpayer is entitled to loss carry forward;

b.

a Taxpayer receives an irregular income;

c.

tax return for the preceding year is filed after the due date;

d.

a Taxpayer is granted an extension of the due date to file the tax return;

e.

a Taxpayer revises the tax return on his own initiative, which gives rise to a higher installment than that prior to revision;

f.

there is a change in Taxpayer's business or activities.

(7)

The monthly installment applicable to new Taxpayers, banks, state-owned enterprises; local government-owned enterprises and certain Taxpayers including specific individual Taxpayers will be stipulated by the Minister of Finance Decree.

(8)

An individual Taxpayer traveling abroad shall pay taxes in accordance with such provisions as may be determined by Government Regulation.

(9)

Tax paid by certain individual Taxpayers in the current taxable year constitutes the payment of tax payable for that year, except if the Taxpayer derives other income which is not subject to a final tax governed by this law.

 

Elucidation Article 25

This article governs the calculation of monthly installments, which must be paid by the Taxpayer in current year.

Paragraph (1)

Example 1:

Income tax payable based on Annual Income Tax Return 2000

Rp 50.000.000,00

Deducted :

 

a.

Income tax withheld by employer (art 21)

Rp 15.000.000,00

 

b.

Income tax withheld by other parties (art 22)

Rp 10.000.000,00

 

c.

Income tax withheld by other parties (art 23)

Rp 2.500.000,00

 

d.

Offshore income tax credit (art 24)

Rp 7.500.000,00 (+)

 

Total tax credit

Rp 35.000.000,00 (-)

Difference

Rp 15.000.000,00

The amount of tax installment must be paid by Taxpayer for year of 2001 is Rp1,250,000.00 (Rp 15,000,000.00 : 12)

Example 2:

If the income tax in above example associates with income derived from a fraction of taxable year which covers the period of 6 months in 2000, the amount of monthly installments for 2001 is Rp2,500,000.00Rp15,000,000.00 : 6). (

Paragraph (2)

Since the expiration date of filing tax return is 3 (three) months after taxable year ended, the amount of tax installment that must be paid by Taxpayer himself prior to the expiration date of filing tax return has not be calculated under the provision of paragraph (1).

According to this provision, the amount of tax installment for the months prior to the expiration date of filing income tax return is equal to the tax installment of the last month in the previous year.

Example:

If Annual Income Tax Return is submitted by the Taxpayer on March 2001, hence the amount of tax installment must be paid by Taxpayer for January and February 2001 is equal to the amount of tax installment for December 2000, for instance Rp1,000,000.00

If on September 2000 the Decree of Tax Installment Reduction was issued, and according to the Decree the tax installments becomes null, as a consequence tax installment from October to December 2000 becomes null, hence the amount of tax installment for January and February 2001 is equal to the tax installment for December 2000 which is null.

Paragraph (3)

Sufficiently clear.

Paragraph (4)

If in the current year the Notice of Tax Assessment is issued for the previous taxable year, as the consequence, the tax installment shall be calculated based on the Notice. The tax installment adjustment applies from the following month after the issuance of the Notice.

Example:

In accordance with the Annual Income Tax Return of 2000 submitted on March 2001, the calculation of tax installment must be paid is Rp1,250,000.00. On June 2001 The Notice of Tax Assessment for taxable year of 2000 is issued resulting the amount of monthly tax installment of Rp2,000,000.00

In accordance with this provision, the amount of tax installment from July 2001 is Rp2,000,000.00. The assessment based on Tax Assessment Notice may be equal, lesser or more than tax installment based on Annual Tax Return.

Paragraph (5)

Sufficiently clear.

Paragraph (6)

Principally the amount of tax installment payment paid by Taxpayer himself in the current year shall be as close as the amount of tax payable in the year end. As a consequence, in accordance to this provision, the Director General of Taxes is authorized to adjust the calculation of the amount of tax installment paid by Taxpayer himself in certain cases, for example in case of loss carry over, in case Taxpayer derives irregular income, or the alteration of Taxpayer business or activities.

Example 1:

-

Income of PT. X in 2000

Rp 120.000.000,00

-

Loss carryover from previous year

Rp 150.000.000,00

-

Loss after carryover in 2000

Rp 30.000.000,00

The determination of income tax of Article 25 is as follows:

-

Income as a basis for determination of income tax installment of Article 25 =

Rp 120.000.000,00 - Rp 30.000.000,00 = Rp 90.000.000,00.

-

Income tax payable:

 

10% x Rp 50.000.000,00 =

Rp 5.000.000,00

 

15% x Rp 40.000.000,00 =

Rp 6.000.000,00 (+)

 

 

Rp 11.000.000,00

If in 2000 there is no tax withheld by other party and no tax paid and payable in foreign countries pursuant to Article 24, the amount of monthly tax installment of PT X in 2001 shall be:

1/12 x Rp11,000,000.00 = Rp916,666.67 (rounded down 916,666.00).

Example 2:

A regular business income of Taxpayer “A” in 2000 is Rp48,000,000.00 and an irregular income from rent house for 3 years entirely paid in 2000 is Rp72,000,000.00. Since entire irregular income received in 2000, the income as a basis for the determination of monthly income tax installment of Article 25 for Taxpayer A in 2001 shall be the regular income only.

Example 3:

Increasing and decreasing of the business may affect performance of Taxpayer business. PT. B, a yarn-producing company pays a monthly tax installment of Rp15,000,000.00 in 2000.

On June 2000, the “B” factory is burned, hence, in accordance with The Decree of Director General of Taxes beginning from July 2000; a monthly tax installment of “B” may be adjusted become less than Rp15,000,000.00.

On the other hand, where PT. B enhances their business due to an increasing sales and it is estimated that taxable income will be larger than that of preceding year, the Director General of Taxes may adjust the amount of monthly tax installment.

Paragraph (7)

Principally the calculation of a monthly tax installment for the current year shall be based on the previous Annual Tax Return. However, pursuant to this provision the Minister of Finance is authorized to determine the basis for the calculation of a monthly installment other than the said principle to accommodate the fairness based on supporting data to determine income tax payable in the yearend and as a basis for the calculation of a monthly installment in the current year.

It is necessary to regulate the basis for the calculation of monthly installment for the Taxpayer who commences their business in the current because the Annual Tax Return has not filed yet.

Facts and circumstances of Taxpayer's business shall be taken into account in the determination of the amount of tax installment.

Taxpayers operating in banking business and state or local state owned companies are required to submit periodic financial reports to the government in respect of its financial management. Such report may be used as a basis for the determination of tax installment in the current year.

In line with the development of business sphere there is possibility that a business or a Taxpayer, including individual Taxpayers who have more than one business spreading in many places, such electronic goods retailer who has a number of outlets in different shopping centers, whose tax installment may be calculated based the facts and circumstances to maintain the fairness.

Paragraph (8)

Tax paid by an individual Taxpayer who departs from Indonesia is treated as an tax installment for the current year and may be creditable against income tax payable in the yearend. Taking into certain considerations, such as government duties, or societal, culture, education and religion, or international practice, there is an exception from the tax obligation under this provision stipulated by the Government Regulation.

Paragraph (9)

As referred to in paragraph (7), the amount of tax installment for certain individual Taxpayers who have more than one place of business, such as electronic goods retailer who has a number of outlets in different shopping centers, shall be determined by the Minister of Finance Decree. Tax installment for such Taxpayer is treated as a payment of tax payable in the taxable year concerned insofar as the Taxpayer does not receive or accrue income, which is not final in nature. In case he receives or accrues income which is treated as final in nature, to determine tax payable his total income will be added together and taxed at a general tax rate, and the tax paid is treated as a tax credit against total income.

 

 

Article 26

 

(1)

The following income, in whatever name and form, paid or payable by a government institution, a resident taxable entity, a person who organizes activities, a permanent establishment or a representative of a non-resident company to a non-resident Taxpayer other than a permanent establishment in Indonesia, shall be subject to withholding tax of 20% (twenty percent) of the gross income:

a.

dividends;

b.

interest, including premiums, discounts, swap premiums and compensation in accordance with a loan guarantee;

c.

royalties, rent, and other income connected with the use of property;

d.

compensation for services employment and activities;

e.

gifts and rewards;

f.

pensions and other periodic payments.

(2)

Gains on the transfer of assets in Indonesia other than that governed by paragraph (2) of Article 4, derived by a non-resident Taxpayer other than a permanent establishment in Indonesia, and insurance premiums paid to a foreign insurance company, shall be subject to withholding tax of 20% (twenty percent) on the deemed profit.

(3)

The implementation of the provisions referred to in paragraph (2) will be governed by the Minister of Finance Decree.

(4)

Profit after income tax of a permanent establishment in Indonesia shall be subject to additional tax of 20% (twenty percent), except where the profit is re-invested in Indonesia, which will be governed by the Minister of Finance Decree.

(5)

The withholding tax referred to in paragraphs (1), (2) and (4) are treated as final tax, except:

a.

The withholding tax on income referred to in paragraph (1) subparagraph b and subparagraph c of Article 5;

b.

The withholding tax on income derived or accrued by a non-resident individual or non-resident company whose tax status has changed into a resident Taxpayer or permanent establishment.

 

Elucidation Article 26

For income received or accrued by a non-resident Taxpayer from domestic source, this law adopts two systems of tax imposition, namely fulfillment of tax obligations by non-resident Taxpayers who conduct business or is engaged in activities through a permanent establishment in Indonesia, and withholding by payer for other non-resident Taxpayers.

This provision regulates withholding tax in respect of income derived from sources in Indonesia and received or accrued by a non-resident Taxpayer other than a permanent establishment.

Paragraph (1)

The withholding tax under this provision is obliged to be carried out by a government entity, a resident taxable person, organizer of activities, permanent establishment or the representative office of a foreign company who make payment to a non-resident Taxpayers other than a permanent establishment in Indonesia, at a rate of 20% (twenty percent) of the gross amount.

The types of income on which withholding must be done can be categorized into:

1)

Income derived from capital in the form of dividend, interest including premium, discount, premium swap with respect to interest swap and compensation for a guarantee loan, royalties, rent and other income related to the use of property;

2)

Compensation for services, employment and activities;

3)

Gift and rewards in whatever name or form;

4)

Pensions and other periodic payment.

Under this provision, for instance, a resident taxable person who pays royalty of Rp100,000,000.00 to a non-resident Taxpayer is obliged to withhold tax of 20% (twenty percent) of Rp100,000,000.00.

Another example, a foreign athlete who participates marathon in Indonesia and wins a cash prize is subject to withholding tax of 20% (twenty percent).

Paragraphs (2) and (3)

This provisions regulate withholding tax on income derived by a non-resident Taxpayer from income originating from Indonesia, other than income referred in to paragraph (1), namely gain on transfer of asset and insurance premiums, including reinsurance premiums.

Such income is subject to 20% (twenty percent) withholding tax on the deemed net profit which is treated as a final tax. The Minister of Finance is authorized to determine the deemed net profit and any other issues related to the withholding tax.

This provision is not applicable where the non-resident Taxpayer conducts business or is engaged in activities through a permanent establishment in Indonesia, or if the gain on transfer of asset has been taxed under the provision of paragraph (2) of Article 4.

Paragraph (4)

On profit after tax of a permanent establishment in Indonesia shall be subject to 20% (twenty percent) of withholding tax.

Example:

Taxable income for permanent establishment in Indonesia

Rp17.500.000.000,00

Income tax:

 

10% x Rp 50.000.000,00 =

Rp 5.000.000,00

 

15% x Rp 50.000.000,00 =

Rp 7.500.000,00

 

30% x Rp 17.400.000.000,00 =

Rp5.220.000.000,00 (+)

 

Income tax

Rp 5.232.500.000,00 (-)

Taxable income after tax

Rp12.267.500.000,00

Branch profit tax referred to in Article 26

20% X 12.267.500.000 = Rp 2.453.500.000,00

 

If, however, income after tax of Rp12,267,500,000.00 is reinvested in Indonesia in accordance with the Minister of Finance Decree, such income shall not be subject to withholding tax.

Paragraph (5)

In principle, the withholding tax on income of a non-resident Taxpayer is treated as final, however, for income referred to in paragraph (1) b and c of Article 5, and income derived by a non-resident Taxpayer which changes his status become a resident Taxpayer or a permanent establishment, the withholding tax shall not be treated as a final, therefore tax withheld may be credited in the Annual Income Tax Return.

Example:

“A” is a foreign employee, enters a contract with resident Taxpayer PT. “B” to work in Indonesia for five months commencing 1 January 2001. On 20 April 2001 the contract of work is extended to eight months, then, it will be end on 31 August 2001.

If the contract of work had not been extended, the status of “A” would remain that of a non-resident Taxpayer. With the extension of the contract of work, the status of “A” changes from a non resident Taxpayer to a resident Taxpayer beginning from 1 January 2001. For the period January to March 2001, PT “B” has withheld income tax from the gross income of “A” under Article 26.

Under this provision, to determine income tax payable of “A” for the period January to August 2001, income tax withheld under Article 26 and deposited by PT “B” up to March may be credited against the tax of “A” as a resident Taxpayer.

 

 

Article 27

 

Deleted.

 

Elucidation Article 27

Sufficiently clear.

 

CHAPTER VI

CALCULATION OF TAX AT THE END OF THE YEAR

Article 28

 

(1)

Resident Taxpayers and permanent establishments are entitled to claim tax credit against tax payable for the same taxable year:

a.

tax withheld on income from employment, personal services and activities referred to in Article 21;

b.

tax withheld on income in connection with payment on import activities or other business activities referred to in Article 22;

c.

tax withheld on dividends, interest, royalties, rent, gifts and rewards, and compensation for services referred to in Article 23;

d.

creditable foreign tax paid or payable on offshore income referred to in Article 24;

e.

self tax payments during current taxable year referred to in Article 25;

f.

tax withheld on income referred to in paragraph (5) of Article 26.

(2)

An administrative penalty in the form of interest, fine and surcharge, or a criminal penalty in the form of a fine in connection with the implementation of the prevailing tax laws, may not be credited against tax payable referred to in paragraph (1).

 

Elucidation Article 28

Paragraph (1)

Tax which has been paid for the current year either by the Taxpayer himself or withheld and collected by other parties may be credited against the tax payable in the yearend.

Example:

Income tax payable

 

Rp 80.000.000,00

Tax credit:

 

 

Withholding tax from work (Article 21)

Rp 5.000.000,00

 

Withholding tax by other party (Article 22)

Rp 10.000.000,00

 

Withholding tax on Capital (Article 23)

Rp 5.000.000,00

 

Foreign tax credit (Article 24)

Rp 15.000.000,00

 

Tax paid by Taxpayers himself (Article 25)

Rp 10.000.000,00 (+)

 

Total tax credit

 

Rp 45.000.000,00 (-)

Income tax must be paid

 

Rp 35.000.000,00

Paragraph (2)

Sufficiently clear.

 

 

Article 28A

 

In case tax payable in a taxable year is less than the allowable tax credit referred to in paragraph (1) of Article 28, then after a tax audit is conducted, the excess tax shall be refunded after being offset against outstanding tax and penalties.

 

Elucidation Article 28A

In accordance with the provisions of paragraph (1) of Article 17 B of the Law on General Rules and Procedures on Taxation, the Directorate General of Taxes or an authorized official may conduct an audit before refund or calculation of tax overpaid.

Any substance must be considered before a tax refund or calculation of overpayment carried out include:

a.

the validity of the amount of Income tax payable;

b.

the validity of evidence of withholding tax together with proof of tax payment by the Taxpayer himself for taxable year concerned.

For the purpose of audit, the Directorate General of Taxes or another authorized official is authorize to conduct audit on financial statements, books, other records and to conduct other audit related to determining the amount of income tax payable, the correctness of the amount of tax payable and the amount of tax credit and to determine the amount of tax overpaid that must be refunded.

The purpose of the audit is to ensure that any money to be refunded to the Taxpayer is, indeed, the Taxpayer’s right.

 

 

Article 29

 

In case tax payable in a taxable year is greater than the allowable tax credit referred to in paragraph (1) of Article 28, the outstanding tax shall be paid up not later than the 25th (twenty fifth) day of the third month after the end of that taxable year, and before the tax return is filed.

 

Elucidation Article 29

The provisions place an obligation on a Taxpayer to pay underpaid tax payable in accordance with this Law before an Annual Income Tax Return is filed. If the accounting year is the same as the calendar year, any tax underpaid must be paid at the latest by 25 March after the end of the taxable year, while if the accounting year is different from the calendar year, for instance it runs from 1 July until 30 June, the tax underpaid must be paid at the latest by 25 September.

 

 

Article 30

 

Deleted

 

Elucidation Article 30

Sufficiently clear.

 

 

Article 31

 

Deleted

 

Elucidation Article 31

Sufficiently clear.

 

 

CHAPTER VII

OTHER PROVISIONS

Article 31A

 

(1)

A Taxpayer who invests capital in certain sectors and or in certain regions may be granted tax incentives in the form of:

a.

Up to 30% (thirty percent) investment allowance;

b.

accelerated depreciation and amortization;

c.

extended loss carried forward but shall not exceed 10 (ten) years; and

d.

ten percent tax on dividends referred to in Article 26, unless the tax rate under the relevant tax treaty is lower.

(2)

Tax incentives referred to in paragraph (1) shall be stipulated by Government Regulation.

 

Elucidation Article 31A

Paragraph (1)

One of the principles to be upheld in tax law is that of equality in treatment for all Taxpayers or all cases of taxation, which is the same as holding firmly to the valid law. Therefore, each incentive must be guided by the above principle and requires overseeing to ensure there is no divergence in its application from the meaning and purpose for which the incentives is granted.

The meaning and purposes of granting tax incentives are primarily to promote the direct investment in IndonesiaIndonesia, as part of the effort to spread the benefits of development. either foreign investment or domestic investment in certain business sectors or certain areas which have the highest national priority, in particular the promotion of exports. In addition, tax incentives are granted to develop remote area, mostly in eastern

The incentives for investment have benefit of 6 (six) years, so that, the Taxpayer have the rights to deduct 5% (five percent) of the real investment against the net income in every year. This provision can also be used to cover the possibility of agreements with another country or countries in the field of trade, investment and other areas.

Paragraph (2)

Sufficiently clear.

 

 

Article 31B

 

(1)

Taxpayers who takes part in debt restructuring program through a special institution established by the government may enjoy a limited tax incentives, in term of the period and its type which will be granted, in the form of tax relief of income tax payable on:

a.

discharge of indebtedness;

b.

debt to asset swap;

c.

debt to equity swap.

(2)

The tax incentives referred to in paragraph (1) shall be stipulated by Government Regulation.

 

Elucidation Article 31B

The economic and monetary crisis, which has happened since 1997, has caused negative effects to the area of banking, investment, working opportunities, and in economy in macro. It happened, mainly, as a result of the amount of foreign and domestic debt (in foreign currencies), which experiences as drastic increment as a result of the depreciated rupiahs against US dollar significantly. In order to recover the national economic activities, the Government needs to make a special policy on debt restructuring. This restructuring can be implemented in the form of discharge of debt (in part or in a whole), transfer of assets for debt payment, and the exchange of debt into capital. The debt restructuring which is expected to be capable of accelerating the economic recovery needs to be encouraged by granting tax facilities.

The tax incentives granted are limited both in types and time range. In order that the incentives can be utilised by the beneficiaries, guided and controlled in accordance with the meaning and purposes, the incentives are only given to debt restructuring conducted by a special institution formed by the government, that is the Jakarta Initiative Task Force (Satuan Tugas Prakarsa Jakarta).

Paragraph (1)

The validity of tax incentive given is only limited for tax years of 2000, 2001, 2002. The term tax incentive means dispensation of income tax in the form of:

a.

Partial exemption and installment of income tax payment on the exemption given by a creditor;

b.

Exemption of income tax payable on transfer of assets to a creditor as long as the assets are valued amounting to the book value of the transferor;

c.

Exemption of income payable on the debt to equity as long as it is valued amounting to the debt.

Paragraph (2)

Sufficiently clear.

 

 

Article 31C

 

(1)

Tax revenue collected from individual resident Taxpayer and withholding tax that falls under Article 21 shall be shared between central government and local government where a Taxpayer registered, whereby the former is entitled to receive 80% (eighty percent) and the later will receive 20% (twenty percent).

(2)

Revenue allocation to local government referred to in paragraph (1) shall be further regulated by Government Regulation.

 

Elucidation Article 31C

Paragraph (1)

Sufficiently clear.

Paragraph (2)

Sufficiently clear.

 

 

Article 32

 

The procedure in relation to the imposition of tax and its penalties under this law shall be governed by Law Number 6 of 1983 on General Tax Provisions and Procedure, as lastly amended by Law Number 16 of 2000.

 

Elucidation Article 32

Sufficiently clear.

 

 

Article 32A

 

The Government is authorized to conclude an agreement with the government of foreign countries for the avoidance of double taxation and the prevention of tax evasion.

 

Elucidation Article 32A

In efforts of promoting economic and trade relationship with other countries, it is necessary to have a special set of law (lex-specialis) which regulates taxing rights of each country covered in the law to provide legal certainty, to avoid double taxation and to prevent tax evasion. Forms and substances of such law refer to the international convention, other regulations, and also the national tax regulation of each country.

 

 

CHAPTER VIII

INTERIM PROVISIONS

Article 33

 

(1)

A Taxpayer whose accounting year is ended on the 30th of June 1984, and those ended between the 30th of June 1984 and the 31th of December 1984 may elect Corporate Income Tax Ordinance of 1925 or Individual Income Tax Ordinance of 1944 or this law in calculating its tax.

(2)

Tax incentives that have been granted on or before December 31, 1983

 

a.

where the incentives extend to a certain period of time, the Taxpayers can continue to enjoy such incentives until the time expired.

 

b.

where the incentives do not have any time limit, they can be enjoyed up to taxable year before 1984 taxable year.

(3)

Taxable income received or accrued from the oil or natural gas sector or other mining sectors in the form of a Contract of Work or a Production Sharing Contract that remains in force at the time this law takes effect, shall be governed by Corporate Income Tax Ordinance of 1925 and the Tax Law on Interest, Dividends and Royalties of 1970 and their implementing regulations.

 

Elucidation Article 33

Paragraph (1)

For a Taxpayer whose taxable year is the accounting year, there is possibility that a fraction of the taxable year is covered in the calendar year of 1984.

According to the provision of this paragraph, if 6 (six) months of the said taxable year is included in the 1984 calendar year, then the Taxpayer is allowed to choose, whether he desires to apply the income tax ordinance 1944 or the corporate tax ordinance 1925, or to choose the application of the provisions contained in this law, the opportunity for such a choice shall also apply to a Taxpayer with 6 (six) months or more of his taxable year are included in calendar year of 1984.

Paragraph (2)

Sub paragraph a

A tax incentive of which the period is limited, for example the tax incentive pursuant to Law number 1 of 1967 on foreign investment, and Law number 6 of 1968 on domestic investment, granted up to December 31, 1983, can still be utilised until the expiration of the said tax incentives.

Sub paragraph b

A tax incentive of which the period is not determined can no longer be utilised from the date this law takes into effect, for example:

-

The tax incentives granted to PT. Danareksa, namely corporate tax exemption on business profit and exemption of capital stamp duty for the subscription and deposit of share capital pursuant to the Minister of Finance Decree number: KEP-1680/MK/II/2/1076 dated December 28, 1976;

-

Tax incentive granted to Limited Corporation selling shares through the Capital market, namely a corporation tax rate reduction pursuant to the Minister of Finance Decree number: 112/MK/04/1979 dated March 27, 1979.

Paragraph (3)

The Corporate Tax Ordinance 1925, and the Tax Law on interest, dividend and royalty 1970, as well as implementation regulations thereof shall remain effective on taxable income derived from oil and natural gas mining, conducted within the frame of Contract of Work and Production Sharing Contract, as long as the said Contract of Work and Production Sharing Contract agreements are still effective at the moment this law takes into effect.

The provision of this law shall only apply to taxable income derived from oil and natural gas mining, conducted within the frame of Contract of Work and Production Sharing Contract agreements, if said Contract of Work and Production Sharing Contract agreements, are drawn up after this law comes into force.

 

 

Article 33A

(1)

Taxpayers whose accounting year ends after the 30th June 1995, shall be obliged to calculate their taxes based on the provisions of Law Number 7 of 1983, as lastly amended by this law.

(2)

Taxpayers who have been granted tax incentives and have obtained a notification of the commencement of commercial production before the 1st January 1995, may continue to enjoy the incentives in accordance with the time period stipulated therein.

(3)

Except as provided in paragraph (2), any existing tax incentives previously granted shall cease to exist as of the 31st December 1994.

(4)

Income tax payable of Taxpayers who conduct business in the oil and natural gas, general mining sector and other mining sector under a Production Sharing Contract, Contract of Work or other cooperation agreement that remains valid at the time this law takes effect, shall be computed on the basis of the provisions contained in the Production Sharing Contract, Contract of Work or cooperation agreement until the termination of the contract or agreement.

 

Elucidation Article 33A

Paragraph (1)

If a Taxpayer uses an accounting year that ends on or before 30 June 1995, the accounting year concerned is the taxable year of 1994. Tax payable in that year will continue to be calculated on the basis of Income Tax Law Number 7/1983 as amended by Law Number 7/1991. However, a Taxpayer whose accounting year ends after 30 June 1995 must calculate tax for the 1995 and subsequent tax years on the basis of Law Number 7/1983 as amended by this law.

Paragraphs (2) and (3)

A Taxpayer who has obtained the Minister of Finance Decree concerning tax incentives relating to the time of commencement of production, and which has been issued before 1 January 1995 shall be continue enjoy the tax incentive for the period determined by the Decree concerned. Therefore, as of 1 January 1995 there will be no further Decree concerning the time at which production starts.

Paragraph (4)

Tax provisions in a Production Sharing Contract, Contract of Work or Cooperation Agreement for a mining business which still valid at the time this Law takes into effect, remain valid until the termination of the Production Sharing Contract, Contract of Work or Cooperation Agreement concerned. Notwithstanding the effective date of this Law, the tax obligation of a Taxpayer bound by Production Sharing Contract, Contract of Work or Cooperation Agreement for a mining business will continue to be determined on the basis of the contract or agreement concerned.

Accordingly, the provisions of this Law will apply to the imposition of tax on income derived by a Taxpayer in the oil and gas industry and other general mining sectors, where the activities are governed by a Production Sharing Contract, Contract of Work or Cooperation Agreement signed after the coming into effect of this law.

 

 

Article 34

 

As this law takes effect, all implementing regulations related to Income Tax, shall remain valid provided that they are not contrary to the provisions of this law.

 

Elucidation Article 34

Sufficiently clear.

 

 

CHAPTER IX

CLOSING PROVISIONS

Article 35

 

Matters that which are not dealt with in this law, shall be stipulated by virtue of Government Regulation.

 

Elucidation Article 35

Matters not covered by this Law will be further taken care of by the Government Regulation, including transitional and other regulations required to enable this Law to be implemented as effectively as possible.

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