An expat’s guide to the Indonesian tax system

With its rich cultural landscape and international population, Indonesia has become a prominent location for expats looking to pursue new opportunities.

However, due to the unfamiliarity of Indonesian law and the regulations that surround it, an ongoing cause for confusion is the tax obligations for non-locals.

If you're making plans to relocate to Indonesia or are an expat who is new to its tax regulations, then this is for you!

From the types of taxable income to the different tax brackets that exist, this article aims to help readers navigate their way around the Indonesian Tax System.

Here are the list of topics covered in this guide:

• Tax residency criteria
• Taxation rates in the Indonesian tax system
• Taxable income in Indonesia
• The taxpayer registration process
• The tax identification number (NPWP)
• Planning to leave Indonesia? Remember to de-register
• Get support from Airswift

Tax residency criteria

In December 2011, the Indonesian Directorate General of Taxes (DGT) established an updated set of criteria that is presently used to determine tax residency.

Based on this, tax obligations can be imposed unto two separate groups: Individual Taxpayers and Companies. Let’s take a look at the criteria for each of them below:

Individual Taxpayers

• The individual is considered as a tax resident if they have lived in Indonesia for more than 183 days within a 12-month period
• Or has been present in Indonesia for under 183 days within a fiscal year but has the intention to continue staying there.
• The intention can be displayed when the individual obtains a working visa, work and stay permit or an employment contract that extends beyond 183 days.

Companies

• A company is considered as registered in Indonesia if its establishment is based on Indonesia laws or if it is set up in Indonesia.
• A company is considered domicile in Indonesia if its head office is based in Indonesia, has an administrative or financial headquarter in Indonesia or if members of its management reside in or are domiciled in Indonesia.

If you'd like to learn more about tax for companies, our helpful guide on corporate tax will have everything you need to know. For this article, our focus will be placed on the tax regulations for individual expats in Indonesia.

Taxation rates in the Indonesian tax system

In Indonesia, personal income tax is calculated through what is known as a self-assessment system. This means that resident taxpayers are required to file their own individual tax returns.

There are plenty of legitimate registered local tax advisors that expats can engage to help them find their way around the Indonesian taxation system. This guide is a great way to get a head start on understanding basics surrounding the regulations that you may encounter along the way.

Keep in mind that all tax residents are subjected to a Withholding Progressive Tax which is a form of income tax that is contributed to the government by the employee of the income recipient.

The progressive tax system means that the higher your income, the bigger the percentage of tax imposed. Tax rates range from 5 percent to 30 percent depending on the individual’s income bracket.

These rates currently fall into four applicable tax bands:

Taxable income in Indonesia

Practically all forms of income generated by tax residents in Indonesia are considered as taxable and according to Article 4, Chapter 3 of the Personal Income Tax Law, these include:

• Employment income
• Income from the exercise of an independent profession or business
• Passive Income (dividends, royalties, interest and insurance gains)
• Capital gains (from the sale or transfer of property)
• Rent collection and any other income incurred from the use of property

On the flipside, non-residents are subject to a flat rate 20 percent withholding tax on their gross income. There are however, instances in which this rate can be reduced via tax treaty provisions or exempt services that may qualify as business profits.

Additionally, non-residents are only liable to pay personal income tax (PIT) for Indonesian-owned income unlike their tax resident counterparts who are taxed on the income they earn in Indonesia and abroad; Unless there is a Double Taxation Avoidance Agreement between the individual’s country of residence and the Indonesian government.

In cases such as this, the non-resident taxpayer may not be required to pay any tax in Indonesia or pay a reduced amount.

Deductions

Under some circumstances, individuals may qualify for certain deductibles. The most common ones include individual taxpayers (IDR 54m), spouse and/or dependant individuals (IDR 4.5m).

The taxpayer registration process

Where do I register?

Before you file your taxes, you will need to register at the Tax Service Office in your city of residence in order for you to get your tax identification number (NPWP). For expats based in Jakarta, you will need to register at the Tax Office for Foreign Bodies and Expatriates (KPP BADORA).

Taxpayers can choose to employ a representative (such as an accountant) to assist them in the registration process but this step is entirely up to you. If you decide to appoint a representative, do remember that you will be held legally accountable for any unsettled taxes so make sure to only give this responsibility to a reliable and trustworthy source.

What should I have with me?

As part of the registration process, these are the documents you will need to have with you:

• The completed tax registration form
• A copy of all pages of your passport
• A copy of your work permit
• A certificate of domicile for you and your employer
• A copy of your employers NPWP
• Letter of Authorization (only if you send a representative to complete your registration process)

What are my tax obligations in Indonesia?

For residents in Indonesia. There are currently two types of tax returns that they must file:

• Monthly Individual Income Tax
• Annual Individual Income Tax

For individual taxpayers, the monthly tax payment deadline is usually by the 15^th of the following month and monthly submission of all necessary reports should be no later than the 20^th of the following month. For annual filing, the deadline is at the end of the 3^rd month after the tax year ends.

Do keep track of important tax payment dates in Indonesia as late payments may incur interest penalties starting at 2 percent monthly and it can go all the way up to 48 percent.

The tax identification number (NPWP)

One of the most important things you must do before you file your taxes is obtain your NPWP or your tax identification number.

All resident individuals in Indonesia are required to have this and the same rule applies to expat residents in the country.

Once you’ve received your own NPWP from the tax office, you will be able to pay your monthly income taxes, file annual tax returns and more. Some other activities that require an NPWP in Indonesia include:

• Obtaining a driver’s license
• Opening a bank account
• Applying for a credit card with a local bank
• Purchasing a vehicle
• Building a house
• Renewing the registration of a vehicle that is above a certain value
• Transferring money from an Indonesian bank account to a foreign account

Penalties for failing to secure your NPWP can be harsh so remember to do this as quickly as possible or you may risk imprisonment of up to six years and a maximum fine of up to four times more than the total amount of tax due

Planning to leave Indonesia? Remember to de-register

For expatriates who are making plans to leave Indonesia on a permanent basis, do remember to cancel your tax registration.

All you need to do is submit an application to the local tax office in your city of residence to schedule an audit on your tax returns history and the supporting documents. Once this is done, your application to de-register should be approved.

Do take note that this process can be lengthy and may take up to three years for the audit to be complete. During this time, you are free to leave Indonesia, but the government may hold on to several personal documents while they complete the audit.

Get support from Airswift

Relocation can be daunting especially when you’re dealing with the rules and regulations that come with the new surroundings.

This is why working with a global employment and mobility team like Airswift is a great way to find support from experts in the field who can help you simplify the process so you can focus on the things that really matter.

Get in touch with us today to learn more about what we do and how we can help.