Indonesia: Will the amendments to the Income Tax Law simplify the rules?
Nina Cornelia Santoso
Since last year, the Indonesian government has planned to reform a number of tax policies, including an amendment to Law No. 7 of 1983 on Income Tax, which was last changed by Law No. 36 of 2008 (Income Tax Law).
As unveiled in various news, a tax reformation team has been formed to organise and supervise the process. The team has received several proposals on the amendment to the Income Tax Law from various entities including proposals to:
Reduce the income tax rate for entities, as proposed by the Fiscal Policy Agency (Badan Kebijakan Fiskal) (BKF) of the Ministry of Finance (MOF); and
Abolish the final income tax calculation for several sectors, among others, construction, property, gas station business, and micro/small/medium enterprises, as proposed by the Directorate General of Tax (DGT). The DGT suggested that the amendment to the calculation of the income tax for these sectors should be based on bookkeeping by the taxpayers, instead of stipulating a certain figure as a final rate. The BKF briefly stated that under the Income Tax Law, final income tax is imposed in such sectors because of the difficulties in collecting the tax and because it is a form of incentive for the taxpayers that is a better option than keeping books that are too detailed.
In relation to the proposal to abolish the final income tax calculation from the DGT, the BKF requested the DGT to elaborate and emphasise what impact this would have on state revenue, inflation, and the interests of entrepreneurs, stressing that this must all be considered. In response to this request, the DGT stated that the abolition will require each taxpayer to conduct detailed bookkeeping and record all of its income in any form, thus will ultimately increase the state revenue. If the final income tax is still imposed, the taxpayers must pay for income tax, whether or not they suffer a loss or gain a profit.
In addition to the above proposals, the DGT also suggested to:
Clearly stipulate income tax on e-commerce business in the amendment to the Income Tax Law; and
Revise transfer pricing provisions and amend tax facilities.
Clear provisions on income tax on e-commerce business are expected to encourage tax compliance by foreign e-commerce entrepreneurs that sell to Indonesian customers. As for tax facilities, more incentives, such as tax holiday or tax allowance, may be further stipulated to attract investors.
Further, there is also a plan to revise the requirements on dividends distribution derived from overseas investment through a controlled foreign company (CFC) owned by Indonesian taxpayers. The Indonesian government is concerned because there are cases where Indonesian taxpayers place investments in other countries, but the dividends derived are not distributed to Indonesia. In other words, the dividends are deliberately shifted to countries with low tax rates, resulting in tax avoidance.
To ensure conformity with international taxation laws, the BKF highlights compliance by Indonesian taxpayers by planning to stipulate better procedures of tax payment. Through the reformation, the Indonesian government is hoping to simplify the tax obligations and stipulate more flexible tax rates in the Income Tax Law. Details on the rates and calculations will be further specified under each implementing regulation. This will allow the Indonesian government to make quick adjustments in the event of any changes or developments in the future.
Despite being a long-standing plan, to date, the amendment to the Income Tax Law is still being discussed internally at the MOF. The final revision to the Income Tax Law is scheduled to be completed by this year.
On a separate occasion, the MOF enacted MOF Regulation No. 52/PMK.010/2017 concerning the utilisation of book value for the transfer and acquisition of assets in the framework of a merger, amalgamation, division, or acquisition of a business (MOF Reg 52) in April 2017. This regulation revoked and replaced MOF Regulation No. 43/PMK.03/2008 stipulating the same. The previous regulation only allowed the utilisation of book value for the transfer of assets due to a merger, amalgamation, and division. However, MOF Reg 52 has now included the acquisition of a business. In summary, MOF Reg 52 provides more detailed requirements to use the book value for the transfer of assets, including the procedures on obtaining approval from the DGT to use book value and the subsequent obligations of taxpayers having obtained the approval.
A quick update on regulations related to the exchange of information. Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-undang, or Perppu) No. 1 of 2017 concerning Access to Financial Information for the Interest of Taxation was enacted on May 8 2017. In general, the Perppu stipulates that the DGT is authorised to get access to financial information for the interest of taxation from financial services institutions in banking, capital market, insurance sectors, other financial services institutions and/or other entities categorised as financial institutions in accordance with exchange of financial information standard pursuant to international agreements related to tax.
The said institutions are required to submit:
Report of financial information for each financial account identified as financial account which must be reported; and
Report financial information for the interest of taxation, administered by them in one calendar year, to the DGT. The institutions must conduct financial account identification procedures comprising of a series of verification process in order for them to be able to generate data for the report.
The report shall be submitted electronically and/or manually (only for certain report by certain institution, to the extent that an electronic system is not yet available) to the DGT. Non-compliance with the reporting obligation is subject to criminal sanction in the form of fine up to a maximum of IDR 1 billion ($75,000).
In addition to receiving the above reports, the DGT is also authorised to request information and/or evidence or an explanation from financial services institutions, other financial services institutions, and/or other entities.
Ali Budiardjo, Nugroho, Reksodiputro, Law Offices
Tel: +62 21 250 5125