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.
If you need any assistance in working out your company’s corporate tax obligations, we at Paul Hype Page & Co can be of assistance. We will help you reduce your tax burden to as low a level as possible without overstepping any legal boundaries. By using our solutions, your company will be able to help itself to a greater portion of its profits.