How Can Companies Deduct Bad Debts for Corporate Income Tax in Indonesia?

Companies in Indonesia can deduct bad debts from taxable income if they meet specific tax requirements. An unpaid invoice or an accounting write-off alone does not qualify for a corporate income tax deduction.

When does a bad debt qualify for a tax deduction?

Indonesia’s Income Tax Law allows genuinely uncollectible receivables to be deducted from gross income.

A bad debt is a receivable from a normal business transaction that cannot be collected after the company has made the required efforts to recover it.

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To claim the deduction, the company must record the bad debt as an expense in its commercial profit and loss statement and submit a list of the uncollectible receivables to Indonesia’s Directorate General of Taxes (DGT).

The company must generally also satisfy at least one of the following conditions:

• The collection case has been submitted to a District Court or a government institution responsible for state receivables.
• The creditor and debtor have entered into a written agreement to write off the receivable or release the debtor from the debt.
• The bad debt has been published in an eligible general or special publication.
• The debtor has acknowledged that the specified debt has been written off.

If a bad debt that previously qualified for a deduction is later recovered in full or in part, the amount recovered is treated as income for the creditor in the tax year in which it is received.

What evidence should the company keep?

Companies should keep the commercial records behind the debt, including contracts, invoices, payment records, and collection correspondence.

The list of uncollectible receivables and the required supporting evidence must be submitted with the company’s annual corporate income tax return.

Do different rules apply to small debts?

Indonesia provides simplified treatment for certain bad debts involving small debtors. These rules apply only to categories defined by the tax regulations, rather than to all small unpaid invoices.

For qualifying small-debtor receivables, the normal requirement for court action, a written debt-release agreement, publication, or acknowledgment from the debtor does not apply.

Certain qualifying small-debtor receivables are limited to IDR 100 million (US$5,600) and generally relate to specific types of credit provided by domestic banks or financing institutions. A separate category for other small debtors is limited to IDR 5 million (US$280).

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A separate rule applies to debtor identification. For bad debts where the credit limit is up to IDR 50 million (US$2,800), whether from one debt or several debts from the same creditor, the debtor’s tax identification number does not have to be included in the required documentation.

What about bad debts from related parties?

Bad debts arising from transactions with related parties do not qualify for this deduction. This can affect foreign-owned companies with unpaid intercompany receivables from services, financing, royalties, or other related-party transactions.

These transactions may also raise transfer pricing issues, including whether the original transaction and how the company later treats the debt are consistent with the arm’s-length principle.

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Dezan Shira & Associates can assist foreign investors with corporate income tax compliance and bad-debt deductions in Indonesia.

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