Changing landscape of the Indonesian taxation system and beyond
Ichwan Sukardi and Sophia She Jiaqian of RSM Indonesia explore the country’s taxation system and consider how the government is paving the way for a tax environment full of opportunities.
Indonesia, since the bygone of days of the Silk Road, has been a centre of exchange for goods, cultures, and ideas. It has thrived based on its strategic location on the equator with access to other prominent and important trade regions. In addition to its advantageous setting, this archipelago has also always been blessed with an abundance of natural resources.
Over the past decade, Indonesia has steadily undergone a revolution led by President Joko Widodo's administration, with major overhauls to its regulatory framework and progressive approach to digitisation. The political landscape is also not what it once was, with greater stability and a growing middle-class.
It is therefore not surprising that there has been growing interest in Indonesia as an investment destination, with its vast land that abounds in market opportunities.
Tax system and main types of taxes
The tax system in Indonesia was developed from a colonial dominant past based on the Income Tax Law of 1944 and the Corporation Income Tax Law of 1925.
For a significant period of time, Indonesia was over dependent on tax revenues from the oil and gas sector, whereby the proportion of the tax revenues from oil and gas had once reached almost 70.1% to the total tax revenues.
The 1944 Law was amended several times with hundreds of decrees issued, lastly by the Law No. 9 of 1970. In 1983, Law No. 7 emerged and integrated individual income tax and corporate income tax (CIT) under one 'new income tax' which aims to achieve several objectives such as simplicity, progressivity and certainty. Law No. 7 was amended several times, with the latest by Law No. 36 in 2008 before the recent enactment of the Omnibus Law.
The tax management in Indonesia can be divided primarily into central government taxes, i.e. VAT, CIT and withholding tax, and regional and local tax, i.e. property tax and vehicle tax, etc.
The fundamental pillars of Indonesia tax system are now built upon:
Income Tax Law (ITL);
General Tax Provisions and Procedures (Ketentuan Umum dan Tatacara Perpajakan /KUP) Law;
Stamp Duty Law; and
Regional Taxes and Retribution (Pajak Daerah dan Retribusi Daerah/PDRD) Law.
In general, Indonesia's tax system is on a self-assessment basis whereby taxpayers are given responsibilities to calculate, pay, and report their own taxes in accordance with prevailing tax laws and regulations, and the tax authority (the Directorate General of Taxes or DGT), acts more as an auditor and controller. Self-assessment system applies to mainstream taxes which are regulated centrally by the government such as income tax and value added tax (VAT).
Official assessment system whereby the taxpayers' payment would entirely depend upon assessment by the Tax Office, also exist – but it applies to local level taxes such as land and building tax (Pajak Bumi dan Bangunan/PBB), duty on the acquisition of land and buildings (Bea Perolehan Hak atas Tanah dan Bangunan/BPHTB) and vehicle tax (Pajak Kendaraan Bermoto/PKB).
Indonesia implements a withholding tax system as its mechanism to collect income tax revenue, and hence various activities and payment transactions are subject to withholding tax in Indonesia whereby tax is required to be deducted at source by third parties and deposited to the tax authority.
The statistics of tax structure produced by the OECD shows that CIT, VAT and other taxes on goods and services account are, among others, the largest contributors to the tax revenues in Indonesia – in which CIT and VAT contribute to around 34% and 29% respectively.
Tax environment and tax dispute issues
Being the fourth most populated country in the world, Indonesia is not devoid of fiscal budget problems – its tax-to-GDP ratio is around 12%, which is well below the OECD average of more than a third and lower compared to other Asian countries. Partially related, Indonesian tax authorities have been known for their tough measures of administrations and never-ending vigilance to ensure dodgers are brought in from the cold.
On one hand, Indonesia government has been trying on a tax amnesty scheme – some 328,000 people took advantage of in its first and most generous phase during July to September 2016 when applicants only had to pay a penalty of 2% on domestic or repatriated assets, and 4% on declared offshore assets.
“There is a clear trend of digitalisation and synchronisation as the tax authorities target to implement the core tax system in 2023 and 2024.”
The tax amnesty ended in March 2017 with 800,000 people coming forward with a total declaration of IDR 4.7 trillion (approximately $325 million) in assets – the state had hence realised a tax revenue of IDR 135 trillion, which undoubtedly also reveals the unhealthy state of tax compliance in Indonesia. The tax amnesty, however, received more criticism than praise, with the focal point of criticism being the ease in which the wealthy are let off the compliance hook.
In January 2017, Indonesia signed up to the common reporting standard (CRS) under the OECD scheme which pressed the game button for Indonesian government to participate in the automatic exchange of information (AEOI) for tax purposes – up until now, there were 116 countries committed and agreed to adopt the AEOI. The CRS seems to have helped better as Indonesia leans on the signatories to share information on foreign accountholders.
On the other hand, Indonesia tax court has been overwhelmed in recent years (after the tax amnesty period) with a steady increase of dispute cases – the number of disputes, according to statistic data, was at 11,436 cases in 2018, and increased to 15,048 cases in 2019.
Most of these disputes were directed to the DGT that governs central taxation such as income tax and VAT, whereas fewer disputes are targeted at Directorate General of Customs and Excise and local governments. Disputes are commonly derived from a disagreement of tax assessment issued by the DGT, primarily as a result of tax audit. In such circumstances, the taxpayer may seek resolution through a channel of objection that may be filed to the DGT.
In the event that the DGT rejects the objection by the taxpayer, the latter may then find fair and just recourse at the tax court for dispute settlement with the DGT. However, assuming that the tax court grants a verdict in favour of the taxpayer, the DGT may still continue their assertions through a judicial review to the Supreme Court.
This may have resulted in perhaps some undue and unfair misconceptions by the business community that the tax environment in Indonesia is overly complex, cumbersome, and incomprehensible.
While it can be acknowledged that there are intricacies and nuances in the tax regulatory landscape to appreciate and negotiate, these 'misconceptions' can be easily prevented through self-education, engaging with the right professionals or even the tax authorities 'from day one' so as to ensure few complications in future.
Revolution of the tax system
During the first half year of 2020, as the pandemic had just begun to hit the country socially and economically, the government of Indonesia pushed forward and passed the law for reduction of CIT rate – from 25% to 22% and eventually 20% from 2022 onwards. A series of tax incentives were also introduced by the government to help businesses, including foreign-owned corporations to cope with the impacts of the pandemic.
On November 2 2020, the President of Indonesia signed the long-waited Omnibus Law on Job Creation through Law No. 11 Year 2020, marking a new chapter of Indonesian legal system reform. The reform involves amendments to several tax laws. With the purpose to promote investment, provide justice and equality to foreign investors, and encourage voluntary compliance, the tax cluster of the Omnibus Law is viewed and appraised widely as it opens a new era for foreign investment and the country's economy.
In February 2021, Government Regulation (GR) No. 9 Year 2021 (GR-9) was issued as one of the implementing regulations of the Omnibus Law. GR-9 deals with taxation issues under the Omnibus Law. Subsequently in the same month, the MoF issued Regulation No. 18/PMK.03/2021 to provide implementing rules to the amendments made on ITL, VAT Law and KUP Law.
The implementing regulations could be said to have paradigm shifting qualities for the business community, with notable changes on relaxation of sanctions, conditional exemptions on income tax for dividend distribution to resident individuals, limited territorial-based taxation for expatriates with certain skills, and a more business friendly approach to VAT.
Amid the rapid societal changes, coupled with the Omnibus Law enactment, Indonesia's tax system is set to evolve quicker than ever, as it seeks to streamline certain bureaucratic process and operate in a more efficient manner.
With a raft of legislative, regulatory, and administrative changes under way to reform the existing tax system, Indonesia appears to be more ready than ever to welcome foreign investors to step foot into this archipelago of opportunities.
Investors looking to set up a business presence in Indonesia are encouraged to understand the tax system here, its potential upcoming changes, assess the tax implications and opportunities available to them and optimise various models at both investment and operating level to realise growth, seize efficiencies and control risks.
International digital economy
After the early release of digital economy taxation policies as part of the Omnibus Law initiative amid the COVID-19 pandemic and having fully implemented the indirect tax (VAT) on the digital economy since July 2020, the Indonesian government has decided to delay the application of direct tax (income tax).
Indonesia is eagerly waiting for the landing of consensus solution from the OECD to roll out detailed measures of direct tax policy on global digital players before officially applying it to the digital economy transactions within scope.
In January 2021, the 11th meeting of the OECD/G20 Inclusive Framework on BEPS 2.0 was held – bringing it a step closer for publishing of final blueprint for both pillars of which OECD sets a timeline of around summer 2021.
Thus far, the discussion of pillar one (profit allocation and taxing nexus) has encountered substantial challenge from its most recent public consultation due to the complexity and workability, whereas pillar two (global minimum taxation) is seen as more tractable.
Indonesia has so far not responded to the draft blueprints and how it will impact the implementing rules to its mandate of taxing multinational tech companies with significant economic presence.
Nonetheless, given the accelerating impact of the digital economy and Indonesia being one of the most active markets where multinationals are keen to deepen their footprints, the government would likely need to pour in more efforts to paint its framework around pillar one – most likely seeking alignment with the final blueprint as the stake is high (potential trade war) if it disregards the consensus and issue unilateral policies.
Whilst there are still many questions that remains to be answered, especially at the political and technical level with pillar one, it can be expected that once global consensus is reached, Indonesian fiscal structure may be vitally changed, and tax administration and policy focus may shift as well – with more state resources being devoted to capturing digital taxation and release domestic traditional corporations from dispute plights.
One of the significant concerns, however, is that whether heavy administrative burden will be added in light of the final consensus – this should be mapped out and calculated with pros and cons laid out with some care given that the general perception of Indonesia domestic tax system is generally that of perplexity that comes with undue compliance costs. The subtle balance between tax certainty and simplification is key to the success of any brand-new packages.
A glimpse into the future
Without a doubt, the Indonesia government faces unprecedent pressure to pivot and continuously pave the way for the taxation system to transition into a clearer and more certain future – the stakes are high, and the government will need to allocate a tremendous amount of funding to meet its national development plan budget as well as to secure its people's welfare amid the fast-evolving landscape of the global economy.
It may also be observed that the Indonesian tax authorities could look into the digitisation of its general infrastructure as a means of ameliorating and addressing its constant struggles to meet their tax revenue targets.
While this may not happen overnight, such initiatives have already commenced and are in progress as seen through the initiatives that are being put in place by the Indonesian government, there is a clear trend of digitalisation and synchronisation as the tax authorities target to implement the core tax system (COTS) in 2023 and 2024.
The COTS solution is expected to support 20 business processes, manage more than 40 million taxpayers and their tax return documents, implemented across 583 tax offices in Indonesia, and replace eight existing tax administration channels. This, coupled with the development of the human resources of the tax authorities, certainly has great potential to usher in a new era for taxation in Indonesia.
Further down the road, changes in tax laws are expected, powered by the Omnibus Law to be further reviewed which would trim down more redundant and irrelevant tax regulations – as the global economy focus shifts completely from traditional to a renovative and digital one.
The Indonesian tax authorities will probably be forced to change its formula of meeting the national revenue budget and tailor ways to ensnare non-compliance taxpayers; albeit with the 'big data' and 'analytic' concepts embedded into the future tax system, it can be expected that there would be more voluntary rather than enforced tax compliance.
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T: +62 21 5140 1340
Ichwan Sukardi is a tax partner, who heads the tax practice at RSM Indonesia. With almost 25 years of experience, he provides tax advisory services to a wide range of multinational and domestic companies, mostly in the energy sector.
Ichwan is the engagement partner for leading international oil and gas firms, and regularly assists his clients in achieving efficient tax structures for restructurings, dividend distributions, financings, and exit strategies.
Ichwan serves as the chairman of the Indonesian branch of the International Fiscal Association (IFA). He regularly speaks and writes on matters concerning the taxation of oil and gas, mining, investments, and other general tax issues.
Ichwan holds master's degrees in international tax law from Leiden University, and in business administration from Prasetiya Mulya Business School, Indonesia. He obtained his bachelor's degree in law from the University of Indonesia.
Sophia She Jiaqian
T: +62 21 5140 1340
Sophia She Jiaqian is a senior manager at RSM Indonesia. With more than six years of professional experience in providing corporate compliance and advisory services, she has served clients with a business background in both Singapore and Indonesia.
Sophia is experienced in a range of international tax issues, and possesses in-depth knowledge on the application of treaties, withholding taxes, and tax restructuring. She has handled tax cases for a wide range of multinational companies in sectors including oil and gas, manufacturing, and pharmaceuticals.
Prior to joining the firm, Sophia was based in Singapore and worked with other tax consulting firms including one of the Big Four firms.
Sophia holds a bachelor's degree in applied accountancy from Oxford Brookes University. She is fluent in both Chinese and English.