Information on Changes to Indonesia's Income Tax Regime

In July 2000, the Indonesian parliament made significant changes to Indonesia's income tax regime through the enactment of Laws No. 16 and 17 of 2000. These laws amend Law No. 6 (General Provisions and Procedures) and Law No. 7 (Income Tax) of 1983. The Directorate General for Taxes (DGT) in the Ministry of Finance has since issued a number of regulations, circulars, and informal statements intended to clarify various aspects of the new laws. While the DGT's administration of these laws is still evolving, they will likely affect the income tax obligations of most U.S. citizens working in Indonesia:

· With few exceptions, resident expatriates working in Indonesia are now required to register with the Tax Office and file annual income tax returns (see Section III).

· For most expatriates working in Indonesia, the net effect of the tax law changes will likely be significantly higher Indonesian income tax obligations beginning in tax year 2001 (see Section IV). The higher tax obligations result from:

1. Law 17 increased the number of tax brackets from three to five and raised the rate on the top bracket (applicable to annual income above Rp 200 million) from 30 to 35 percent.

2. The DGT appears set to implement a provision of Indonesian tax law mandating the taxation of worldwide income (WWI). Previously, the DGT's standard practice was to tax income received from an individual's job in Indonesia only.

· There are significant unresolved tax policy and administration issues that could further affect the income tax obligations of expatriates, including U.S. citizens, working in Indonesia (see Section V).

· As of March 2001, there is no longer a blanket income tax exemption for contractors, consultants, and suppliers working on government projects funded by foreign loans and grants (see Section VII). Government Regulation 43/2000 dated June 23, 2000 has deleted the express exemption from income taxes for individuals working on loan-funded government projects. Subsequent regulations have affirmed the income tax exemption for contractors, consultants and suppliers under grant-funded government projects while imposing taxes on their personnel, sub-contractors, sub-consultants and sub-suppliers. U.S. citizens working on such projects should contact their tax advisors for further information.

This paper provides informal, background information on key points of Indonesia's evolving income tax regime for the use of U.S. citizens living in, or considering moving to, Indonesia. The Embassy provides this information with no warranty of any kind, and does not warrant that the information will meet your specific requirements. The Embassy also assumes no responsibility for the accuracy of the information. This paper does not represent an official U.S. Government position on any issue of Indonesian income tax policy or administration. American citizens should consult their tax advisors for more detailed information.

Section VIII provides contact numbers for sources of more detailed information on Indonesia's income tax regime and its implications for filers of U.S. income tax returns.

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II. Tax Subjects vs. Non-Tax Subjects and Resident vs. Non-Resident Taxable Persons

Indonesian law divides foreigners into two groups, tax subjects and non-tax subjects. According to Article 3 of Law No. 17, the following individuals are not considered tax subjects:

The information in this paper does not apply to individuals in the above groups.

Indonesian law further divides tax subjects into two categories, resident and non-resident taxable persons. Taxable persons can be either individuals or other taxable entities, such as corporations or certain inheritances. The information in this paper applies to individual, resident taxable persons only.

Article 2(3) of Law No. 17 defines a Resident Taxable Person as an individual residing in Indonesia or present in Indonesia for more than 183 days in any 12 month period, or an individual residing in Indonesia during a tax year and intending to reside in Indonesia.

According to DGT decision number Kep-516/PJ/2000, dated December 4, 2000, an individual taxpayer who is engaged in business or who is self-employed, or who obtains income that exceeds the non-taxable income allowance (Rp 2.88 million per year with an allowance for dependents) must register for the purpose of obtaining a Taxpayer Identification Number (NPWP). Expatriates living in Jakarta should register at the Tax District Office for Foreign Companies and Foreigners (BADORA); individuals living in other areas should register at the local tax office in their place of residence (see section VIII for contact information for selected local tax offices).

The above DGT decision also stipulates that individual taxpayers engaged in trade or business activities or who are self-employed are obliged to obtain a Taxpayer ID number not later than one month after the business activity has occurred. Individual taxpayers who are not self-employed or engaged in trade or business activities but receive income above the non-taxable income threshold must obtain a Taxpayer ID number not later than the end of the following month after the receipt of the income.

BADORA informs that in order to register, expatriate taxpayers should fill out a registration form available at each tax office and submit it with the following documents, as appropriate:

b) If the taxpayer is employed, a photocopy of the Expatriate Employment Permit.

c) If the taxpayer is an employee, a photocopy of the Taxpayer ID Number of his or her employer.

d) If the taxpayer is self-employed or runs a business, his or her Business Permit.

Indonesian law carries heavy criminal and civil penalties for failure to register. Article 39 of Law No. 16 of 2000 provides that if an individual taxpayer deliberately fails to obtain a Taxpayer ID number, with the result that losses may accrue to the state, then he or she shall be guilty of a criminal offense punishable with a maximum term of imprisonment of 6 years and a maximum fine of 400 percent of the tax owed.

When a registered taxpayer intends to permanently depart Indonesia, he or she must also submit an application to cancel his or her Taxpayer ID Number. DTG officials have warned that failure to cancel the Taxpayer ID Number could expose taxpayers to contingent tax liabilities in the event they return to Indonesia.

Indonesia taxes on a calendar year basis. Individual taxpayers are required to pay tax due by March 25 and file Form SPT 1770 (Annual Tax Return) by March 31 of the year following the taxable year. Form 1770 must be filled out in Indonesian, with amounts listed in rupiah, and submitted to BADORA or the appropriate local tax office. In many cases, expatriates may also need to file one or more of the following supporting schedules or documents:

b) Form 1770-II: Income Tax Withheld/Collected by Third Parties (including foreign tax returns and other documents supporting the calculation and payment of foreign taxes)

c) Form 1770-III: Income Which Has Been Subject to Final Tax, Separate Income Tax, and Excluded Income

f) Copy of Form 1721-A1 and/or 1721-A2 (for taxpayers receiving employment income)

g) Financial statements for taxpayers who chose to maintain full accounting records.

Family units (including dependents) are required to file a single tax return unless the tax office grants permission for separate filings by each spouse.

In addition to the annual filing requirement, many expatriates may also be required to file monthly tax returns and pay monthly tax installments. Individual taxpayers required to file monthly must do so by the 20th day of the following month. Tax installments must be paid by the 15th of the following month.

Minister of Finance Decree No. 522/KMK.04/2000 specifies that individual taxpayers who are not engaged in business or who are not self-employed shall not be required to submit monthly tax returns. There is some confusion about whether taxpayers who are not required to file monthly returns must nonetheless make monthly tax payments. As of February 2001, the Tax Office seems to hold the view that taxpayers should make monthly tax payments even if they are not required to file monthly tax returns.

Minister of Finance Decree No. 522/KMK.04/2000 also establishes the method for calculating the amount of monthly income tax installments taxpayers must pay. According to this decree, taxpayers who filed returns in the previous tax year should pay an installment equal to 1/12 of their previous year's tax due on regular income after deducting income tax withheld and creditable income tax accrued or paid abroad. There are also guidelines for irregular sources of income. For new taxpayers, the amount is calculated based on the application of the general tax rate to annualized net monthly income (divided by 12), after the deduction of the tax-free allowance from annualized net monthly income.

Individuals may request a filing extension for three to six months from BADORA or the appropriate local tax office. If the taxpayer does not receive a response within one month, the request is considered approved. However, the extension applies only to the legal filing requirement; individuals must still pay all tax due by the March 25 deadline. Interest on unpaid tax bills accrues at 2% per month up to a maximum of 24 months.

For most expatriates working in Indonesia, including U.S. citizens, the net effect of Laws No. 16 and 17 and subsequent DGT implementing decrees will likely be significantly higher Indonesian income tax obligations beginning in tax year 2001. The higher tax obligations result from reconfigured and more steeply progressive tax rates applicable to returns beginning in 2001, and the apparent implementation of a worldwide income taxation system.

New Tax Rates

Law 17 reconfigured Indonesia's tax brackets, increasing the number of brackets from three to five and raising the rate on the top bracket (applicable to annual income above Rp 200 million) from 30 to 35 percent. The following table compares the tax rates applicable to taxable income in 2000 and previous years with the new rates applicable to tax year 2001.

*Taxable Income*	*2000 Tax Rate*	*2001 Tax Rate*
Up to Rp 25 million	10%	5%
Rp 25 million to Rp 50 million	15%	10%
Rp 50 million to Rp 100 million	30%	15%
Rp 100 million to Rp 200 million	30%	25%
Above Rp 200 million	30%	35%

The effect of the new tax brackets on an individual's tax obligations obviously depends on a variety of factors, including the amount of taxable income earned, the currency in which the individual earns his income, and the exchange rate. However, the following example illustrates the potential effect of the new tax rates on the Indonesian tax obligations of higher-income individuals. An individual (expatriate or Indonesian) earning $200,000 in wages and taxable benefits in tax year 2000 would be assessed a tax of approximately Rp 561.2 million or $59,079 (at Rp 9,500/$), before allowable credits and other adjustments. However, in tax year 2001, the tax assessment on the same amount of taxable income would rise to approximately or Rp 631.2 million or $66,447.

Worldwide Income

A second development that could lead to significantly higher Indonesian tax obligations for expatriates living in Indonesia is the DGT's apparent intention to enforce a provision of Indonesian tax law mandating the taxation of worldwide income (WWI). Previously, the DGT only sought to tax income received from an individual's job in Indonesia, not passive income from investment, rental properties, or other sources outside of Indonesia.

According to information provided by the DGT, residents of Indonesia are "...subject to tax on the basis of worldwide income principle, [which] comprises any increase in economic prosperity received or earned, whether originating from within Indonesia or outside Indonesia...." Despite this clear-cut statement, the DGT has issued conflicting public statements in 2000 and 2001 about the extent to which it will enforce the WWI provision.

U.S. citizens should be aware that unlike in the U.S., Indonesian law does not provide a special tax rate for long-term capital gains (the U.S. currently taxes long-term capital gains at a 20% rate). All forms of active and passive income, including long-term capital gains, are taxed at the rates shown in the table above. It is thus likely that beginning in 2001, U.S. citizens whose marginal income is above the Rp 100 million threshold for the 25% tax bracket (currently $10,526) and who have significant long-term capital gains, will face higher Indonesian tax obligations.

V. Unresolved Tax Policy and Tax Administration Issues

Despite the passage of Laws No. 16 and 17 and the issuance of various DGT and MOF implementing decrees, there remain significant unresolved tax policy and administration issues that have the potential to further affect the income tax obligations of expatriates working in Indonesia, including U.S. citizens. The DGT has not yet developed detailed guidance on these issues, most of which are related to the taxation of worldwide income. U.S. citizens living in Indonesia should consult with their tax advisors about the status of these issues.

As of February 2001, some of the most significant unresolved tax policy and administration issues requiring resolution or clarification are as follows:

· Losses on Passive Income: DGT officials have made conflicting statements about whether and how the DGT will recognize passive losses. As a result, it is not clear how individuals should report losses from sources of passive income, such as capital losses or rental losses (see below). In the past, the DGT generally permitted taxpayers to offset foreign losses against foreign income on a per country basis, but only to the extent of the income earned in that country.

· Taxation of Overseas Rental Income: DGT officials have given conflicting advice about how the DGT will tax rental income. Indonesian rental income is subject to a final tax of 10% of gross rent, and some commentators have suggested that the same taxing method should be applied to foreign rentals. In the past, the DGT accepted that, in the case of foreign rentals, taxpayers could deduct rental expenses against rental income to arrive at net taxable income or loss.

· Taxation of the Sale of a Residence: In most instances, capital gains from the sale of a primary residence are not subject to U.S. income tax or reported on U.S. Form 1040. However, capital gains from the sale of a residence would appear to meet the definition of "income" under Indonesian law, even if the residence is in the U.S. and the owner is only temporarily residing in Indonesia. The DGT has not issued detailed guidance on this issue.

· Implications of Indonesia's "Economic Unit" Concept for Expatriate Taxpayers: Unlike in the U.S., Indonesian law establishes an "economic unit" concept under which all income earned by spouses and dependent children is combined for the purpose of determining taxable income. As the DGT implements a WWI taxation system, it is not clear to what extent offshore income (passive or active) earned by a dependent spouse or children is taxable in Indonesia, including the income of a U.S. citizen spouse working outside Indonesia.

· Monthly Installments: Despite existing guidelines on monthly installments (see Section III), there are still significant uncertainties, particularly in relation to the receipt of irregular income.

· Language of Tax Returns: At present all tax documents including registration forms, tax returns and instructions, are in the Indonesian language. The International Business Forum (IBF), a Jakarta-based group of 16 chambers of commerce, has made representations to the DGT supporting the need for official English versions.

· Currency Used on Tax Returns: The DGT requires figures to be reported in Rupiah. However, many expatriates receive income and suffer losses in foreign currencies over a period of time at various exchange rates. In some cases, they may experience artificial gains purely as a result of the depreciation of the Rupiah against foreign currencies. In addition, many expatriates may find it difficult or impossible to maintain financial records for offshore income in Rupiah. The IBF and Jakarta-based tax professionals have encouraged the DGT to permit the use of foreign currencies, as is currently permissible for designated foreign organizations operating in Indonesia.

· Fairness in Tax Enforcement: The DGT has stated repeatedly that it is under strong pressure to increase income tax collections. U.S. citizens working in Indonesia are concerned that the DGT may unfairly target Americans for enforcement because of the detailed information on worldwide income required on U.S. tax returns. Broader fairness concerns involve the DGT's emphasis on individual taxpayers when tax compliance among Indonesian corporations is very low and on foreign vs. Indonesian-citizen taxpayers.

· Administrative Capacity in the DGT: As the above issues make clear, implementing a WWI taxation system requires sophisticated understanding of the characteristics of various kinds of passive income.

VI. The U.S. - Indonesia Tax Treaty and the Avoidance of Double Taxation

Note: Tax treaties are very technical. The provisions described below are subject to a variety of restrictions relating to, among other things, place of fiscal residence, source of income, and other rules of taxation. U.S. citizens should consult their tax advisors or the IRS about these issues. Section VIII gives contact information for the IRS office in Singapore.

The U.S. - Indonesia tax treaty, signed in 1988 and amended in 1996, contains provisions designed to avoid double taxation of U.S. citizens resident in Indonesia or Indonesian citizens resident in the U.S. This treaty remains in force today.

For U.S. citizens, the key section of the treaty is Article 23, under which the United States allows, subject to U.S. law, U.S. citizens or residents to take a U.S. tax credit for appropriate amounts of Indonesian tax. The credit is based upon the amount of tax paid to Indonesia, but may not exceed the limitations provided by United States law for the taxable year. Article 23 also allows residents of Indonesia, subject to Indonesian law, to claim as a credit against Indonesian tax the appropriate amount of income taxes paid to the United States.

With the implementation of a worldwide income taxation system in Indonesia, many U.S. citizens living in Indonesia may face complex decisions concerning to which country they should pay tax on particular sources of income, and in which country they should claim a credit. (In some situations they may have to pay tax to both countries if tax rates between the U.S. and Indonesia differ on certain types of income.) IRS Publication 514 (Foreign Tax Credit for Individuals) provides information on how U.S. taxpayers should calculate the foreign tax credit on their U.S. returns. This publication is available on the IRS web site (www.irs.gov). On the Indonesian side, taxpayers normally list the amounts of foreign tax paid on Form 1770-II.

Article 26 (Exchange of Information) of the tax treaty allows the United States and Indonesian tax authorities to exchange information in connection with the enforcement of treaty provisions or the domestic tax laws of either state. Under the treaty, either the U.S. or Indonesia may request specific information from the tax authorities of the other state, including information held by private third parties. In such a case, the tax authorities of the other country are obliged to acquire and provide the requested information (subject to applicable laws), including U.S. tax return information. A request by Indonesia to the United States for information must concern a specific taxpayer on whom there is an open tax investigation for a specific year or years.

IRS Publication 901 (U.S. Tax Treaties), available on the IRS web site, gives general background information on U.S. tax treaties. Copies of the U.S. - Indonesia Tax Treaty are available from most Jakarta-based tax consultants, the U.S. Embassy, or the following address:

VII. Income Tax Status of Individuals Working on Donor-Funded Government Projects

As noted above, as of March 2001, there is no longer a blanket income tax exemption for contractors, consultants, and suppliers working on government projects funded by foreign loans and grants. Government Regulation 43/2000 dated June 23, 2000 deleted the express exemption from income taxes previously granted to individuals working on loan-funded government projects. According to the DGT, individuals working on projects under loan agreements signed on or after June 23, 2000 are now subject to income tax in accordance with Indonesian law.

As to grant-funded government projects, the DGT has stated that contractors, consultants, and suppliers working on government projects will continue to enjoy the exemption from income taxes provided by Government Regulation No. 42 of 1995. Subsequent regulations have affirmed this statement. However, subsequent regulations have also imposed taxes on 1) the employees of contractors, consultants, and suppliers and 2) sub-contractors, sub-consultants and sub-suppliers working on grant-funded government projects. In summary, only the contractor, consultant, or supplier organization is entitled to the income tax exemption. U.S. citizens working on government projects funded by foreign grants or loans should contact their tax advisors for further information.

Notwithstanding the above regulations and decrees, USAID grantees and contractors working in Indonesia are entitled to an exemption from Indonesian income taxes under relevant Strategic Objective Agreements (SOAGs) between USAID and the GOI. SOAGs are authorized under the 1950 U.S.-Indonesia Economic and Technical Cooperation Agreement. According to USAID, the exemption from Indonesian income taxes applies to the employees of any contractor, grantee, or other organization carrying out activities financed by USAID under the SOAG. Individuals working on USAID-funded projects should contact USAID's Legal Advisor for further information (see Section VIII for contact information).

VIII. Contact Numbers for Further Information

BADORA Tax Office (Tax District Office for Foreign Companies and Foreigners)
Jalan Taman Makam Pahlawan Kalibata
P.O. Box 3322 Jakarta Selatan 12760
Tel: (6221) 798-0012, (6221) 798-1116 Ext. 262 and 359
Fax: (6221) 798-0022

(The BADORA tax office serves individuals living in the DKI Jakarta. Individuals living outside of Jakarta should contact the appropriate regional tax office.)

Selected Regional Tax Offices

Medan
Kanwil I Pajak (Tax Regional Office I)
Jl. Diponegoro 30A, Medan 20152
Tel: (061) 415-3044, 453-8833
Fax: (061) 453-8340

Surabaya
Kanwil IX Pajak Jl. Dinoyo 111, Surabaya 60265
Tel: (031) 562-1010 Fax: (031) 561-5363

Bandung
Kanwil VII Pajak Jl. Asia Afrika 114, Bandung 40261
Tel: (022) 423-2198 Fax: (022) 423-5042

Denpasar
Kanwil IV Pajak Jl. Kapten Tantular (GKN II), Denpasar 80235
Tel: (0361) 263-891/2/3/4 Fax: (0361) 263-895

Mataram
Kantor Pelayanan Pajak (Tax Services Office)
Jl. Raya Langko 74, Mataram 83125
Tel: (0370) 217-95 Fax: (0370) 633-724

Makasar
Kanwil XII Pajak Jl. Urip Sumohardjo (GKN), Makasar 90232
Tel: (0411) 456-131/2 Fax: (0411) 456-976

Jayapura
Kanwil XV Pajak Jl. Jend. A. Yani 8 (GKN), Jayapura
Tel: (0967) 534-435 Fax: (0967) 535-814

Balikpapan
Kanwil XI Pajak Jl. Jend. A. Yani 68-69, Balikpapan 76113
Tel: (0542) 436-368 Fax: (0542) 421-900

U.S. Internal Revenue Service
Taxpayer Service Specialist American Embassy - Singapore
Tel: (65) 476-9413
Fax: (65) 476-9030

(The IRS Taxpayer Service Specialist answers phone and fax inquiries about U.S. income tax issues, including tax credits and exclusions. The IRS can also answer questions about the U.S.-Indonesia Tax Treaty. It does not deal with Indonesian tax issues.)

U.S. Agency of International Development
Natalie Freeman, Legal Advisor USAID/Jakarta
Tel: (6221) 3435-9306
Fax: (6221) 380-6694

The American Chamber of Commerce in Indonesia (AmCham)
Executive Director - Maggy Groccia
World Trade Center, 11th Floor Jl. Jendral Sudirman, Kav. 29-31 Jakarta, 12920 Indonesia
Tel: (6221) 526-2860
Fax: (6221) 526-2861
E-Mail: info@amcham.or.id

AmCham Tax Committee
Philip J. Shah, Co-Chair
Karen Mills, Co-Chair

(The AmCham can provide a list of U.S. and Indonesian member firms that offer tax-consulting services.)

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Information on Changes to Indonesia's Income Tax Regime