Personal Income Tax in Indonesia for Expatriate Workers Explained
By: Dezan Shira & Associates
Editor: Ellena Brunetti, Dustin Daugherty
When it comes to personal income tax, Indonesia, as a handful of other countries have, has adopted a worldwide income taxation system, meaning that people considered as tax residents in Indonesia will pay tax to the Indonesian government not only on the income they earned by working in Indonesia, but also on the income they earn while working abroad.
Regarding the individuals who work in Indonesia without being a resident, they will only be liable to pay personal income tax (PIT) to the Indonesian government for the income they earn in Indonesia, and depending on the terms of the applicable tax treaty between Indonesia and the country in which they are tax resident, not pay any tax in Indonesia at all.
Thus, it is important for expatriate workers to understand their tax liabilities in Indonesia, and to be able to determine which tax law regime will be applicable to them along with exemptions that may bring.
Who is eligible to pay personal income tax in Indonesia
Only foreigners that can be designed as tax residents of Indonesia must pay PIT on all earned income, even those earned overseas, in Indonesia.
To be considered as a resident of Indonesia, a foreign individual must either:
- Be present more than 183 days during one year in Indonesia – knowing this 12 month period is not necessarily the calendar year. Indeed, anyone who has spent that length of time in the country, regardless of the type of visa they are using to visit the country, will be considered as a tax resident in Indonesia.
- Reside in Indonesia and intend to remain there – a foreign individual working in Indonesia might be considered as a resident even though they have spent less than 183 days in the country. For instance this would be the case if he moved with his family to Indonesia and that it was clear enough that he intended to stay in Indonesia for a reasonable length of time.
Thus, the key criteria to determine whether or not an individual must be considered as a Indonesian tax resident isn’t nationality, but rather length of stay (or intended stay).
An expatriate will be considered as a tax resident in Indonesia until the date of final departure from the country.
Individuals exempted from personal individual tax
Some foreigners, even though they stay for more than 183 days per year, or reside and intend to stay in Indonesia, are still not considered as Indonesian tax residents because of their special legal status. Thus, those individuals are simply exempted from paying Personal Income tax in Indonesia.
As stated in the article 3 of the Personal Income tax in its updated version of 2008, exemptions apply for:
- Foreign diplomatic and consular personnel if they conduct no other business there and their home country extends reciprocal treatment to Indonesian diplomatic and consular personnel
- Military personnel and civilian employees of foreign armed services
- Representatives of international organizations specified from time to time by the Minister of Finance
Scope of taxable income in Indonesia
According to the law, income must be defined as any increase in economic capacity. It can consist of employment income, personal investment income, etc.
In Indonesia, according to article 4 of chapter 3 of the Personal Income tax in its updated version of 2008, taxable income includes:
- Employment income
- Income from the exercise of an independent profession or business
- Passive income (dividends, royalties, interest, insurance gains)
- Capital gains (from the sale or transfer of property)
- Rents and other income from the use of property
For the purposes of this article however, we will offer a focus on taxation of employment income.
Presentation of Indonesia’s PIT system
The taxation unit
A family is generally regarded as a single tax reporting unit with a single tax identity number (in Indonesian: Nomor Pokok Wajib Pajak/NPWP) in the name of the head of the family (who usually is the husband). Thus, his dependent children and wife’s income must be reported on the same tax return in his name.
Deductions and reliefs that can be made on the income before applying the rates
Regarding the allowable tax deductions, there are several elements can be deduced from the gross income when determining the annual taxable income of an individual.
- First, spending incurred for obtaining, collecting and maintaining income can be deduced, if they fill some specific conditions
- Besides, if the taxable individual has dependent partners or children, this taxation unit might be entitled to tax deductions in a form of un-taxed income (In Indonesian: Penghasilan Tidak Kena Pajak/PTKP), as following:
When it comes to tax rates, understanding whether or not an individual must be considered as a tax resident:
- Residents are subject to a withholding progressive tax. Thus, their net taxable income is taxed at graduated rates, with current rates ranging from 5 percent up to a maximum of 30 percent, depending on an individual’s income.
- While non-residents are subject to a final withholding flat tax of 20 percent on gross income.
Regarding the progressive tax that is relevant for an individual defined as a resident of Indonesia for tax purposes, it is currently structured around four income bands, with rates that apply to the fractional income within each band.
Compliance obligations to be fulfilled for PIT
Employer compliance obligations
Income tax in Indonesia is mostly paid by the mean of withholding by the employer. Therefore, the tax withheld by employers must be remitted to the government body on a monthly basis.
Employee compliance obligations
When it comes to Individual income tax, Indonesia operates a self-assessment system under which all tax residents have tax filing obligations. They are indeed required to complete an annual tax return and compute their tax liability by March 31 in the following tax year. The tax return used for taxpayer receiving income from employment is Form 1770-S.
In Indonesia the majority of PIT is paid through statutory employer withholdings on earned income. However, for any other income that a taxpayer in Indonesia earns on a regular basis, they must make monthly provisional tax payments to the tax department based on the income earned in the previous year.
Regarding other irregular forms of incomes, those are dealt with by the final annual tax return.
In order to file a tax return, an individual must register as a taxpayer in order to obtain a tax identification number (NPWP). Foreigners considered as tax residents must obtain such a number, while foreigners that don’t meet the qualification of “tax resident” under Indonesian tax law do not.
Thus, in a nutshell, what must be understood is that employers are responsible for deducting tax off their employees’ salaries but it is the individual employee’s responsibility to register as a taxpayer and file their tax returns.
Upon leaving Indonesia
Even though it’s not an obligation, it is highly recommended for expatriates leaving Indonesia permanently to make sure to cancel their tax registration to avoid any misunderstandings, and thus avoid being continuously considered tax resident and liable in Indonesia.
To do so, the expatriate should submit an application to the local tax office, which will then perform a tax audit on the taxpayer’s returns and supporting documents prior to granting approval to deregister.
The individual should ensure that all tax related documents are readily available in anticipation of a tax audit (including bank statements, salary slips, foreign tax documentation if applicable, work contracts, etc.).
Punishment for individuals failing to meet compliance obligations
Failure to register a taxpayer number
Foreigners who are tax residents in Indonesia must be aware of the fact that not having an NPWP is illegal, as stated in the article 21 (5) of the updated personal income tax law of 2008, and the punishment could range from fines to imprisonment.
Employees without an NPWP are subject to a 20 percent tax surcharge.
Further support from Dezan Shira & Associates
For more information on paying tax as an expatriate in Indonesia, as well as other key aspects of doing business in the emerging Southeast Asian economic dynamo, please get in touch with Dezan Shira & Associate’s Indonesia specialists at email@example.com.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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