Given that taxation accounts for a major portion of a nation’s income, it is crucial for countries to implement a tax system and set regulations to ensure that all taxpayers adhere to them. The amount imposed also has a significant impact on an investor.
After incorporating a company in Indonesia, you should take note of the tax registration process to ensure that you are compliant with the governmental regulations to avoid facing penalties.
Taxation in Indonesia
In Indonesia, various tax systems exist for individuals, companies, and investors. These include:
- Individual income tax
- Corporate income tax
- Withholding tax
- Value-added tax (VAT)
- International tax agreements
- Sales tax on luxury goods
- Tax on custom and excise
- Tax on international agreements
- Tax on land and buildings
- Tax concessions.
These forms of taxes are obligatory and must be complied with accordingly.
Taxation is a fundamental law in Indonesia. This fact is specified in the 1945 Indonesian Constitution, which states that it is a compulsory levy on citizens as well as residents and foreigners who have resided in Indonesia for a cumulative total of 183 days within a tax year.
Tax Registration in Indonesia
The taxation system in Indonesia is based on your resident status. To put it simply, a company in Indonesia is regarded as a resident when it has been incorporated in Indonesia. For resident companies which earn at least 15,850,000 rupiah a year has to register at the local branch office of their Directorate General of Taxes to open an annual tax return file.
During registration with the Directorate General of Tax, individuals are given an identity number known as Nomor Pokok Wajib Pajak (NPWP). In Indonesia, a family is a single unit for the purpose of taxation. Hence, the entire family is given only one NPWP under the family head’s name.
For tax registration in Indonesia, the following documents should be provided:
Tax Registration Authorities in Indonesia
The Directorate General of Taxes, also known as Direktorat Jenderal Pajak (DJP), is a government agency under the Indonesian Ministry of Finance. It is saddled with the responsibilities of policies regarding taxation as well as the standardising of technical matters regarding taxation.
This body is a combination of several other agencies that are sub-units. They include:
Tax Audits in Indonesia
To audit the tax activities in Indonesia, the Direktorat Jenderal Pajak uses a risk-based method to select returns for audit and can also randomly select candidates for audit. Tax refunds will automatically trigger an opening of a tax audit.
The taxpayer is then expected to submit all documents regarding the request within a month from the date of the request; otherwise, the documents not provided will not be taken into consideration during tax objections.
This process begins with an on–site visitation. After this, the information required is to be submitted in documents. The tax auditor will also pose some questions to the taxpayer and additional documents will be included based on the response provided.
The additional documents should include correlation between tax returns and the financial statement. Also, invoices and other important documents may be manually requested.
Tax Disputes in Indonesia
The Direktorat Jenderal Pajak also allows the taxpayer to file objections and make appeals. If irregularities are discovered or if the taxpayer has a dispute regarding the tax assessments, the taxpayer can file for appeals.
The appeal can be submitted to the Tax Court regarding the results of the disputed tax audit. The tax objection should be filed by the taxpayer within three months from the date that the Tax Office sends the letter of assessment.
The appeal process can come after a decision has been issued by the Directorate General of Taxes over the objection submitted earlier by the taxpayer. A taxpayer can appeal to the Tax Court against the decision of the DGT on the tax objections (if negative).
This appeal must be submitted not more than three months after receiving the decision of the DGT. Before submitting the letter, the taxpayer must have paid at least 50% of the tax which the taxpayer was expected to pay earlier. The Tax Court decides on the appeal within 12 months of the lodging of the appeal. If the appeal is rejected, the taxpayer then pays an additional penalty to the Directorate.
Finally, the decision of the Tax Court may then be challenged by the taxpayer or the Directorate General of Taxes at the Supreme Court by filing a request for a judicial review. The request from either party must be filed to the Supreme Court not more than three months after the verdict of the Tax Court was passed. The Supreme Court is then expected to conduct proper investigations and scrutiny before the final verdict is passed. The final verdict holds.
Tax Compliance in Indonesia
Compliance with certain tax obligations is necessary. Hence, taxpayers are assigned with a representative from the tax office at which they register. This account representative will be charged with monitoring the compliance of the taxpayer to tax duties and are done manually. The authenticity of the response is confirmed in the tax office’s internal database.
For foreigners who are incorporating a company in Indonesia, it is advised that you engage an experienced tax expert to ensure your tax filings comply with the latest tax laws.
What are the Penalties for Defaulting on Tax Obligations in Indonesia?
If you fail to comply to the regulations or deemed to have defaulted on your tax obligations, there are various penalties that you could face.
|General late payment||Surcharge of 2% every month|
|Tax assessment revealing underpayment||Surcharge of 2% every month for 24 months or surcharge of 50% or 100% of the underpayment made|
|Intentional alteration of returns||Surcharge of 2% every month or surchage of 50% or 150% of the underpayment made|
|Issuance of incomplete Value Added Tax invoice/ non-issuance/ late issuance/ non-conforming issuance||Surcharge of 2%|
|Non-submission of tax returns/ submission of wrong information of tax returns||200% payment of the tax underpaid or three months to a year of imprisonment|
|Deliberate refusal to register Tax ID Number (NPWP) / Improper NPWP use as a taxable investor / Refusal of tax audit / Non-remittal of taxes collected withheld, Refusal to practice book-keeping or refusal to support bookkeeping||200% to 400% payment of the tax underpaid or six months’ to six years’ imprisonment; if the offense is repeated, the sentence is doubled|
|Illicit use of NPWP without rights / Incomplete tax return||200% to 400% of the refund requested or six months’ to two years’ imprisonment|
|Intentional issuance or use of tax document of other transactions / Issuance of tax invoice as an unconfirmed taxable entrepreneur||Intentional issuance or use of tax document of other transactions / Issuance of tax invoice as an unconfirmed taxable entrepreneur|
|Improper bookkeeping, fraud, and embezzlement||200% to 600% surcharge of the actual payments or imprisonment of up to six years|
Yes, there are many tax incentives for both individuals and companies in Indonesia. You can find more about them here.
Value added tax (VAT) is the consumption tax imposed on each production stage of both goods and services until the final product sales. Business owners in Indonesia must be fully aware of the VAT system as it affects their business activities all over the country.
Tax Identification Number (TIN) is known in Indonesia as Nomor Pokok Wajib Pajak (NPWP). It is a set of number given to taxpayer (both individual and entity) for personal identification in carrying out their taxation rights and obligations (i.e. Income Tax, and VAT). NPWP is given to eligible taxpayer who has fulfill the subjective and objective requirement as stipulated in taxation laws and regulation.
The corporate tax rate in Indonesia stands at 22%, and will be adjusted to 20% from 2022 onwards.