How to Avoid Being Taxed on Your Worldwide Income by Indonesian Tax Department

In previous updates we have highlighted the reason we view the changes in taxation laws in Indonesia have been the main drivers to changing ownership structures.  In this article we wish to highlight some of the technical aspects of constructing a villa on leased land and renting it out for commercial purposes and the potential taxation risks.

On April 1, 2019, the Minister of Finance issued Regulation No. 35/PMK.03/2019 of 2019 on Determination of Permanent Establishments (the “Regulation”). Previously, permanent establishments were dealt with only in the Income Tax Law (Law No. 7 of 1983, as amended) and a Circular Letter issued of the Directorate General of Taxation.

The Regulation was issued taking into account the significant growth of foreign tax subjects conducting businesses and activities in Indonesia through a permanent establishment (a “PE”).

General Provisions

Under the Regulation, a PE is defined as follows:

1. A foreign individual who does not reside in Indonesia or residing in Indonesia for less than 183 (one hundred eighty three) days within a period of 12 months; or
2. A foreign entity established and domiciled outside of Indonesia.

What Happens if I am Deemed as a PE?

1. A PE must obtain a Taxpayer Identification Number (Nomor Pokok Wajib Pajak or an “NPWP”) by no later than 1 (one) month after the commencement of a PE’s business or activity in Indonesia.
2. If a PE does not do so, the relevant Tax Office has in its discretion the right to issue an NPWP to the PE.
3. Under applicable tax laws and regulations, once a PE has an NPWP, the PE is required to submit monthly and annual tax returns to the Indonesian tax authorities.

Generally speaking, a holder of an NPWP must disclose all of its income (including income received outside Indonesia).

What does this mean to a foreign tax subject?

Given the requirements to have an NPWP and a VAT collector number above and, more importantly the possible requirement to disclose income outside Indonesia, a foreign tax subject (the “Foreign Subject”) should consider creating presence in Indonesia separate from the foreign legal entity. This may be achieved by establishing a limited liability company under Indonesian laws (a “PMA Company”).  So then, the PMA Company (and not the Foreign Subject) will carry out business in Indonesia and be subject to Indonesian tax laws and regulations.

Equally important, foreign companies and individuals must not regard the Regulation as a license to do business in Indonesia. The Income Tax Law and the Regulation focus on the imposition of tax laws and regulations on foreign companies and individuals who do business in Indonesia.  There are specific laws and regulations regarding trading and doing businesses in Indonesia that foreign companies and individuals must comply with.

For further information please see:

https://aksetlaw.com/news-event/newsflash/permanent-establishments-clarified/