How to Determine Personal and Corporate Income Tax Indonesia

Taxation plays a pivotal role in investment considerations, regardless of one’s location. In Indonesia, investment allure hinges significantly on personal and corporate tax rates, making them vital factors for prospective investors seeking entry into this thriving market. In this article, we help you understand more about Indonesia’s company tax rate.

Understanding Indonesian Tax Landscape

In Indonesia, corporate income tax, or company tax, encompasses levies imposed on entities at the organizational level within the jurisdiction. These taxes span income and various fiscal obligations. 

Globally, most countries enforce income taxes at the entity level, typically targeting companies and corporations. Additionally, owners or members of these entities often face taxes on dividends and distributions.

Investors frequently encounter corporate taxes when starting a company registration in a foreign country. Most nations mandate that corporations doing business within their borders pay taxes on their income or, in specific cases, on certain business activities conducted in the country.

Indonesia aligns with this global tax framework, imposing corporate taxes on businesses operating within its borders and personal income taxes for employees.

Corporate Tax Rates in Indonesia for 2024

Indonesia’s corporate tax rate is set to remain at 22% in 2024. However, public companies meeting specific requirements, including a minimum 40% listing on the Indonesia Stock Exchange (IDX) and other criteria, can enjoy a 5% tax reduction from the standard rate.

Smaller enterprises with an annual turnover not exceeding IDR 50 billion are entitled to a 50% reduction from the standard tax rate based on their taxable income proportion, resulting in a gross annual turnover of IDR 4.8 billion. 

For companies with gross turnovers below IDR 4.8 billion, this reduction results in a final income tax rate of 0.5% of turnover. Companies with revenues ranging from IDR 4.8 billion to IDR 50 billion are subject to a 12.5% tax rate on profits. Conversely, those with incomes exceeding IDR 50 billion face a 22% tax rate.

Certain types of income companies earn are subject to a final income tax (Article PPh 4 (2)) withheld by third parties. This tax is imposed on residents with various types of revenue, including land and building rentals, construction fees, and interest income.

Read more: Guide on Filing Corporate Annual Tax Return (SPT) in Indonesia

Special Tax Rates in Indonesia

Distinct industries in Indonesia fall under specific tax rate structures, including:

• Petroleum companies: Taxed at a flat rate of 30% to 45%.
• General mining companies: Tax rates vary between 30% to 45%, contingent on their contracts with the Indonesian Government.
• Geothermal companies: Subject to a 34% income tax rate.
• Construction companies: Incur a final tax of 2% of gross turnover.
• Construction design, supervision, or consultancy firms (excluding legal and tax consultancy): Taxed at 4% of gross turnover.
• Foreign drilling companies: Face a 5.6% tax on gross turnover.
• Non-resident international shipping companies and airlines: Taxed at 2.64% of gross turnover.

Those establishing a Representative Office in Indonesia are prohibited from generating any revenue. The Representative Office’s income must be directly transferred to the corporate headquarters overseas. 

This process may involve repatriation for Limited Liability Companies (PT and PT PMA) when transferring dividends to overseas shareholders, subject to tax under Article PPh 26, with a general rate of 20% on dividends or as stipulated in applicable Tax Treaties between the involved countries.

Tax Incentives in Indonesia

Specific industries in Indonesia benefit from tax incentives, particularly tax holidays. Eligibility for a tax holiday hinges on the amount of new capital investment:

• IDR 100 billion to IDR 500 billion: 50% tax holiday for five years
• IDR 500 billion to 1 trillion: 100% tax holiday for five years
• IDR 1 trillion to 5 trillion: 100% tax holiday for seven years
• IDR 5 trillion to 15 trillion: 100% tax holiday for ten years
• IDR 15 trillion to 30 trillion: 100% tax holiday for 15 years
• IDR 30 trillion or more: 100% tax holiday for 20 years

Other Tax Allowances

Companies investing in less developed areas of national priority can also avail themselves of tax allowances, including:

• Additional net income reduction of up to 30% of investment in tangible fixed assets (charged at 5% per year for six years)
• Accelerated depreciation and amortization
• Extended loss carry-forward period of up to ten years
• Withholding tax on dividends distributed to foreign shareholders at 10% unless tax treaties specify a lower rate

Additional Tax Incentives

Other available tax incentives for Indonesian companies encompass:

• 60% additional cost recovery for new asset acquisitions or business expansion in labor-intensive sectors not eligible for other incentives
• 200% deduction for apprenticeship, internship, and teaching activities aimed at human resource development
• 300% reduction for specific research and development (R&D) activities conducted in Indonesia.

Understanding Deductible Expenses for Companies

In Indonesia, companies can deduct various expenses when computing their taxable income for corporate tax purposes. These deductible expenses are pivotal in reducing the company’s taxable income, thereby diminishing the corporate income tax liability. 

Here are some common deductible expenses that companies can typically claim in Indonesia:

1. Operating Expenses 

These encompass expenses directly associated with daily business operations, such as rent, utilities, salaries, office supplies, travel, entertainment, and communication costs.

2. Interest Expenses

 Interest payments on loans and other forms of business debt are typically deductible. However, certain restrictions or limitations may apply based on thin capitalization rules or other regulations.

3. Depreciation and Amortization 

Companies can deduct expenses related to the wear and tear of tangible assets (e.g., machinery and buildings) and the amortization of intangible assets (e.g., patents) over their useful life.

4. Bad Debts

Some uncollectible debts may be deductible, subject to specific criteria.

5. Royalties and Licensing Fees

Payments for using intellectual property rights, such as royalties and licensing fees, are generally deductible.

6. Research and Development (R&D) Expenses 

Costs associated with R&D activities aimed at product or process improvement may be deductible.

7. Employee Benefits and Pensions 

Expenses related to employee benefits, such as pension fund contributions, are typically deductible.

8. Legal and Professional Fees

Fees paid to legal and accounting professionals for business-related services are generally deductible.

9. Taxes and Duties 

Certain taxes and duties paid during business operations may be deductible.

10. Insurance Premiums

Premiums for business insurance, such as liability or property insurance, can be deducted.

11. Advertising and Marketing Expenses 

Costs related to advertising and marketing campaigns are typically deductible.

It is essential to note that Indonesia’s tax laws and regulations may evolve, and the deductibility of expenses may be subject to specific rules and limitations. 

Therefore, companies should collaborate with tax professionals or advisors well-versed in Indonesian tax laws to ensure compliance and optimize tax deductions. Furthermore, meticulous record-keeping is crucial to substantiate claims for deductions during tax audits or assessments.

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Non-Deductible Expenses

While numerous expenses are deductible for corporate tax purposes in Indonesia, certain costs are generally not eligible for deduction. These non-deductible expenses encompass:

• Non-Business or Personal Expenses
• Capital Expenditures
• Dividend Payments
• Penalties and Fines
• Private Benefits
• Excessive Interest Payments
• Non-Deductible Taxesr.
• Non-Business Losses
• Contributions to Non-Approved Charities
• Provisions for Future Expenses

Understanding these distinctions is crucial, as specific rules and regulations can influence the deductibility of expenses. Therefore, companies should collaborate with tax professionals or advisors well-versed in Indonesian tax laws to navigate these nuances and ensure compliance.

Personal Income Tax in Indonesia

Indonesia also levies income tax on all employees, including those in the private sector, state-owned companies, and government roles. The tax rates applicable to their income are as follows:

All tax residents are required to register for the National Taxpayer Identity Card (NPWP). Failure to obtain an NPWP may result in an additional 20% charge on annual tax reports.

Read more: Corporate Income Tax and Value Added Tax

Navigating Tax Compliance in Indonesia with InCorp

InCorp Indonesia, a distinguished market entry and business consulting firm, offers comprehensive support for tax reporting and payroll outsourcing to foreign companies and entities operating within Indonesia’s dynamic market. 

Do not hesitate to contact us for expert guidance on taxation matters in Indonesia. To access a FREE consultation, please get in touch with us using the form below.