Indonesia has a very favorable income tax system for small businesses. Effective from July, it will become even more attractive. This is the set timeline for when the new reduced income tax rate in Indonesia becomes applicable.
Learn how small business owners can capitalize on it and what are some of the tactics you can use to optimize your taxes if you are already a medium sized business.
New Reduced Income Tax Rate in Indonesia
According to the government regulation (Peraturan Pemerintah, 23/2018), a new tax rate is about to apply for the income tax. The current rate is down from 1% to 0,5% for both individual taxpayers as well as companies with gross income below IDR 4,8 billion a year (~$US 339,029.8). Individuals and companies can use the new income tax rate for different validity periods.
Changes in the Corporate Income Tax Rate
A company may use the reduced income tax rate in Indonesia initially for three years. If you reach the gross income limit (IDR 4.8 billion per year) during this time, you must stop using the reduced income tax rate. Although, if your company income stays in the given limit, you can continue with the new income tax rate. This being said, make sure you also notify the tax office about continuously using the lower rate.
For example, your company will use lower tax rates from the beginning of 2019 as you stay in the gross income limit. If the income exceeds the IDR 4,8 billion by the end of 2019, you are prohibited from using the new income tax again in 2020. This means that you will start to use general tax rates.
The regulation changes show further flexibility in tax liability. If your annual gross income is not above IDR 4.8 billion, then you may choose in between two taxes:
Income tax rate (0,5% from gross income)
General tax rate (12,5~25% from the profit)
However, as soon as your annual income reaches the annual limit, you will start to use general tax rates. Using general tax rates means having a bookkeeping system in place for financial reports. Calculate in advance or ask advice from your tax consultant to see which rate would be most suitable for your business.
Note that some industries are expected not to be included in the reduced income tax program. We will update this article as we get more information from the Tax Office.
Tax Benefits of Setting Up Several Legal Entities
You can set up several legal entities in Indonesia to keep the income per company below the required IDR 4.8 billion. For example, setting up a PT Prima Satu and a PT Prima Dua you can have a total income of IDR 9.6 billion per year. This would allow you to still pay the reduced income tax rate in Indonesia, as long as you divide the income between the companies.
Note that making this happen also depends on the status of each entity. If one entity is registered as a branch office and the other as the headquarter, you can combine the income. If the companies are independent (not registered as part of the branch of one another), then these incomes can be separated. This also means that reducing the tax pay is possible.
If PT Prima Satu is the headquarter and PT Prima Dua is the branch, then you may combine their incomes. Although, if PT Prima Satu is independent from PT Prima Dua or if PT Prima Dua is not the registered branch of PT Prima Satu, then you can’t combine the income.
Changes in the Personal Income Tax Rate
As an individual taxpayer, you can use the 0,5% reduced income tax rate in Indonesia for seven years. After seven years you also need to notify the tax office if you wish to proceed with the same rate.
How to Keep Track of Your Payroll Taxes and Tax Obligations
It is important for a tax resident in Indonesia not to lose sight of your tax commitments. Find out below what is the difference between a personal and corporate income tax. If you wish to get better at planning your taxes in Indonesia, make sure to go through our tax planning guide.
Personal and Corporate Income Tax
Companies with a domicile in Indonesia must also comply to Indonesian tax obligations. There are exceptions, although the standard corporate income tax in Indonesia is 25%.
Income earned by an individual who is working in Indonesia is subject to personal income tax. The tax is calculated by using the progressive rate (5%-30%):
|Annual Income||Personal Income Tax Rate|
|Up to IDR 50,000,000||5%|
|Above IDR 50,000,000 Up to IDR 250,000,000||15%|
|Above IDR 250,000,000 up to IDR 500,000,000||25%|
|Above IDR 500.000.000||30%|
|Without NPWP||Rate is 20% higher than those with NPWP|
If you do not have the Tax Identification Number (Nomor Pokok Wajib Pajak – NPWP), the rate is 20% higher than it is for the ones with a NPWP.
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