eyid-tax-alert-jan25

PMK-131: New Calculation of VAT Payable

On 31 December 2024, Indonesia Minister of Finance (MoF) issued Regulation No 131/ 2024 (“PMK-131”) in relation to New VAT Treatment. PMK-131 is the implementing regulation of Article 8A of Law No 8/1983 (VAT Law) which was last amended by Law No. 6/2023. PMK-131 is effective on 1 January 2025.

Key highlights of PMK-131 are:

  1. Starting 1 January 2025, the importation and/ or delivery of taxable goods by VAT-able Entrepreneurs within Indonesia Customs Area is subject to VAT rate of 12% on the import or sales value. The VAT rate of 12% is imposed on taxable goods that are subject to Luxury Goods Sales Tax (LGST). These taxable goods are luxury automotive vehicles (as stipulated in MoF Regulation No 141/PMK.010/2021 as amended by MoF Regulation No 42/PMK.010/2022), and luxury goods other than automotive vehicles (as stipulated in MoF Regulation No 96/PMK.03/2021 as amended by MoF Regulation No 15/PMK.03/2023 – “PMK-15”).
  2. Luxury goods other than automotive vehicles as stated in PMK-15 are limited to: (a) luxury residences, such as luxury houses, apartments, town houses and alike, with sales value of at least Rp. 30 billion; (b) air balloon and glider; (c) private firearms and their ammunitions, (d) private helicopter and jets; and (e) private cruise ships and yachts.
  3. The importation and/ or delivery of taxable goods within Customs Area by VAT-able Entrepreneurs, other than the luxury goods mentioned above, and the utilization of intangible taxable goods and/ or taxable services from outside of Customs Area in the Customs Area, is subject to VAT rate of 12% on the Adjusted Tax Base. The Adjusted Tax Base is defined as 11/12 of the import value, sales value or replacement value. So that the effective VAT rate remains at 11% (i.e., 12% x 11/12 x import value or sales value or replacement value = 11% x import value or sales value or replacement value).
  4. Input VAT on the acquisition or import of taxable goods and/ or services and utilization of intangible taxable goods and/ or taxable services from outside of Customs Area in the Customs Area, which are using Adjusted Tax Base in the calculation, can be credited in accordance with the prevailing tax regulations.
  5. VAT on the delivery of taxable goods and/or services that have used Adjusted Tax Base and those using certain amount which are separately regulated under the prevailing tax regulations, are excluded from the provisions under PMK-131. The VAT thereon shall continue to be calculated in accordance with those prevailing tax regulations.
  6. 6.VAT-able Entrepreneurs who deliver luxury taxable goods (as mentioned above) to end-consumers shall apply the following:
    • From 1 January 2025 to 31 January 2025, the VAT payable is calculated using the VAT rate of 12% multiplied by the Adjusted Tax Base of 11/12 of sales value (i.e., effective VAT rate of 11% of the sales value); and
    • Starting 1 February 2025, the VAT payable is calculated using the VAT rate of 12% of the sales value or import value.

New Developments in Tax Holiday Regulations

The Ministry of Finance (MoF) has rolled out MoF Regulation No.69 Year 2024 (“PMK-69”) which is effective from 9 October 2024. PMK-69, as an update to MoF Regulation No.130 Year 2020 (“PMK-130”), marking the latest update to the Tax Holiday incentive aimed at substantial new investments in designated Pioneer industries. PMK-69 extends the window for submitting Tax Holiday proposals which initially limited to application up to 8 October 2024 under PMK-130 to be up to December 31, 2025.

Key changes in this update include:

  • Pillar Two Implementation: Taxpayers benefiting from the Tax Holiday who are also part of a multinational enterprise group subject to the Global Minimum Tax under Pillar Two rules will now face an additional domestic top-up tax. This applies even to those who secured the Tax Holiday before PMK-69 came into effect.
  • Anticipated Regulations: Although the MoF has yet to issue domestic regulations for the Global Anti-Base Erosion (GloBE) rules, it is expected that the Qualified Domestic Minimum Top-up Tax (QDMTT) will be incorporated into upcoming regulations.

Additional updates in PMK-69 include:

  • Exclusions: Taxpayers who have received the Tax Holiday under the National Capital named "Nusantara" (Ibu Kota Negara bernama Nusantara/IKN) are not eligible to apply for this Tax Holiday.
  • Application Requirements: Applicants must now submit their own Tax Clearance Letter (Surat Keterangan Fiskal/SKF) online to use the Tax Holiday facility. Under PMK-130, this requirement is only applicable for their domestic shareholder.
  • Reporting Obligations: Capital investment and production realization reports must now be submitted online via the OSS.

This regulation aims to align with international tax standards and continue to boost economic growth by attracting significant new investments in Pioneer industries.

New Guidelines for Bad Debt Provision Calculation in Financial Institutions

On October 18, 2024, the Minister of Finance (MoF) introduced MoF Regulation No. 74 Year 2024 (“PMK-74”), a regulation that revises the existing rules on deductible bad debt provisions for specific financial institutions. This regulation is effective for Fiscal Year 2024.

The fundamental approach in determining fiscal adjustments related to bad debt provisions for these financial institutions remain consistent. PMK-74 refines the calculation methods for allowable bad debt provisions, and offers more detailed guidance on several aspects. Here are the key changes introduced by the regulation:

  • Scope of Application: The updated rules specifically apply to banks, finance companies, finance lease companies with option rights, consumer finance companies, and factoring companies. Any provision pertaining to bad debt for insurance companies, the Deposit Insurance Agency, mining companies, forestry companies, and industrial waste provisions under Minister of Finance Regulation No. 219/PMK.011/2012 remain unchanged.
  • Calculation Method: PMK-74 provides a revised methodology for calculating the allowable bad debt provision, ensuring a more precise and transparent process.
  • Detailed Guidance: The regulation elaborates on various aspects of bad debt provision calculations, offering clearer instructions and reducing ambiguities.

These changes aim to enhance the accuracy and clarity of bad debt provision calculations for financial institutions, ensuring compliance with updated fiscal policies.


Table of 2

New Limits for Calculating Bad Debt Provision Balances

PMK-74 introduces specific limits for calculating bad debt provision balances. These limits can be determined using either the Staging method or the Collectability method:

  • Staging Method: This approach categorizes debts as good, not good, or poor.
  • Collectability Method: This method classifies debts into categories such as current, special mention, substandard, doubtful, and loss.

The staging method is to be applied by taxpayers who already implement PSAK 71, such as conventional banks or conventional finance companies. For those taxpayers who have not yet implemented PSAK 71, such as sharia banking or sharia multi finance company, they have the option to either use the staging method, or the collectability method in calculating their bad debt provision.

New Approach to Fiscal Adjustment for Bad Debt Provisions

PMK-74 specifies the permissible limits for calculating the starting and ending balances of bad debt provisions for tax purposes. The net change in these balances, after factoring in actual qualifying bad debt write-offs, determines the allowable bad debt provision expense. The difference between this amount and the commercial bad debt provision expense results in a fiscal adjustment. The allowable bad debt provision limit for tax purposes is the lower of the commercial provision, or the tax limit for each sub-category under the chosen method.

To qualify for loan write off deduction

To qualify for write off deduction, taxpayer must submit specific documentation, including a list of uncollectible receivables and evidence showing that reasonable efforts were made to collect the debts. These documents must be attached to the annual corporate income tax return.

The template format of the list is specified in the appendix of PMK-74, and the columns concerning copies of evidence that shows that the receivables are uncollectible should be filled in with the document type code, as follows.

Clarification on Non-Deductible Write-Offs in PMK-74

PMK-74 clarifies that any write-offs which do not meet the deductibility criteria cannot be included in the calculation of the beginning balance of the provision. Additionally, these non-deductible write-offs are not allowed to be used in determining the ending balance of the provision.

Transitional Provisions

Existing Bank Perkreditan Rakyat (BPR) and Bank Pembiayaan Rakyat Syariah (BPR Syariah) that have not yet transitioned to the new BPR and BPR Syariah formats can calculate their bad debt provisions using the guidelines set forth in this regulation.

For the calculation of provisions in Fiscal Year 2024:

  • Both the starting and ending balances of the bad debt provision must be determined according to this new regulation.
  • The difference between the FY24 starting balance (calculated using this regulation) and the FY23 ending balance (calculated using the previous regulation) will be addressed as follows:
    • If the FY24 starting balance is higher than the FY23 ending balance, the difference will be recognized as a deductible expense in FY24 and/or FY25.
    • If the FY24 starting balance is lower than the FY23 ending balance, the difference will be recognized as taxable income in FY24.

New Guidelines on Tax Treatment for Joint Operations

The Ministry of Finance (MoF) has introduced Regulation No. 79 Year 2024 (“PMK-79”), which outlines the tax treatment for Joint Operations (JO/Kerja Sama Operasi).

PMK-79 defines a JO as an entity formed through a joint arrangement between its members, where the members share joint control or have rights to assets and obligations towards liabilities, regardless of the name or form of the arrangement.

The regulation distinguishes between two types of JOs for tax purposes:

  1. JO Required to Register as Taxpayer: Obtain a Tax ID (Nomor Pokok Wajib Pajak/NPWP) and Register as VATable Entrepreneurs (Pengusaha Kena Pajak/PKP):
  2. JO Not Required to Register as Taxpayer: exempt from any registration requirement

The following is a summary of the tax treatment for each JO:

  1. JO Required to Register as Taxpayer

Qualification:

A JO is required to obtain NPWP if the agreement or its to other parties, under the name of the JO. execution specifies that the JO will:

  • Supply goods or services;
  • Generate income; and/or
  • Incur expenses or make payments

A JO is subject to PKP appointment for delivering taxable goods or services under the following conditions:

  • The JO surpasses the small enterprise threshold as defined in the Ministry of Finance Regulation regarding small enterprise limits for Value-Added Tax (VAT) purposes; and/or
  • At least one member of the JO has already been designated as a PKP.

VAT treatment of JO:

PMK-79 specifies the taxable event, tax base, and VAT Invoice issuance according to the flow of delivery of taxable goods or services, as outlined below:

  • Taxable Events:
    • JO Member to JO: When the JO delivers the taxable goods/services to Customer
    • JO to Customer: When the JO delivers the taxable goods/services to Customer
  • Tax Base:
    • JO Member to JO: Other values based on the agreed contributions outlined in the JO agreement, which specifies the detailed types of taxable goods or services provided by each JO member.
    • JO to Customer: Follow general VAT rule
  • VAT Invoice issuance:
    • JO Member to JO: No later than when the JO issues the VAT Invoice to Customer.
    • JO to Customer: Follow general VAT rule

Income Tax Treatment of JO:

The corporate tax treatment is as follows:

  • Tax on Income for JO:
    • Final-tax income, or
    • Non-final-tax income.
  • Expense Deduction for JO:
    • Final-Tax: Non deductible
    • Non-Final-Tax: deductible for business purposes
    • The JO's business-related costs, including expenses incurred from JO member's contribution.
    • The JO member’s contribution is based on the agreed amount specified in the JO agreement and supported with details of the types of taxable goods or services.
  • Tax Loss:

JO losses can only be offset by the JO itself and not by its members. This includes any losses incurred upon the dissolution of the JO.

Income Tax Treatment of JO Member:

The corporate tax treatment is as follows:

  • JO Member’s Contribution:
    • Treated as income for JO Member.
    • The income is not subject to WHT if the JO Member is a Domestic Taxpayer. However, WHT is applicable to contribution by Foreign JO Member.
    • Non-Final-Tax JO: JO Member recognised the income at the time when JO receives the income from Customer and recognises the expenses incurred based on the JO member’s contribution
    • Final-Tax: JO Member recognised the income at the time when JO receives the income from Customer.
  • b. JO’s Profit Distribution:
  1. Not subject to corporate income tax or withholding tax.
    • The income is reported as income not subject to income tax by JO member in their Income Tax Return.
    • However, any residual profit of Permanent Establishment which is not reinvested in Indonesia is still subject to Branch Profit Tax.
    • Domestic Corporate Taxpayer and Permanent Establishment
  2. Foreign Taxpayer
  • The profit is subject to Withholding Tax.

Tax Treatment of JO Transferring Land and/or Building Right:

Income from JO engaging in transfer of Land and/or Building right is subject to final tax. The JO should submit the validation request to the Tax Office.

During the process of transferring the land and/or building title at the Ministry of Agrarian Affairs and Spatial Planning, the JO must provide:

  1. a statement letter resulting from the tax payment validation process; and
  2. a copy of the JO agreement or the JO deed of establishment

2. JO Not Required to Register as Taxpayer

Qualification:

A JO is not required to register for NPWP and PKP if it does not fulfil the condition as stipulated in the qualification criteria in PMK-79. Thus, the JO does not have any tax right and obligation. The tax registration requirement remains with each JO Member.

Income Tax and VAT treatment of JO:

Since JO is not required to register for PKP, any transaction which subject to VAT or incurred any input VAT should be settled by the JO Member. The income tax obligation also remains with each JO Member based on the proportion agreed in the JO Agreement.

Transitional Provisions

JO that already have a NPWP prior to the effective date of PMK-79 and meeting the qualification stipulated in PMK-79 is required to:

  • Submit an application for transferring to the Tax Office which cover the jurisdiction where the JO is domiciled;
  • Register the JO as PKP;
  • Collect VAT for tax period after October 2024;
  • Withhold Income Tax starting January 2025 tax period;
  • Calculate, pay, and report Income Tax starting from Fiscal Year 2025.

On the other hand, a JO that is already registered for NPWP prior to the effective date of PMK-79, but do not qualify for tax registration requirement as stipulated in PMK-79, is required to submit an application to revoke its NPWP and PKP (if applicable).