Personal Income Tax in Indonesia

An individual’s income is subject to 5% to 35% of progressive income tax rates.

Contributing Advisor

Meizaroh

Assistant Manager, Corporate Accounting Services

Expatriate workers need to know that personal income tax (PIT) in Indonesia is determined through a self-assessment scheme.

The country has adopted a worldwide income taxation system, meaning that individuals considered as Indonesian tax residents must pay tax to the government on the income they earned in Indonesia, and also on income they earned from abroad, unless there is an applicable double tax agreement.

Non-resident taxpayers will only be liable to pay PIT for income they earn in Indonesia, unless the country in which they are a tax resident has an applicable tax treaty with Indonesia. In these cases, the taxpayer might not pay any tax in Indonesia or pay a reduced amount.

Given these tax treatments, it is important for expatriate workers to understand their tax liabilities in Indonesia. It is advisable to use the services of registered local tax advisors to help determine which tax law regime will be applicable along with any exemptions that may bring.

Who is eligible to pay Personal Income Tax?

An individual is considered a domestic tax subject if they were present in the country for more than 183 days during a 12-month period, or they have an intention to stay in Indonesia.

The government has provided further clarification on the definition of ‘residing in Indonesia’ and the ‘intention to stay in Indonesia’.

‘Residing in Indonesia’ is defined as an individual who:

• Lives at a place of residence in Indonesia that is at their disposal and can be accessed at all times, which they own, rent, and is not a place of transit;
• Have their vital interests in Indonesia; and
• Have their habitual abode in Indonesia.

An ‘intention to stay in Indonesia’ needs to be substantiated with the following documents:

• A permanent stay permit;
• A limited stay visa;
• A limited stay permit; or
• Other documents that support their stay of more than 183 days in Indonesia.

Territorial taxation for foreigners

Foreigners who have become domestic tax subjects will only be taxed on Indonesian-sourced income. This is only applicable if they meet the expertise requirements from Appendix II of PMK-18.

Their expertise, however, must be supported by:

• A certificate issued by a government-authorized institution, or have a minimum of five years’ work experience in the field of science, technology, and math; and
• An obligation for knowledge transfer to an Indonesian citizen.

Foreigners looking to apply for the territorial tax treatment must do so through the Directorate General of Taxes (DGS). Those who were already a domestic tax subject prior to the issuance of PMK-18/2021 can also apply to the DGS for this tax treatment.

Individuals exempted from Personal Income Tax

Certain foreign expatriates, because of their special legal status, are not considered as Indonesian tax residents and are exempted from paying PIT, even if they stay for more than 183 days per year or reside and intend to stay in Indonesia.

These exemptions apply for:

• Foreign diplomatic and consular personnel;
• Military personnel and civilian employees of foreign armed services; and
• Representatives of international organizations specified by the Minister of

Tax rate

Residents and non-residents are taxed differently:

• Residents are subject to a withholding progressive tax (their net taxable income is set at graduated rates, with current rates ranging from five percent up to a maximum of 35 percent, depending on an individual’s income); and
• Non-residents are subject to a final withholding flat tax of 20 percent on gross income.

Deductions and relief

Several elements can be deduced from the gross income when determining the annual taxable income of an individual. A family is regarded as a single tax reporting unit with a single tax identity number (NPWP) in the name of the head of the family. The head of the family needs to report the income of their dependent spouse and children on their tax return. The following personal deductions are available for resident taxpayers.

Employer compliance obligations

Income tax in Indonesia is mostly paid by withholding by the employer. The tax withheld by employers must be remitted to the government body every month.

Employee compliance obligations

Expatriate employees are required to complete an annual tax return and compute their tax liability by March 31 of the following tax year. The majority of PIT is paid through statutory employer withholdings on earned income. However, for any other income that a taxpayer in Indonesia earns regularly, they must make monthly provisional tax payments to the tax department based on the income earned in the previous year.

Filing a tax return

To file a tax return, an individual must register as a taxpayer in order to obtain a tax identification number (NPWP). Expatriates must obtain an NPWP if they are a tax resident. While employers are responsible for deducting tax from their employees’ salaries, it is the individual employee’s responsibility to register as a taxpayer and file their tax returns.

Who is required to report their individual tax returns?

Individuals who are required to report their taxes are referred to as “taxpayers”. A person can be a taxpayer when they meet the subjective and objective requirements.

The subjective requirements are of two categories:

Domestic tax subject

• An individual residing in Indonesia, or
• An individual who is in Indonesia for more than 183 days within a 12-month period; or
• An individual who is in Indonesia during the tax year and plans to stay in Indonesia.

Foreign tax subject

• An individual who does not reside in Indonesia or has not resided in Indonesia for more than 183 days within 12 months but runs a business or carries out activities through a permanent establishment in Indonesia; or
• An individual who does not reside in Indonesia or has not resided in Indonesia for more than 183 days within 12 months but earns an income from Indonesia from means other than not from running a business.

The objective requirements are essentially any additional economic capacity received or obtained by a taxpayer, both from Indonesia and from elsewhere that can be used for consumption or to increase the taxpayer’s wealth, in whatever name and form.

How do you report your individual tax returns in Indonesia?

There are several ways to report your individual tax return in Indonesia:

• Directly to the tax office;
• Through postal or expedition services; and
• Authorized online tax services.

Tax deregistration when leaving Indonesia

It is recommended that expatriates leaving Indonesia should permanently cancel their tax registration to avoid any misunderstandings, and thus avoid being continuously considered a tax resident of Indonesia.

To do so, expatriates should apply to the local tax office, which will then perform a tax audit on the taxpayer’s returns and supporting documents prior to approving to deregister.

The individual should ensure that all tax-related documents are readily available in anticipation of a tax audit (including bank statements, salary slips, foreign tax documentation if applicable, work contracts, etc.).

Dividends and offshore income exempted from income tax

To increase investments in Indonesia’s financial markets and the real sector, the government has provided income tax exemptions for foreign dividends received by domestic taxpayers. The reinvestment requirements are not required for domestic dividends received by domestic corporate taxpayers.

Such concessions will require reinvestment for a certain period from when the dividend is received. PMK-18/2021 provides details on these reinvestment requirements:

Qualifying reinvestments are as follows:

• Investment in financial market instruments such as:
• Government bonds, including shariah instruments;
• Bonds or Sukuk issued by a state-owned enterprise, private companies;
• Financial investments in perception banks including shariah banks; or
• Other legal forms of investments.

Investments in financial instruments outside the money market include:

• Investment in the real sector;
• Investment in infrastructure through a private-public partnership;
• Equity cooperation in an already existing company domiciled in Indonesia;
• Cooperation with the Indonesian Sovereign Wealth Fund; or
• Lending to small and medium-sized businesses in Indonesia.

The investment must be held for a minimum of three years from when the dividend or offshore income is received. The taxpayer must also invest he dividend or offshore income in the qualifying investments by the end of the third or fourth month after the end of the fiscal year. Finally, the investment cannot be transferred except to another qualifying investment.

If the reinvestment requirement provides a 30 percent threshold, the taxpayer can enjoy the full exemption if this threshold is fulfilled. However, if the reinvestment is less than the 30 percent threshold, the taxpayer must pay income tax on the spread between the investment amount and the 30 percent threshold to enjoy the exemption.

Investors should note that the exemption does not apply to foreign citizens who utilize the DTA between Indonesia and the partner country/jurisdiction of the DTA.

Scope of taxable income in Indonesia

• According to the Personal Income Tax Law, income must be defined as any increase in economic capacity. It can consist of, among others, employment income, and personal investment income.
  • Income includes:
    • Employment income;
    • Income from the exercise of an independent profession or business;
    • Passive income (dividends, royalties, interest, insurance gains);
    • Capital gains (from the sale or transfer of property); and
    • Rents and other income from the use of property.

Taxpayer categories

Monthly ETR

There are three categories of taxpayers.

Category A

• Single with no dependent (S/0);
• Single with one dependent (S/1); and
• Married with no dependent (M/0).

Category B

• Single with two dependents (S/2);
• Single with three dependents (S/3);
• Married with one dependent (M/1); and
• Married with two dependents (M/2).

Category C

Married with three dependents (M/3).

Daily ETR

This ETR is applied to non-permanent employees who are paid on a daily/weekly/unit/piece rate basis.

• Zero percent income tax rate for a daily income of up to 450,000 rupiah (US$28.79); and
• 0.5 percent tax rate for daily income above 450,000 rupiah (US$28.79) and up to 2.5 million (US$159) rupiah.