Corporate tax is a vital part of the Indonesian tax system. The corporate tax which is paid by Indonesia’s companies helps the country’s government operate in the most suitable way possible. Therefore, corporate tax keeps the country functioning in a proper and smooth manner.
The sole purpose of any business activity is to earn profits. While this profit largely benefits the owner of the business and the employees, it will also benefit the government through corporate tax. Corporate tax refers to deductions made on entities taxable in a certain jurisdiction. Similar to companies of other nations, companies in Indonesia are required to pay their tax obligations as required by the Indonesian government. The tax is not only imposed on domestic companies in Indonesia. Foreign companies which have a permanent operational base in Indonesia are equally expected to contribute to corporate tax in Indonesia. Both domestic and foreign companies are taxed at a 25% rate. However, a withholding tax rate of 20% from the payments to foreign companies is also applied in Indonesia.
Before understanding the current corporate tax rates in Indonesia and important facts about them, a brief history of taxation and corporate tax rates in Indonesia will be provided to give proper context.
History of Corporate Tax Rates in Indonesia
The taxation history of Indonesia can be divided into three distinct yet related eras. The first one ran until 1920. In this era, the taxes were primarily levied based on one’s nationality since there were persons from various nationalities in the region. Notably, Indonesians were expected to pay land taxes during the colonial era.
However, a series of changes emerged between the years of 1920 and 1983. The improvements recorded during the period included the introduction of individual income tax, corporation tax, and the pay as you earn system. This marked the second phase of the history of taxation in Indonesia. In 1967, Indonesia introduced a mechanism on income earned by employees. This was the last period, and it officially commenced with income tax laws which were implemented in 1984 to improve existing legislation. Even today, the laws are still in practice as companies and employees in Indonesia continue to pay to corporate and individual income tax respectively.
The preparation for the first major tax reforms in Indonesia commenced in 1981. At this time, the Indonesian tax system was the one which had been adopted from the colonial Dutch administration. Unfortunately, the tax system suffered some shortcomings related to inefficiency. The system was inefficient due to the fact that only a limited number of taxpayers contributed towards taxes. Inefficiency was also brought about by the fact that the system did not embrace modern methods, leading to high rates of tax avoidance. However, this is because during those times, modern methods had not become popular in the country. In any case, there was a need for a reviewing of the system; thus, tax reforms took place.
The Role Played by Corporate Tax Within Indonesia’s Tax System
Corporate tax does not only exist to benefit the government. Corporate tax also plays a crucial role within the tax system of Indonesia.
Tax systems are not easy to manage; such is also the case regarding the tax system of Indonesia. Proper management of a tax system often requires much money to be spent. As a result, the corporate tax which has been collected from companies helps in the management of the tax system of Indonesia by reducing the financial strain which it is required to bear for its proper operation.
Corporate tax also aids in improving Indonesia’s gross domestic product (GDP). For the state to maximize economic growth through taxation, there must be increases in consumption, government spending, and investment and international trading. However, these cannot be done unless significant revenue has been collected; this is possible through the corporate tax which companies have paid.
Corporate taxation in Indonesia aids in maintaining the legality and integrity of companies. The imposition of taxes ensures that the company is operating within the law and that there are no illegal business operations made by the company. Corporate tax also helps in making records of how the company operates.
The most important fact about corporate tax is that it helps raise revenue for the government. Indonesian government functions depend on the tax collected to aid the nation to develop its infrastructure. Therefore, taxation is vital in ensuring that the country’s development is on par with the rest of the world. It also helps the government to regulate unnecessary competition within the economy. Businesses should, therefore, not feel burdened with corporate taxes because, in the absence of these corporate taxes, it would become impossible for these businesses to run smoothly in Indonesia.
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Current Corporate Tax Rates in Indonesia
The corporate tax rate is at a flat rate of 25%. However, a tax cut of 5% is available to public companies which satisfy the requirement of having a minimum listing of 40%. Small enterprises which have a gross turnover of less than 50 billion rupiah may also claim a 50% exemption with regard to the taxes which they would normally pay.
Corporate Tax Exemptions in Indonesia
Regardless of their sources of income, all firms in Indonesia are expected to pay their share of corporate income tax. Foreign companies in Indonesia are taxable if they exist physically in the country and also actively conduct business affairs within there. Should such companies have branches located elsewhere, they will be taxed based on income derived within Indonesia. A company’s taxable income is obtained by subtracting deductible expenses from assessable income.
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It is, however, essential to point out that some exemptions exist concerning corporate tax in Indonesia. As has been mentioned, businesses with a gross turnover of less than 50 billion rupiah are entitled to a 50% tax reduction. This figure is equivalent to approximately US$3.53 million. Small and medium-sized enterprises (SMEs) which earn less than 600 million rupiah annually are not subject to value added tax (VAT). In some instances, companies which have a gross turnover of less than 4.8 billion rupiah in one fiscal year are eligible for a tax exemption of 0.5% on their gross revenue. However, this occurrence is not apparent as some companies, in spite of having met this criterion, do not receive any tax exemption.
How Indonesia’s Corporate Tax Rates Compare to Those of Other Countries
The corporate income tax rate in Indonesia is 25%, making it different from individual income tax. The amount of taxable individual income tax imposed on Indonesia’s taxpayers varies depending on the amount of income earned.
Certain countries have much higher tax rates than others. For example, Denmark has an extremely high tax rate of 55%, as does Spain at 52%. Other countries with very high tax rates are Portugal at 48%, the United Kingdom at 45%, and Papua New Guinea at 42%. Indonesia has favorable tax rates when compared to these countries. On the other hand, some countries do not impose any income tax. These countries include Bahrain, Brunei, Kuwait, Oman, Qatar, and Saudi Arabia. These countries have clearly made adequate plans to enable their citizens to work and live in a tax-free environment.
Corporate tax can sometimes become a burden to businesses in Indonesia. In some cases, a company might have more than the standard 25% rate imposed upon it. Should this happen, not only does the firm become less competitive in the market, but it also risks permanent closure by becoming financially insolvent.
However, there are three ways by which companies may ease their corporate tax burden in Indonesia. The first way is through the meticulous keeping of records and receipts. With the correct receipts and records, the country’s tax system through its human resource department would be able to impose the correct tax on the business and save it from any additional tax burden.
It is also recommended that business owners seek a tax professional for guidance about how to ease the company’s corporate tax burden. This is because tax professionals have much knowledge of taxes and would provide much information on the techniques to use to ease a business’s corporate tax burden.
A third method which should be used in combination with the prior two is that of being aware of the corporate tax rates. Those who are unaware of the corporate tax rates may end up inadvertently paying a larger amount of corporate tax than they normally would have paid. Also, business owners who fail to remain up-to-date about the corporate tax rates of Indonesia might not apply for tax exemptions even if the business is eligible for one or more of these exemptions. Therefore, the importance of being informed about the existing corporate tax rates is obvious.
Corporate Tax in Indonesia FAQs
Which Companies are Tax Residents of Indonesia?Tiwi2020-04-02T14:23:57+08:00
The primary criterion for a company to be considered a tax resident of Indonesia is having a permanent establishment or primary place of management in Indonesia. Resident companies of Indonesia are taxed based on the income they earn anywhere in the world.
What expenses are Deductible in Indonesia?Tiwi2020-04-02T14:22:49+08:00
Certain expenses in Indonesia are tax-deductible. These expenses include certain expenses directly related to a company’s operations as well as certain donations. Among these expenses are occupational expenses, pension contributions, donations for disaster relief, and donations for social infrastructure, among others.
How has Indonesia’s Corporate Tax Rate changed over the years?Tiwi2020-04-02T14:21:46+08:00