12 minute read 29 Nov 2021

The Indonesian Government has passed the Tax Regulations Harmonization Law (“HPP Law”) on 7 October 2021 and it became Law No 7/ 2021 on 29 October 2021. The provisions take effect at varying times – e.g., for income tax purposes from the 2022 Fiscal Year, and for VAT purposes from 1 April 2022.

The changes under the HHP Law are very significant and wide-reaching.  There are changes not only to administrative matters but to key aspects of the Income Tax and VAT Laws

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Wide ranging taxation changes in Indonesia under Tax Regulation Harmonization Law

Benjamin Koesmoeljana
By Benjamin Koesmoeljana

Partner, International Tax and Transaction Services, PT Ekasurya Yasa Consult

Passionate in serving and delivering value to clients by bringing the best that our global organization can offer. Builder of strong relationship and mentoring others to achieve their full potential.

12 minute read 29 Nov 2021
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The Indonesian Government has passed the Tax Regulations Harmonization Law (“HPP Law”) on 7 October 2021 and it became Law No 7/ 2021 on 29 October 2021. The provisions take effect at varying times – e.g., for income tax purposes from the 2022 Fiscal Year, and for VAT purposes from 1 April 2022.

The changes under the HPP Law are very significant and wide-reaching.  There are changes not only to administrative matters but to key aspects of the Income Tax and VAT Laws, including:

  • An increase in the progressive income tax brackets for individuals, taking the top marginal rate to 35% for income above IDR5 billion per annum;
  • A carbon tax;
  • A cancellation of the previously regulated corporate income tax reduction to 20%, so that the corporate income tax rate remains at 22% starting 2022 fiscal year;
  • Introduction of general anti avoidance provision adopting the substance over form principle;
  • Excessive payment to a related party to be deemed a dividend;
  • A new round of the Tax Amnesty program under a different name;
  • Potentially extending withholding tax obligations to web platforms and others, noting that at present this obligation only falls on customers/payers;
  • An increase in the general VAT rate to 11% from 1 April 2022 and to 12% by 1 January 2025, from the current 10% rate;
  • A broadening of the VAT base to remove the exemptions on a number of previously exempt services – e.g., medical and financial services.  Also, to subject certain essential goods and mined minerals to VAT, which were previously exempt; and
  • Shift towards multiple VAT rates, for different categories of taxable goods and services.

These measures come in the context of significant pressures on the nation’s financial position, associated with the COVID-19 pandemic. The HPP Law is based on the following principles of taxation law - that it must be:

a)     Just;

b)     Simple;

c)      Efficient;

d)     Provides certainty of law;

e)     Provides benefits; and

f)      In the interest of the nation

Some more detail in each broad area of the tax law is as follows:

  • KUP*

    [*] Chapter II – Article 2

    1.     For an individual taxpayer who is an Indonesian resident, the Tax ID Number shall use the National ID Number (“NIK”) [Article 2(1)(a)]. In this regard, the Home Affairs Ministry will provide the residents’ data to the Minister of Finance (“MoF”) to be integrated with tax data base [Article 2(10)]. Article 2(5) of KUP Law, which empower MoF to determine the timing and method of registering and deregistering of a Tax ID and VAT Registration Numbers, has been deleted.

    2.     Article 8(4) is amended so that the previous conditions for taxpayers to self-report any error in their tax returns although a tax audit has commenced have been removed. Now, taxpayers can self-report any errors in their tax returns unconditionally even though a tax audit has commenced provided the Directorate General of Taxation (“DGT”) have not yet issued a tax audit findings notification letter (“SPHP”).  Any tax underpayment will be subject to interest penalty based on a monthly benchmark rate determined by MoF plus 10% divided by 12 for a maximum of 24 months, where part of a month is calculated as one month. The tax underpayment and the interest penalty must be paid prior to the submission of the self-report. The tax audit process will continue based on the self-report.

    3.     The DGT can only issue a tax assessment letter within the 5 years statute of limitation after conducting a tax audit. Interest penalty in relation to underpaid tax assessment letter on income tax that is underpaid or under-withheld is stipulated based on a monthly benchmark rate determined by the MoF, plus 20%, divided by 12 for a maximum of 24 months and part of a month is calculated as one month. [Articles 13(1), 13(3b) and (3c)]

    4.     Administrative sanctions applicable to underpaid tax assessment letters have been reduced, where their relate to: (a) tax returns that have not been submitted on-time, and also not been submitted within the period in a warning letter; (b) VAT and Luxury Goods Sales Tax (“LGST”) that should not have been compensated to the tax balance or should not have been zero rated; and (c) there is tax obligation under Articles 28 and 29 (i.e. bookkeeping and accounts recording) that have not been met so that the tax payable cannot be calculated.  These have been reduced to:

    a)     Interest from the income tax that is unpaid or underpaid within one fiscal year (previously 50% of the unpaid or underpaid income tax within one fiscal year);

    b)     Interest from income tax that is un-withheld or under-withheld or un-collected (previously 100% of the un-withheld or under-withheld, un-collected or under-collected, unpaid or underpaid, withheld or collected but unpaid or underpaid income tax);

    c)      75% increase from VAT and LGST that is unpaid or underpaid (previously 100% of the unpaid or underpaid VAT and LGST); or

    d)     75% increase from income tax that is withheld or collected but unpaid or underpaid.

    [Article 13(3)]

    5.     The DGT can now issue a tax collection letter if there is an amount of tax that is unpaid or underpaid within the period in accordance with the agreement to install or postpone the payment of tax as referred in Article 9(4). [Article 14(1)(i)]

    6.     The DGT is granted the authority to provide tax collection assistance to a partner country or jurisdiction and vice versa based on an international agreement with reciprocal principles. [Article 20A (2) and (3)]

    7.     In case the taxpayer’s tax objection is rejected or only partly granted, the fine is now reduced to 30% from previously 50% based on the amount of tax stated in the tax objection decision less the tax that have been paid before the tax objection is submitted. [Article 25(9)]. In case the taxpayer file for tax appeal, the 30% (previously 50%) fine is not imposed. [Article 25(10)]

    8.     In case the taxpayer’s tax appeal is rejected or partly granted, the taxpayer is subject to fine of 60% (previously 100%) based on the amount of tax stated in tax appeal decision less the tax that have been paid before the tax objection is submitted. [Article 27(5d)]. If the taxpayer or the DGT file for a judicial review, implementation of the Tax Court decision shall not be delayed or put on-hold [Article 27(5e)]. If the decision from the Supreme Court results in additional tax to be paid, 60% (previously 100%) penalty will still apply [Article 27(5f)].  This means that if the taxpayer won in the Tax Court, but the Supreme Court subsequently overturned the Tax Court’s decision, the 60% penalty would still apply.

    9.     The DGT is granted the authority under law to carry out a Mutual Agreement Procedure (“MAP”) to avoid or resolve any tax problem arising in the implementation of a double tax agreement. The MAP can be filed by: (a) a domestic taxpayer; (b) the DGT; (c) the competent tax authority of treaty partner country or jurisdiction; or (d) an Indonesian citizen via DGT in relation to discriminative actions in the treaty partner country or jurisdiction that contradict any non-discrimination provisions.  If the points discussed under MAP have been decided by the Tax Court or the Supreme Court, the DGT will refer to the Appeal or Judicial Review Verdict or propose for termination of the MAP negotiation [Article 27C]. This is designed to reflect in the law what is provided for in the 2020 MAP regulations issued by the Minister of Finance.

    10.  The Minister of Finance can appoint another party (not the customer/recipient - e.g., electronic system provider) to carry out tax withholding and/or tax collection as well as tax payment and reporting in accordance with the prevailing laws. The other party is a party that is directly involved or facilitates the transaction between the parties that undertake a transaction. Issue of tax assessments, collection, legal actions, and the imposition of sanctions on a taxpayer are also applicable to the ‘other party’ appointed to withhold or collect tax, in accordance with the prevailing tax laws.  Further, in the case where the appointed tax withholder is an electronic system provider, other than tax sanctions applicable as above, it can also be sanctioned with disconnection from internet access after being warned. This could be a significant change, perhaps aimed at collecting withholding taxes where customers generally do not withhold – e.g., B2C scenarios. [Article 32A]

    11.  A tax criminal case can be terminated if only the taxpayer or the suspect pays: (a) the State loss as stated in Article 38 plus one time fine of the State loss; (b) the State loss as stated in Article 39 plus three times fine of the State loss; or (c) tax amount in the tax invoice, proof of tax collection, proof of tax withholding and/ or proof of tax payment as stated in Article 39A plus four times fine of the said tax amount [Article 44B(2)]. Previously all the fine is four times of the tax amount or State loss.

    12.  In the event that a criminal case has been referred to the court, the taxpayer can still pay the respective tax payable (Kerugian Pada Pendapatan Negara) plus administrative sanctions and such payment will be taken into consideration to prosecute the taxpayer without imprisonment. If the payment made during the investigation until the trial stage does not cover the respective amount (Kerugian Pada Pendapatan Negara plus administrative sanctions), it can be considered as prepayment of the criminal fine imposed on the convicted person. [Articles 44B (2a), (2b), (2c)]

    13.  Penalty sanctions as stated in Articles 39 and 39A of the KUP Law (criminal tax matters) cannot be replaced by imprisonment and must be paid by the convicted person. If within a month after the verdict, the convict does not pay the tax penalty, the prosecutor shall seize and auction the convict’s assets to pay the un-paid penalty sanction according to the prevailing laws. [Article 44C]

    14.  Further procedures regarding data sharing for the integration between residents’ data and tax data base shall be stipulated under a Government Regulation. Other procedures that will be stipulated under the Minister of Finance Regulation are:

    a)     The period of registration and reporting as well as procedures for registration and confirmation as referred in Article 2(1), 2(2), 2(3) and 2(4), including the use of NIK as Tax ID Number, revocation of Tax ID Number and/ or VAT-able Entrepreneur Number;

    b)     The provision and the request for assistance to collect tax as referred in Article 20A(2);

    c)      The collection and delivery of tax collection results on tax claims as referred in Article 20A(9);

    d)     The implementation of mutual agreement procedures as referred in Article 27C(1);

    e)     The implementation of the tax rights and obligations by a proxy as referred in Article 32(3) as well as certain competencies that have to be possessed by a proxy as referred in Article 32(3a);

    f)      The appointment, withholding, collection, payment and/ or reporting of tax that has been withheld or collected by the other party as referred to Article 32A(2);

    g)     Assessment, collection and legal actions as referred in Article 32A(3);

    h)     Reprimand as referred in Article 32A(4) as well as request to disconnect and restoration of access as referred in Article 32A(7);

    i)       Request to stop a tax criminal investigation as referred in Article 44B(1) upon making the tax payment as referred in Article 44B(2) and (2a).

    [Article 44E]

     

     

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  • Taxpayer’s Voluntary Disclosure Program*

    [*] Chapter V – Article 5

    1.     Two chapters – dealt with in further detail below:

    a.      Corporates and individuals that participated in the 2016 Tax Amnesty program, that still have non-disclosed or under disclosed assets

    b.     Individuals that have not previously participated in the 2016 Tax Amnesty program.

     

    Taxpayers that participated in the 2016 Tax Amnesty

    2.     A taxpayer can disclose its net assets (i.e., assets less liability) that have not been disclosed or have been under-disclosed in a statement letter under the 2016 Tax Amnesty, provided the DGT has not yet found the data and/ or information regarding the relevant assets. The assets shall be assets acquired by the taxpayer from 1 January 1985 until 31 December 2015. The disclosed net assets shall be subject to final income tax at the rate of:

    a)     6% on the net assets located in Indonesia provided they are invested in: (i) the natural resources processing or renewable energy sectors in Indonesia and/ or (ii) Government securities.

    b)     8% on the net assets located in Indonesia but not invested in (i) the natural resources processing or renewable energy sectors in Indonesia and/ or (ii) Government securities.

    c)      6% on the net assets located outside of Indonesia provided they are: (i) transferred into Indonesia; and (ii) invested in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities;

    d)     8% on the net assets located outside of Indonesia provided they are: (i) transferred into Indonesia; but not (ii) invested in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities; or

    e)     11% on the net assets located outside of Indonesia and are not transferred into Indonesia.

    [Articles 5(1) to 5(7)]

    3.     The tax base to calculate the final income tax payable is the amount of net assets that have not been disclosed or under-disclosed in the statement letter. The guidelines for the assets value to calculate the net assets are as follows:

    a)      Nominal value, for assets in the form of cash or its equivalent;

    b)     Tax object sales value (NJOP) for land and/ or building and motor vehicle sales value (NJKB) for motor vehicles;

    c)      Value published by PT Aneka Tambang Tbk., for gold and silver;

    d)     Value published by the Indonesia Stock Exchange (IDX) for shares and warrants traded on the IDX;

    e)     Value published by PT Penilai Harga Efek Indonesia, for Government securities and debt securities and/ or sukuk issued by corporates,

    according to the assets’ conditions and circumstances at the end of the last fiscal year. If there is no value that can be used as a guideline as stated in item (b) up to (e) above, the assets value shall be based on the appraisal value from a public valuer. [Articles 5(8) to 5(10)]

    4.     The taxpayer should disclose its net assets in the assets disclosure notification letter, and this must be submitted to the DGT from 1 January 2022 up to 30 June 2022. The DGT shall issue a statement letter as a receipt of the assets disclosure notification letter submitted by the taxpayer. Data and information sourced from the asset disclosure notification letter and its attachments cannot be used as a base for tax criminal investigation and / or prosecution against the taxpayer. [Articles 6(1), 6(3), 6(6)]

    5.     Taxpayer who states that it will transfer its net assets into Indonesia must transfer the assets no later than 30 September 2022. For taxpayer who states that it will invests its net assets in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities, it must invest its net assets no later than 30 September 2023. The investment must be made for at least five years after it is invested. [Articles 7(1) to 7(3)]

    6.     If the investment requirements in item (5) are not met by the taxpayer, part of the assets that did not meet the investment requirement will be considered as final income in 2022 fiscal year and are subject to additional final income tax at the following rates:

     

    If the taxpayer does not meet the requirements where:

    If the DGT issues an underpayment tax assessment letter

    If the taxpayer voluntarily discloses the income and pay the final income tax by self-assessment

    the net assets located in Indonesia are not invested in: (i) the natural resources processing or renewable energy sectors in Indonesia and/ or (ii) Government securities

    4.5%

    3%

    the net assets located outside of Indonesia are: (i) transferred into Indonesia; but not (ii) invested in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities

    4.5%

    3%

    the net assets located outside of Indonesia are not: (i) transferred into Indonesia; and not (ii) invested in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities

    7.5%

    6%

    the net assets located outside of Indonesia are not transferred into Indonesia

    5.5%

    4%

    [Article 7(4)]

     

    Individual taxpayer that has not participated in 2016 Tax Amnesty

    7.     An individual taxpayer can disclose his/her net assets under this program if:

    a)     They were acquired from 1 January 2016 until 31 December 2020;

    b)     the taxpayer still owns the assets as of 31 December 2020; and

    c)      the assets have not been reported in the annual individual income tax return for 2020 fiscal year to the DGT.

    The net assets shall be assets value less debt values. The net assets shall be considered as additional income for the individual taxpayer in 2020 fiscal year. [Articles 8(1) to 8(3)]

    The disclosure of un-reported assets can be carried out provided the individual taxpayer is not under tax audit or tax preliminary investigation for fiscal years 2016 up to 2020, and is not under tax criminal investigation, tax appeal or imprisonment due to tax criminal sanction. [Article 8(4)]

     

    8.     The un-disclosed assets shall be considered as additional income for the individual taxpayer for the 2020 fiscal year and subject to final income tax at the rate of:

    a)     12% on net assets located in Indonesia provided they are invested in: (i) the natural resources processing sector or renewable energy in Indonesia and/ or (ii) Government securities.

    b)     14% on the net assets located in Indonesia but not invested in (i) the natural resources processing or renewable energy sectors in Indonesia and/ or (ii) Government securities.

    c)      12% on the net assets located outside of Indonesia provided they are: (i) transferred into Indonesia; and (ii) invested in the natural resources processing sector or renewable energy in Indonesia and/ or Government securities;

    d)     14% on the net assets located outside of Indonesia provided they are: (i) transferred into Indonesia; but not (ii) invested in the natural resources processing sector or renewable energy in Indonesia and/ or Government securities; or

    e)     18% on the net assets located outside of Indonesia and are not transferred into Indonesia.

    [Articles 9(1) to 9(3)]

    9.     The tax base to calculate the final income tax payable is the amount of net assets that have not been reported or under-reported in the 2020 annual individual income tax return. The guidelines for the assets value to calculate the net assets are: (i) nominal value for assets in the form of cash or its equivalent; or (ii) acquisition value, for assets other than cash or its equivalent. [Articles 9(4) and 9(5)]

    10.  The individual taxpayer can disclose his/ her assets in asset disclosure tax return, and it shall be submitted to the DGT between 1 January 2022 up to 30 June 2022. The tax return must be attached with:

    a)     proof of the final income tax payment;

    b)     list of assets details along with the ownership information on the assets reported;

    c)      list of payable;

    d)     a statement letter on the transfer of net assets into Indonesia for taxpayer who intends to transfer his/ her net assets from outside Indonesia into Indonesia;

    e)     a statement letter that the reported assets will be invested in the required sector and/ or Government securities, in case the taxpayer would like to invest the assets.

    [Articles 10(1) and 10(3)]

    11.  The DGT shall issue a statement letter on the submission of the asset disclosure tax return to the individual taxpayer. If based on the DGT’s investigation, it is found out there is inconsistency between the disclosed assets and their actual conditions, the DGT can revise or cancel the said statement letter. The procedures to disclose the assets shall be further regulated under a Minister of Finance regulation. [Articles 10(6) to 10(8)]

    12.  For individual taxpayers who have received the statement letter from the DGT, the following shall apply:

    a)     they will not be issued with any tax assessment for tax obligations for 2016 up to 2020 fiscal years, except for other data/ information found regarding assets that have not yet been disclosed;

    b)     the tax obligations as stated in (a) cover individual income tax, withholding income tax and VAT, except for tax that has been withheld but not yet paid; and/ or

    c)      data and/ or information stated in the assets’ disclosure tax return cannot be used as a basis for tax criminal investigation and/ or prosecution of the taxpayer.

    [Article 11(1)]

    13.  If the DGT found other data and/ or information regarding the assets that have not or under disclosed, the un-disclosed assets shall be treated as final income for 2022 fiscal year; and those income is subject to final income tax at the rate of 30% plus interest penalty according to Article 13(2) (i.e., monthly benchmark interest rate determined by the Minister of Finance for a maximum of 24 months), through underpayment tax assessment letter issued by the DGT. [Article 11(2)]

    14.  Individual taxpayer who stated that he/she will transfer the net assets into Indonesia, must transfer the assets no later than 30 September 2022. For individual taxpayer who stated that he/ she will invest the net assets in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities, he/she must invest his/ her net assets no later than 30 September 2023. The investment must be made for at least five years after it is invested. [Articles 12(1) to 12(3)]

    15.  If the above investment requirements in item (14) are not met by the individual taxpayer, part of the assets that did not meet the investment requirements will be considered as final income in 2022 fiscal year and they are subject to additional final income tax at the rate of:

     

    If the taxpayer does not meet the requirements where:

    If the DGT issues an underpayment tax assessment letter

    If the taxpayer voluntarily discloses the income, and pay the final income tax by self-assessment

    the net assets located in Indonesia are not invested in: (i) the natural resources processing or renewable energy sectors in Indonesia and/ or (ii) Government securities

    4.5%

    3%

    the net assets located outside of Indonesia are: (i) transferred into Indonesia; but not (ii) invested in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities

    4.5%

    3%

    the net assets located outside of Indonesia are not: (i) transferred into Indonesia; and not (ii) invested in the natural resources processing or renewable energy sectors in Indonesia and/ or Government securities

    8.5%

    7%

    the net assets located outside of Indonesia are not transferred into Indonesia

    6.5%

    5%

    [Article 12(4)]

    16.  Further procedures on: (a) how the net assets will be transferred into Indonesia; (b) investment of the net assets in natural resources processing sector or renewable energy sector in Indonesia; and (c) Government securities instrument that will be used for investment, will be regulated under the Minister of Finance regulation. [Article 12(5)]

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  • Income Tax*

    [*] Chapter II – Article 2

    1.     Expanded dividend exemptions are provided for, which are basically as per those stated in Law No 11/2020 (i.e., Omnibus Tax Law on Job Creation). Please refer to our tax alerts regarding “Important tax provisions in the Omnibus Law on Job Creation dated October 2020 with the link here: tax-alert_important-tax-provisions-in-the-omnibus-law-on-job-creation.pdf (ey.com) and  “Further details on Omnibus Law tax treatment to support ease of doing business” dated April 2020 with the link here: further-details-released-on-omnibus-law-tax-treatments.pdf (ey.com). [Article 4(3)(f)]

    2.     Certain benefits in kind, will now be tax-deductible under Article 6(1)(n) of the Income Tax Law (“ITL”) and taxable income for the employee/ recipient under Article 4(1)(a) of the ITL. The elucidation of Article 4(1)(a) states that benefit in kind means consideration in kind in the form of goods other than money; and/or consideration in the form of enjoyment for the right to use certain facilities and/or services. Article 4(3)(d) provides tax exemption for the following benefits in kind: (1) food and beverages and their ingredients provided to all staff; (2) benefits in kind provided in certain remote areas/ regions, including offshore where the water depth is more than 50 meters; (3) benefits in kind that must be provided by the employers for the execution of work; (4) benefits in kind that are sourced or funded from the State/Regional/Village budget; or (5) benefits in kind of a certain type and/or of a certain limit. Further criteria on the above benefits in kind shall be regulated under a Government Regulation [Article 32C paragraphs (d) and (n)]

    3.     The annual income tax free threshold shall be at the minimum of:

    a)     IDR 54 million for an individual taxpayer;

    b)     Additional of IDR 4.5 million for a married taxpayer;

    c)      Additional of IDR 54 million for a wife whose income is combined with the husband’s income; and

    d)     Additional of IDR 4.5 million for each child, including adopted child, for a maximum of 3 children for each family. [Article 7(1)]

    4.     Part of a certain annual gross revenue up to IDR 500 million of an individual taxpayer that is subject to final tax as stated in Article 4(2)(e) is not subject to income tax. [Article 7(2a)]

    5.     Deductibility of provision for bad debts for banks and other companies providing credit facilities, leasing companies, consumer finance companies and debt factoring companies shall be calculated based on the prevailing financial accounting standards with certain limits prescribed after consultation with the Financial Services Authority (“OJK”). [Article 9(1)(c)(1)]

    6.     Depreciation of permanent building that has a useful life of more than 20 years shall be carried out using the straight-line method within 20 years or in accordance with the actual useful life based on the taxpayer’s accounting records. [Article 11(6a)]

    7.     Amortization of intangible assets that has a useful life of more than 20 years shall be amortized within 20 years or in accordance with the actual useful life based on the taxpayer’s accounting records. [Article 11A(2a)]

    8.     Progressive income tax rates for individual taxpayers now fall into five tax brackets (previously four) with a new maximum tax rate of 35% (previously 30%). The marginal tax rates are as follows:

     

    Taxable income

    Tax rate

    Up to IDR 60 million (previously IDR50 million)

    5%

    More than IDR 60 million up to IDR 250 million

    15%

    More than IDR 250 million up to IDR 500 million

    25%

    More than IDR 500 million up to IDR 5 billion

    30%

    More than IDR 5 billion

    35%

    [Article 17(1)(a)]

    9.     Corporate taxpayers and permanent establishments are subject to corporate income tax rate of 22% starting from the 2022 fiscal year.  This effectively cancels the previous regulation which reduced the rate to 20% [Article 17(1)(b)]

    10.  Indonesian corporate taxpayer that is: (a) a public company; (b) has at least 40% of its paid-up capital traded on the Indonesian Stock Exchange; and (c) meet certain conditions, can obtain a 3% income tax rate reduction from the applicable normal corporate income tax rate. [Article 17(2b)]

    11.  The Government has the authority to prevent a tax avoidance practice used by the taxpayer to reduce, avoid, or postpone the tax payment that should have been payable that is contrary to the purpose and objective of the prevailing tax laws. One way to avoid tax is by conducting a transaction that is not in accordance with the real situation that is contrary to the substance over form principle, that is recognizing the economic substance over its form. [Elucidation of Article 18]

    12.  The Minister of Finance has the authority to regulate the maximum amount of borrowing cost for tax purpose. [Article 18(1)]

    13.  Taxpayers may avoid tax using many means, including under reporting revenue, over reporting expenses, reporting profits that are too little when compared to the financial performance of other taxpayers in the same business sector, or reporting unreasonable business losses for 5 years although the taxpayer has been conducting commercial sales. In such circumstances, the DGT is authorized to redetermine the amount of revenue and/or expenses in accordance with fair and reasonable common business principles that are not influenced by the special relationship. In redetermining the amount of revenue and/or expenses the DGT may use the following methods: (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) other methods such as (i) profit split method; (ii) transactional net margin method; (iii) comparable uncontrolled transaction method; (iv) tangible and intangible asset valuation; and (v) business valuation. For a taxpayer who reported too little profit or suffered unreasonable losses for 5 years, the DGT may perform benchmarking with other taxpayers in the same business sector to calculate the amount of tax that should have been paid. The difference between the transaction value that is influenced by the special relationship and the transaction value that is not influenced by the special relationship that is in accordance with fair and reasonable common business practice shall be deemed a dividend that is subject to income tax. [Elucidation of Article 18(3)]

    14.  The Government has the authority to form and/ or carry out a bilateral or a multilateral tax agreement and/ or arrangement with the government of a partner country or jurisdiction for:

    a)     Double tax agreement;

    b)     Base erosion and profit shifting;

    c)      Tax exchange information;

    d)     Tax collection assistance; and

    e)     Other tax cooperation.

    [Article 32A]

    15.  Further provisions that will be stipulated under a Government Regulation are:

    a)     Income from gain due to assets transfer in relation to gift, aid or donation that are excluded from the tax objects because it was given to direct family, or to religious, educational and social institutions including foundation, cooperative, and small medium enterprise, provided there is no business, employment, ownership or control relationship between the parties as referred in Article 4(1)(d)(4);

    b)     Criteria of certain expertise as well as income tax imposition on foreigners as referred in Article 4(1a);

    c)      Donated assets received by direct family, religious, educational and social institutions including foundation, cooperative, small medium enterprise, provided there is no business, employment, ownership or control relationship between the parties, that are excluded from the tax objects as referred in Article 4(3)(a)(2);

    d)     Benefits in kind excluded from the tax objects as referred in Article 4(3)(d);

    e)     Criteria, period and change of limitation of invested dividend, as well as provisions on dividend or other income exempted from income tax as referred in Article 4(3)(f);

    f)      Income from investment in certain business sectors received by pension funds, which are excluded from tax objects as referred in Article 4(3)(h);

    g)     Scholarships meeting certain conditions, which are excluded from the tax objects as referred in Article 4(3)(l);

    h)     Excess of funds received or earned by non-profit institutions, which are engaged in the education and/ or R&D sectors, that are excluded from the tax objects as referred in Article 4(3)(m);

    i)       Aid or compensation paid by the Social Security Agency (BPJS) to certain taxpayers, that are excluded from the tax object as referred in Article 4(3)(n);

    j)       deposit funds for the cost of organizing the haj pilgrimage (BPIH) and / or special BPIH and income from Haj financial development in certain sector or certain financial instruments received by Haj Financial Management Institution (BPKH), that are excluded from the tax objects as referred in Article 4(3)(p);

    k)      excess of funds received by social and religious institutions that are excluded from the tax objects as referred in Article 4(3)(p);

    l)       promotional and marketing expenses that are tax deductible as referred in Article 6(1)(a)(7);

    m)    bad debt expenses that are tax deductible as referred in Article 6(1)(h);

    n)     benefits in kind that are tax deductible as referred in Article 6(1)(n);

    o)     certain provisions that are tax deductible as referred in Article 9(1)(c);

    p)     group of tangible assets, useful life and depreciation calculation as referred in Article 11(6) and 11(6a);

    q)     depreciation of tangible assets owned and used in certain business sectors as referred in Article 11(7);

    r)      amortization starting period for certain business sectors as referred in Article 11A(1a);

    s)      amortization calculation as referred in Articles 11A(2) and 11(2a);

    t)      maximum amount of borrowing cost that is tax deductible as referred in Article 18(1);

    u)     determination of when the dividend is earned by resident taxpayers on their investment in a foreign non-public company as referred in Article 18(2);

    v)     the application of fairness and business practice principles in the context of calculating the amount of taxable income for taxpayers who have special relationships with other taxpayers as referred in Article 18(3);

    w)    implementation of advance pricing agreement between related parties as referred in Article 18(3a);

    x)      determination of the actual party who acquire the shares or company’s assets via other party or special purpose company as referred in Article 18(3b);

    y)     determination on the sale or transfer of shares of a company that is established or domiciled in Indonesia or a permanent establishment as referred in Article 18(3c);

    z)      re-determination of the amount of income received by a resident individual taxpayer from an employer that has a special relationship with other company that is not established or does not reside in Indonesia as referred in Article 18(3d);

    aa)  criteria of special relationship as referred in Article 18(4); and

    bb)  formation and/ or implementation of mutual agreement in tax as referred in Article 32A.

    [Article 32C]

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  • VAT*

    [*] Chapter IV – Article 4

    1.      The base VAT rate is increased to 11% from the current 10% starting 1 April 2022 and will increase again to 12% starting no later than 1 January 2025. The VAT rate can be changed to a minimum of 5% and a maximum of 15%. The changes in rate shall be regulated by a Government Regulation after discussion with the Parliament. [Articles 7(1) and 7(3)]

    2.     Broadening the VAT base in that certain goods which are currently exempt from VAT will become VAT-able:

    a.      Mining and drilling products, which are taken directly from their sources; and

    b.     essential goods (i.e., staples currently exempted) which are mostly required by people.

    Money, gold bullion for the country's foreign exchange reserves, and securities remain exempted from VAT. [Articles 4A(1) and 4A(2)]

    3.     Also, the following services are proposed to become subject to VAT (currently exempt from VAT):

    a)     Medical services;

    b)     Social services;

    c)      Courier services with stamp;

    d)     Financial services;

    e)     Insurance services;

    f)      Education services;

    g)     Broadcasting services which are non-advertisement;

    h)     Land and water transportation services as well as domestic air transport services of which is an integral part of the international air transport services;

    i)       Employment services;

    j)       Public telephone services that use coins; and

    k)      Remittance services by postal money order.

    While for other services such as general governmental services, religious preacher services, as well as other services that are subject to local taxes and retributions (e.g. restaurant, hotel, parking and entertainment) are still exempted from VAT. [Article 4A(3)]

    4.     Despite the removal of essential services and the services mentioned in 3 above from not being subject to VAT so that they become VAT objects, the elucidation of Article 16B(1a)(j) reinstate certain essential goods and services as VAT exempt. The essential goods that are exempted from VAT are rice, grain, corn, sago, soya bean, salt, fresh meat, egg, milk, fruits, and vegetables. The essential services that are exempted from VAT are medical services; social services not for profit such as orphanage and nursing home, firefighting, rendering assistance to accidents, rehabilitation institution, funeral services and crematorium, and services in the sports field; financial services; insurance services; education services, and labor services. Any input VAT incurred in delivering goods and services which are VAT exempt is not creditable, whereas input VAT incurred in delivering goods and services where the VAT is not collected would be creditable. [Article 16B]

    5.     A change has been made to the Elucidation of Article 7(2).  This could be read to suggest that the export of all taxable services for the purpose to be consumed outside of Indonesia’s Customs Area (“ICA”) are now subject to zero rated VAT.  [Elucidation of Article 7(2)]. Despite of this suggestion made in the Elucidation of Article 7(2), the existing Article 4(2) of the VAT Law is not changed by the HPP Law and therefore, the Minister of Finance still has the authority to regulate the activities and type of taxable services which export is subject to zero rated VAT.

    6.     Input VAT on the acquisition of taxable goods and/or services, import of taxable goods as well as utilization of intangible goods and/services from outside of ICA in the ICA, for which the calculation of VAT uses a tax base other than price, is creditable. [Article 8A(3)]

    7.     The input VAT concessions for small scale entrepreneurs and others are proposed to be discontinued.  Input VAT for a VAT-able Entrepreneur who: (a) has a gross turnover below a certain amount; and/ or (b) performs certain business activities, can no longer be credited (currently the input VAT can be credited based on input tax credit calculation guideline). [Articles 9(7) and 9(7a)]

    8.     A new article imposing a final VAT rate is also inserted into the Law, which governs Taxable Entrepreneurs with a certain gross turnover and/or who perform certain business activities, may collect and deposit VAT payable on the delivery of taxable goods and/or services with a certain threshold amount. Input VAT on the acquisition of taxable goods and/ or services related to the above delivery cannot be credited. [Article 9A]

    9.     Further provisions that will be stipulated under the Minister of Finance regulations are:

    a)     Other value as referred in Article 8A(1);

    b)     Criteria of having not yet carried out delivery of taxable goods and/ or services and/ or export of taxable goods and/ or services as referred in Article 9(2a);

    c)      Calculation and procedures of input VAT refund as referred in Article 9(4c);

    d)     Low risk VAT-able Entrepreneur that can be given preliminary refund as referred in Article 9(4c);

    e)     Input VAT credit guidelines as referred in Article 9(6);

    f)      Determination of certain business sectors as referred in Article 9(6c);

    g)     Repayment of input VAT as referred in Article 9(6e)(a);

    h)     Input VAT credit as referred in Articles 9(9a), 9(9b), 9(9c); and

    i)       Certain amount of gross turnover, certain business sectors, certain taxable goods and services, and the amount of VAT that is collected and paid as referred in Article 9A(1).

    [Article 16G]

     

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  • Excise*

    [*] Chapter VII – Article 14
    1. Inclusions or exclusions of the type of excisable goods shall be further regulated with a Government Regulation after discussion with Parliament. [Article 4(2)]
    2. Customs and excise officers have the authority to examine suspected excise violations. If the result of the examination is a violation of excise administration, it shall be settled according to the prevailing excise laws. [Articles 40B(1) and 40B(2)]
    3. The result of examination as stated in (2) shall not be investigated further if: (a) there is a violation against Articles 50, 52, 54, 56 and 58 of the Excise Law (i.e., criminal excise issues); and (b) the suspect pays administrative sanction in the amount of 3 times of the excise payable. [Article 40B(3)]
    4. The excisable goods related to the suspected violation which resulted in no further investigation may be confiscated by the State. [Article 40B(4)]
    5. For the benefit of the State revenue, on MoF request, the Attorney General can stop the excise criminal investigation within 6 months after the request letter. The discontinuance of the investigation can only be carried out on criminal actions under Articles 50, 52, 54, 56 and 58 of the Excise Law, after the suspect pays administrative sanction in the amount of 4 times of the excise payable. If the criminal case has been sent to Court, the defendant can still pay the said penalty and the penalty may be taken into account for the defendant to be prosecuted without imprisonment. [Articles 64(1) to 64(4)]

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  • Carbon tax*

    [*] Chapter VI – Article 13

    1.     A Carbon Tax is proposed to apply on carbon emissions that give negative impact to the environment. An individual or a corporate that acquired goods containing carbon and/ or carry out activities causing carbon emission is subject to carbon tax. [Articles 13(1) and 13(5)]

    2.     Carbon tax is payable on the acquisition of goods containing carbon or activities resulted in the carbon emission in a certain amount and for a certain period. [Article 13(6)]

    3.     Carbon tax is to be payable:

    a)     at the time the goods containing carbon is acquired;

    b)     at the end of the calendar year period when the activities that resulted in certain amount of carbon emissions occurred; or

    c)      at another time, which shall be further regulated by a Government Regulation.

    [Article 13(7)]

    4.     The revenue from carbon tax can be allocated for climate change control. [Article 13(12)]

    5.     The Carbon Tax rate is proposed to be higher than or equivalent to the carbon price rate at the carbon market per kilogram of carbon dioxide equivalent (CO2e) or its equivalent unit. If the carbon price rate at the carbon market is lower than IDR 30 per kilogram CO2e, the law appears to set a carbon tax floor of IDR 30 per kilogram of CO2e or its equivalent unit. [Articles 13(8) and 13(9)]

    6.     Provisions regarding: (a) additional tax object subject to carbon tax; (b) carbon tax subjects; (c) revenue allocation from carbon tax for climate change control, shall be further regulated under a Government Regulation. [Articles 13(11) and 13(15)]

    7.     Provisions regarding: (a) procedures to calculate, collect, pay, report and carbon tax imposition mechanism; and (b) procedures to reduce carbon tax and/ or other treatments to meet carbon tax obligations, shall be regulated under a Minister of Finance regulation. [Article 13(14)]

    8.     Taxpayer that participates in the carbon emission trading, carbon emission balancing and/ or other mechanism according to the prevailing laws in the environment sector can be given carbon tax reduction and/ or other treatment on its carbon tax obligations. [Article 13(13)]

    9.     The implementation of taxing rights and obligations related to carbon tax shall be carried out in accordance with the provisions of the KUP Law. [Article 13(16)]

    10.  Carbon Tax will start on 1 April 2022 and first apply to coal fired power producers (“CFPP”) based on a cap and tax system until 2024.  The CFPP will be given a maximum cap on their carbon emission and above the cap they must pay the tax at the rate of IDR30/Kg of CO2e emission.  Instead of paying the carbon tax, CFPP is permitted to buy carbon emission certificate from other CFPP who is producing carbon at less than their cap; or buy carbon emission reduction certificate (i.e., carbon credit). From 2025 onwards, carbon trading shall be fully implemented and the sectors subject to carbon tax shall be expanded in accordance with the readiness of such sectors having regard among other things to economic condition, readiness of the participant, impact and /or scale of the carbon tax.

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  • Closing and transitional provisions*

    [*] Chapter VIII 

    At the time, this Law is enacted:

    1.     All laws and regulations which are implementing regulations of Law No 11/2016 (Tax Amnesty Law) related to net assets disclosure are no longer in force provided the disclosure is carried out between 1 January 2022 up to 30 June 2022. [Article 15]

    2.     All laws and regulations which are implementing regulations of KUP Law, Income Tax Law, VAT Law, Excise Law, Law No 2/2020 and Law No 11/2020 (Job Creation Law) will remain in force provided they do not contravene the provisions of this Law or are not amended by this Law. [Article 16]

    3.     The changes on the Income Tax Law will be effective starting 2022 fiscal year. [Article 17(1)]

    4.     The changes on the VAT Law will be effective starting 1 April 2022. [Article 17(2)]

    5.     The carbon tax will be effective starting 1 April 2022, with the stipulation that coal power generation companies will be subjected to a rate of IDR 30 per kilogram CO2e or its equivalent unit [Article 17(3)]

    6.     Article 5(1)(b) of PERPPU I/2020 which has become Law No 2/2020 (i.e., corporate income tax rate of 20% starting 2022 fiscal year) is revoked and no longer in force. [Article 18]

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Summary

We are pleased to bring you our latest Tax Alert regarding Tax Regulations Harmonization Law ("HPP Law"), The Indonesian Government has passed the HPP Law on 7 October 2021 and it became Law No.7/2021 on 29 October 2021. The provisions take effect at varying times – e.g., for income tax purposes from the 2022 Fiscal Year and VAT purposes from 1 April 2022.

The changes under the HPP Law are very significant and wide-reaching.  There are changes not only to administrative matters but to key aspects of the Income Tax and VAT Laws.

About this article

Benjamin Koesmoeljana
By Benjamin Koesmoeljana

Partner, International Tax and Transaction Services, PT Ekasurya Yasa Consult

Passionate in serving and delivering value to clients by bringing the best that our global organization can offer. Builder of strong relationship and mentoring others to achieve their full potential.

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