Indonesia’s Job Creation Law unlocks new opportunities for foreign investors and expatriates
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Indonesia’s Job Creation Law unlocks new opportunities for foreign investors and expatriates

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David Hamzah Damian and Denny Vissaro of DDTC discuss how Indonesia’s new tax regime brings a competitive edge to the economy by unlocking new opportunities for investors and expatriates.

Southeast Asia's largest economy, Indonesia, has moved the tax system forward to be more globally competitive among countries in the region. By enacting Law No. 11 of 2020 (Job Creation Law), the government has restructured several major tax laws at once, facilitating quick responses toward the need of economic recovery acceleration.

As Indonesia is expected to enter the post-pandemic era in the not-too-distant future, it is highly anticipated that a new pattern of business developments and economic activities will create distinct ways of competition compared to the pre-pandemic stage. To be able to compete, huge capital and development of science along with the technology will be essential. Thus, appropriate support from the government through the tax system is vital.

The Job Creation Law is an integral part of President Joko Widodo's initiative manifested in the Medium-Term National Development Plan 2020–2024. The primary aim is to lower business cost, improve investment conductivity, strengthen competitiveness, and transform the economy by leaving the middle-income trap. As it needs further quick action, the implementing regulations of such law was issued in February 2021.

This defining movement has been preceded with several fiscal policies that favour businesses. Notably, there was a bill of tax omnibus law concerning tax regulations facilities. Part of the plan has already been implemented as a quick response in 2020, such as the lowering of corporate tax to 22%, before falling to 20% in 2021, and taxation of the digital economy.

The rest was stipulated in the Job Creation Law, along with non-fiscal regulations which aim to improve the ease of doing business. It is interesting to note that the timing of the regulation enactment is placed after the issuance of other temporary tax regulations which was more focused on supporting business cash flow and maintaining the consumption level.

In the long term, the government has also used tax instrument to boost investment and competitiveness. It is understood that the intention is to build resilience to face possible tax incentives competition in the future, which usually comes post the economic crisis.

These law changes include foreign income exemption for expatriates with certain expertise, conditional exemption on foreign income, and reduction of withholding tax rates of interest income received by non-resident taxpayers.

Certain expatriates' foreign income is exempt

One of the notable changes is the shifting paradigm on the international tax aspect in terms of tax resident status. Through the implementing regulations in the Minister of Finance Regulation No. 18 of 2021, it is now stipulated that foreign tax residents who meet several criteria will be taxable only on their domestic income for four years. This treatment is distinct compared to resident taxpayers in general, whose income is taxed on a worldwide basis.

The criteria for such expatriates are determined based on the skills and the professional position under which they are working. The provisions regarding the criteria for certain expertise include having expertise in the fields of science, technology, and/or mathematics, as evidenced by the following:

  • A certificate of expertise issued by an institution appointed by the government of Indonesia or the government of the foreign worker's country of origin;

  • Education certificate; and/or

  • A minimum of five-years' work experience.

Further, the government regulates that expatriates with certain expertise should occupy certain positions as stipulated by the minister of manpower and foreign researchers stipulated by the minister in the research sector.

The provisions concerning these positions consist of 25 occupations including chemists, geologists and geophysicists, telecommunication, electrician, industrial, and production engineers, product and apparel designers, university lecturers, application programmers, and mining supervisors.

Fulfilment of this criteria is disclosed through an administrative process where the expatriates propose to this regime. If the approval is granted, the Directorate General of Taxes (DGT) will issue an agreement letter.

For expatriates who are already tax residents in Indonesia, tax treatment maybe applicable as long as the period of four years has not passed. Accordingly, they can submit the proposal, and the period of the tax regime will be applicable from the enactment of the law until the end of the four-year period.

Upon the grant of this taxation treatment, the expatriates are then obliged to transfer their knowledge to domestic co-workers or Indonesian society. However, it is not determined explicitly how the government will measure whether there is knowledge transfer.

Nevertheless, this approach of expatriate taxation is only applicable as long as there is guaranteed benefits given to the country. This is in line with the vision stated by President Jokowi for his second period of regime that human resource is seen as the priority to achieve competitiveness in a sustainable way. One approach is to generate transfer of knowledge, particularly in areas where availability of experts is lacking.

From this stipulation, it can be inferred that the government now sees fiscal instrument as part of the efforts to compete in attracting global talents. This is particularly critical since competition between countries' tax systems has been accelerating in the last decade. As one of the responses, Indonesia welcomes foreigners who have competitive advantage in terms of skills and knowledge so that transfer of knowledge can be spread more quickly.

It is expected that the number of necessary talented expatriates will increase. Hopefully, this trend is to be followed with the rapid transfer of knowledge and technology, resulting in vast human capital in the near future.

Capital inflows are encouraged to be invested

The next major stipulation worthy of attention is the tax exemption of dividend income, whether it is received from within or outside Indonesia, and foreign after-tax income, either from permanent establishment or not. It is understood that such stipulation is part of the movement to make Indonesia as the business hub for the ASEAN region.

Such treatment is given under the condition that dividends are invested in the country for at least three years. If the dividends are received domestically, only the amount invested inside the country will be exempt from income tax. The remaining amount will be taxed according to applicable regulations.

The same treatment is applicable for foreign dividends, where the shares are traded on the stock exchange in a particular country. If they are not listed on the stock exchange, that total amount of dividend invested should be at least equal to 30% of the taxpayers' income after tax. Should the amount of investment fall short of the threshold, the gap will be taxed according to the laws. On the contrary, if the investment amount exceeded the requested level, the whole dividends are exempt from income tax.

“The Job Creation Law is an integral part of President Jokowi’s initiative manifested in the Medium-Term National Development Plan 2020–2024.”

In terms of after-tax income of a permanent establishment abroad that is earned by resident corporate or individual taxpayers, a similar threshold of investment amount is required, where they should at least be equal to 30% of the taxpayers' income after tax.

If the foreign-source income does not go through a permanent establishment the amount invested inside the country will be exempt from income tax. Subsequently, part of the income that is not invested will be taxed according to applicable regulations.

Regarding all these mentioned types of incomes, the taxpayer should start the investment within a certain stipulated period. Accordingly, the investment should be realised by the end of the third month (for individual taxpayers) or the fourth month (for corporate taxpayers) after the end of the fiscal year when the income is received. If the period is passed before investment realisation, the income shall constitute income in the tax year it is earned.

There are 12 instruments that are applicable as investment destinations, where the funds will be placed either in financial instruments or real sector. The funds related to the first one can be placed on many instruments, including savings, deposits, various form of securities, and Sharia financial instruments.

Meanwhile, those outside the financial market can be placed as shareholding in newly-established corporations, collaboration with the Indonesia Investment Authority (LPI), and loans to small and medium-sized enterprises (SMEs), infrastructure and property investment, and other forms of legal investment according to Indonesian laws.

To ensure the fulfilment of the required condition, the investment realisation report should be submitted electronically by the third month (for individual taxpayers) or the fourth month (for corporate taxpayers) of the fiscal year. This way, the money flow can be monitored effectively, thus ensuring the objective of this stipulation can be attained.

This stipulation, along with the expatriate taxation regime, displays that the government has now shifted the spectrum of international tax regime from a worldwide basis into a 'conditional' territorial one. Accordingly, only foreign income which stands in line with the interest of the country can be exempted. In other words, such 'relaxation' is given in exchange with certain 'economic participation'.

Reduced rate on interest income of foreigners

Another important change in the Job Creation Law is the reduction of income tax rate on interest coming from abroad. The Job Creation Law states that the 20% rate on the gross amount of interest, including premiums, discounts, and compensation in connection with debt repayment guarantees received by non-resident taxpayers other than permanent establishments in Indonesia is lowered to 10% or as regulated with the applicable tax treaty. The scope of income stated in the regulation refers to earnings derived from bond interest.

This ensures that foreigners whose residence country does not have a treaty network with Indonesia can get a tariff reduction. This action shows that the government wants to ensure a competitive tariff with neighbouring countries. Most of the ASEAN country members set the tariff between 1% and 15%, leading creditors' preference in favour of these countries.

Certainly, loan financing will be part of the source to accelerate economic recovery. Lowering the tax rate for foreigners' income from interest will hopefully ease the flow to the country.

New taxation era in a post-pandemic world

Tax reform has a long way to go, but this defining act has provided the necessary foundation to move forward. This also signals that to accelerate the economic recovery and be competitive, the government of Indonesia is willing to take an outside customary solution.

Nevertheless, these new stipulations do not change the fact that the government needs to recover tax revenue performance. As the Minister of Finance Sri Mulyani hinted, the tax system in Indonesia has a diverse purpose, and it is the highest priority to save the economy. Above all, tax revenue could never bounce back as long as economic activities are undecided.

From these three major changes, there will be further positive initiatives to be embraced. This is to seize the momentum of demographic 'surplus', which is occurring until the 2030s (approximately). As experienced globally, missing this opportunity would be counter-productive to the future of the economy.

In addition to these movements, the government is also digitising the tax system. The convenience aspect reflected in the cost of compliance is as important as policy reform. Therefore, from a holistic perspective, the future of Indonesia's tax system is directed at revamping economic competitiveness and ease of doing business.

Click here to read all the chapters from ITR's Indonesia Special Focus

David Hamzah Damian




T: +62 21 2938 2700


David Hamzah Damian is the partner of tax compliance and litigation services at DDTC. He is an experienced practitioner in TP, customs, and all aspects of Indonesian taxation with almost 20 years of experience. He holds a tax consultant license to practice before the Indonesian tax authority and tax attorney license to practice at the tax court.

David is well known for his advocacy skills. In 2020, the cases that he handled during dispute resolution processes with the Indonesian tax authority have been closed or are settled with agreements from both the taxpayer and the tax authority. In 2021, he was named as a tax controversy leader in World Tax's dedicated leaders guides.

David holds the advanced diploma in international taxation from the Chartered Institute of Taxation, UK. He is an expert contributor of DDTC News.

Denny Vissaro




T: +62 21 2938 2700


Denny Vissaro is a manager of fiscal research at DDTC. His research expertise encompasses the fields of fiscal policy, international taxation, and tax administration. Most of his projects relate to the works of the DGT and the Fiscal Policy Agency.

Denny is a regular contributor to DDTC News. He is a regular speaker at global events, including the Rust Conference held by WU University in 2017 and Tax Policy Dialogue held by ADBI in 2021.

Denny holds the principle of international taxation and TP certificate from the Chartered Institute of Taxation, UK.

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