This is a brief overview of the requirements, calculation and payment of personal income taxes in Indonesia.
The Employer’s and Individual’s Role in Personal Income Tax
Your employer is the body responsible for the calculation of any taxes that need to be withheld from your salary, monthly payment of these taxes to the tax authorities, and provision of annual numbers to the employee. The individual employee must then file an annual income tax return for the year in question.
Under the old system, the income tax of an individual who only has one source of income was processed by his or her employer. Employers were able to pay the tax of all their employees under one NPWP number (Nomor Pendaftaran Wajib Pajak – Registration number for those obligated to pay taxes), assuming that employees only had this one source of income.
Currently, the individual taxpayer is legally responsible for ensuring that they’ve registered with the tax office and comply with the regulations and payment of the taxes due.
Employers have three choices for the personal income tax calculation:
- Employee’s salaries are classified as Gross and tax is calculated on this, withheld from employee and paid via the banking system to the tax office.
- Employee’s salaries are classified as Net and then grossed up to establish a gross amount from which the tax is calculated to bring the remainder back to the net amount as expressed in the employment letter.
- The tax is calculated on the net and treated as a fringe benefit.
Of special concern to expatriates in when your salary is quoted and paid net. Though your employer may have agreed in your contract to pay your taxes – you are still personally liable for their payment. Ask your employer to show you receipts showing that taxes have been paid for you on a monthly basis. The form required is 1721-A1, which is the actual annual return and a S.S.P. which is the actual proof of payment. It’s very good to have your compensation package expressed in gross amounts. It then is defensible that as you only received the net amount the employer has deducted tax and is therefore liable for the payment to the Tax Office.
Those expatriates working for local PT companies (not the case for multinational firms) may find that in the past their employer “negotiated” their tax with the tax officials. This could come back to haunt you in the future. If your salary was quoted net, and you felt your local employer had paid your taxes according to your agreement, you may find in fact that the taxes were not paid and you are then legally liable for back taxes.
Each employee is supposed to receive their monthly tax calculation from their employer, and at the end of the year or the latest by March of the next year, the company has to produce Form 1721-A1, which summarizes how much taxes the company has been paying for each employee. The employee needs to use Form 1721-A1 to be included in their personal annual income tax return.
NPWP … The Tax Identification Number
The Indonesian tax office (Direktorat Jenderal Pajak) requires all resident individuals in Indonesia to have their own personal tax numbers, Nomor Pendaftaran Wajib Pajak or NPWP. This regulation includes expatriates. Naturally this excludes young children who are too young to work.
This regulation has not been enforced in the past due to the reliance on individuals having no source of income outside their employment or whose earnings fall outside the minimum level for inclusion in the tax scheme. The government assumption was that companies were paying the tax for their employees, but in fact it wasn’t happening in many local firms.
The tax office requires all expatriates resident in Indonesia to register with the tax office and obtain their own separate tax number (NPWP) and pay monthly income taxes, file annual tax returns, and pay tax on their income earned outside Indonesia, less tax paid in other jurisdictions on the additional overseas income.
The government defines an individual taxpayer, who is required to register for NPWP and file income tax returns, as:
- Employed individuals who earn income in excess of the non-taxable income,
- Employed individuals who receive income outside of their main salary,
- Individual taxpayers who receive income from trade/business activities, self-employment or exercise of profession;
- Individual taxpayers who receive income from capital; and
- Foreigners who reside or present in Indonesia for more that 183 days within a single period of 12 months or who are present in Indonesia and have the intention to live in Indonesia. This 12 month period is based on today going back 12 months. It is not a calendar year. (The “intention” to live in Indonesia is seen by such actions as applying for a work permit, owning or renting a house for an extended period, and bringing family members to Indonesia.) Please be advised that, according to the law, those who must pay Indonesian income taxes if they’ve been here the 183 days in a calendar year, includes, those expats here on ITAS , ITAP, business visa or social/visit visas!
- If you stay less than 183 days in a year, then you may not be obligated to pay Indonesian income tax (only taxes from your home country).. You must prove it by showing your visa stamp and fill out FORM 1770 Individual and Monthly SSP (Surat Setoran Pajak). Of course you must have an income tax number first to complete this form.
- Dependent spouses are included in the husband’s tax number and do not have to have a separate number.
Where to Register
Taxpayers must register at the Tax Service Office in your city of residence. Expats living in Jakarta are required to register with the Tax Office for Foreign Bodies and Expatriates (KPP BADORA).
Your registration, monthly tax payment and annual return can be prepared and submitted by appointed representative, usually an accountant specializing in tax matters. Be sure that you receive a good referral, as remember you yourself are legally accountable for any non-payment of taxes.
To register you need:
- a completed registration form
- photocopies of all the pages in your passport
- photocopy of your work permit
- certificate of domicile for you and your employer
- photocopy of your employer’s NPWP
- Letter of Authorization, authorizing your representative to register and handle your tax matters.
- While the registration form only asks for copy of ID page of passport and does not request the other items mentioned above, the bureaucrats at the Tax Office ask for them as a matter of course.
Once you have registered, taxes are due and payable beginning not later that the 15th day of the following month and reports should be submitted to the tax office by not later than the 20th day of the same month.
Enforcement and Linkage of NPWP to other Activities
The Indonesian tax office continues its drive to widen the taxpayer base by trying to register all salaried Indonesian nationals for their own NPWP number. They have started linking this requirement to certain other registrations and regulations to further enforce this regulation. An NPWP may be required for a variety of other activities:
- buying a motorbike
- getting a driver’s license
- building a house
- opening a bank account
- renewing registration of a vehicle over a certain value
- having a credit card limit in excess of a certain amount
- payment of housing tax on houses over a certain value
- applying for a passport (for Indonesians)
- when you transfer money from your Indonesian bank account to a foreign bank account
What Income is Included
The Indonesian personal taxation system is based on worldwide income. This includes:
- Any salary paid to you for your current position, whether it be onshore or offshore
- Dividend and interest income, both onshore and offshore
- Rental income both onshore and offshore
- Capital gains from sale of property, both offshore and onshore
Benefits in Kind are generally excluded: Housing, Cars, School fees, as well as income from inheritance. However, if your company pays you for housing in one lump sum, and then you make the payments … the tax office may construe that lump sum as income. In this case, it may be better for your employer to pay the housing costs direct to the landlord. You take the money as an advance, not as housing allowance. The company then expenses one month at a time as housing, which is then treated as a fringe benefit.
Credit is given for income tax paid overseas, subjected to limits and perhaps dependent on double taxation treaties between Indonesia and your home country. You may also receive credit for tax taken on interest income for local bank accounts and time deposits and other interest earning methods that are taxed.
Since income from overseas investments can be taxed by the Indonesian government, it is best to consult your accountant and your financial consultant to determine how regulations will affect any current and future investment strategies.
Tax Rates for Resident Individual Taxpayers
|Rp 1-50 million||5%|
|portion of income between Rp 50-250 million||15%|
|portion of income between Rp 250 million-500 million||25%|
|portion over Rp 500 million||30%|
An extra 20% is levied on people who do not have a tax number (NPWP) on top of progressive income tax rates above.
Deductions for an individual are Rp. 2,880,000, wife 2,880,000 and up to three children Rp. 1,440,000. Position Expense (Biaya Jabatan) is a deduction with a maximum 5% from gross income or a maximum of Rp 1,296,000.
If your company pays for house rental, car, etc. then it could be considered your income, or not. It depends on how the company will treat the expense. It may go to your income tax report as an income, or may go to the company income tax report as an expense. There are no exemptions for personal house rental, car, etc. Insurance premiums paid by the company are seen as additional income. Check with your tax professional to ask their advice on these perks that could be considered additional income.
Consequences of Tax Registration
Many expats are used to being taxed on worldwide income but the Indonesia system is far broader than first meets the eye. As a registered tax person (body) you become liable for the full range and consequences of the system:
- You will be required to do an annual return on your servants and drivers that are your personal employees and not on the company payroll.
- When you rent a bus for your group’s tour you will withhold tax from the bus company.
- When you receive an advance from your company to rent a house/apartment you will be required to withhold tax from the owner.
- You will pay the appropriate amount of tax via the banking system to the tax office and give proof to the person/company that you withheld from.
- You will do monthly reports to the tax office concerning this.
- You will make monthly payments on your own extra income and make an annual return.
- By virtue of what you do outside employment or as self employed, you may also be liable for registration for PPN (VAT/GST).
- Understand too that once the tax office has your personal residence and employment information, individuals from the tax office may choose to approach you on an individual, personal basis for various reasons. We suggest you refer them to your employer’s HR department whenever possible.
Failure to Register
According to the regulations, failure to secure an NPWP could mean imprisonment for a maximum of six years and a maximum fine of four times the total amount of tax due. Audits could be conducted on past years and would rely on local and overseas tax statements and bank records.
Canceling Your Tax Number
Once you are registered you can only cancel the NPWP number by having a tax audit. This will be extremely difficult as it take 2-3 years for the tax office to perform such audit meanwhile your new job in another country is beckoning. Or you are returning home. The government cannot keep you in Indonesia until the audit is completed as your immigration papers will expire. But they may hold your personal shipment until such time as the audit is completed.
Double Taxation Agreements
The Indonesian Tax Office has the authority to contact the tax offices in countries that have a Double Tax Treaty with Indonesia to ask for information about you from their database. Likewise your country can ask for information from the Indonesian Tax Office, if there is a Double Tax Treaty in place.
The DPKK (Skill & Development Fund Fee) is a tax that is paid by your employer to the Manpower ministry ostensibly to be used in training Indonesian workers. The cost is US$100/month and must be paid in full by the employer as a part of the process for obtaining a work permit. It is separate from and has nothing to do with an expat’s individual income taxes.
U.S. Tax Obligations of American Expatriates
The United States requires all citizens and green card holders to file the U.S. federal income tax returns on their worldwide income (see Section 911 of the tax code). The U.S. is fairly unique in this regard, so take note: you must still file your tax returns even if you move out of the country and are currently living abroad. Even if you have not earned any U.S. income!
If you file a return that does not automatically mean that you owe taxes. In fact there are a number of exclusions and deductions provided in the tax code to take advantage of. To start, there is a Foreign Earned Income Exclusion which allows expats to exclude up to $92,900 of foreign salary. This exclusion can be increased based on your overseas housing costs. There is also another method of reducing or eliminating your U.S. tax bill, Foreign Tax Credit. Depending on how much you paid in foreign income tax, you can claim up to the entirety of your U.S. foreign source income tax. This means you could owe 0 U.S. income tax!
You can only take advantage of these credits and exclusions if you file a tax return! And consider: it’s possible to earn over $100,000 and pay no U.S. tax, so it’s in your best interest to file. There are many other issues to reduce or even eliminate expats’ U.S. tax liability. Ask your tax consultant for more information.