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8.2.1. Corporate/Profit Taxes

The Income Tax Law stipulates that non-resident companies are subject to tax in Indonesia at the rate of 20%. In general, the 20% rate is imposed on the gross proceeds. However, the tax base of certain income is net income where the deemed percentage of net income is determined by the implementing regulations. This applies for example to gains on the transfer of Indonesian company’s shares held by non-residents, and income received by non-resident insurance companies.

For corporate income tax purposes, non-residents with a PE are treated equally by the Income Tax Law. A PE is subject to corporate income tax at the standard rate of 22%. In addition, a PE is also subject to a branch profit tax at 20% on its profit after corporate income tax. Hence, the total effective corporate income tax rate is 37.6% 2% + (20% (100%-22%))]. An exemption from the branch profit remittance tax is granted for the portion of after-tax profits reinvested in Indonesia. Some treaties reduce the 20% branch profit tax to 5-15% whilst others do not allow its imposition.

Taxation of the Digital Economy

Indonesia’s plan for taxing the digital economy was included as a part of the proposed omnibus tax law, which was enacted to sustain the country’s economic stability in the midst of the COVID-19 pandemic. The Law contained two tax measures of which one concerned the taxation of the digital economy.  The regulations stipulated thereon became effective and the Indonesian government issued Law Number 2 Year 2020 (Law No. 2) on 18 May 2020, which served as a formal legal instrument on the basis of Perppu-1.

Law No. 2’s approach to taxing the digital economy is to exert both direct tax (income tax) and indirect tax (VAT) obligations on foreign sellers, service providers and foreign e-commerce platforms (foreign digital players), sourcing revenue through digital transactions from the Indonesian consumer market.

Indirect Tax

For indirect tax (VAT), foreign e-commerce operators are deemed to conduct VATable transactions in Indonesia and are required to collect VAT on such transactions if either the value of their transactions with customers in Indonesia exceeds IDR 600 million in a year (or IDR 50 million in a month), or access to their e-commerce platform from Indonesia exceeds 12,000 users in 12 months (or 1,000 users in one month).

The government has appointed some foreign companies as VAT collector – to collect any VAT payable, settle to the government, and report the transaction on a quarterly basis. Currently, there are already 88 companies appointed.

Direct Tax

Under Law No. 2, the income tax obligation will be applicable for foreign digital players with ‘significant economic presence’ in Indonesia, as they will be deemed to have a PE. If a PE cannot be recognized due to an existing tax treaty, an electronic transaction tax (ETT) will be imposed on direct sales or sales through the marketplace. Foreign digital players can appoint a representative in Indonesia to fulfil their tax obligations.

Furthermore, government regulations will be issued to stipulate the rate, imposition basis, and procedures for the calculation of income tax when a PE is deemed to exist or when the ETT provision applies instead. Provisions on the threshold of constituting ‘significant economic presence’, procedures for payment and the reporting of income tax or ETT, and procedures for the appointment of representatives are all stipulated under the Ministry of Finance (MoF) Decree. We understand that this direct tax regulation is pending the finalization of the global consensus within the OECD / Inclusive Framework.