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U.S. Embassy, Jakarta

RECENT ECONOMIC REPORTS

Information on Changes to Indonesia's Income Tax Regime

March 2001

Table of Contents :

I. Summary and Introduction

II Tax Subjects vs. Non-Tax Subjects and Resident vs. Non-Resident

III Registration and Filing Requirements

IV. New Tax Rates and Taxation Worldwide Income

V. Unresolved Tax Policy and Tax Administration Issues

�

VI. The U.S. - Indonesia Tax Treaty and the Avoidance of Double Taxation

VII. Income Tax Status of Individuals Working on Donor-Funded Government

Projects

VIII.� Contact Numbers for Further Information

I.� Summary and Introduction

In July 2000, the Indonesian parliament made significant changes to

Indonesia's income tax regime through the enactment of Laws No. 16 and 17 of

2000. These laws amend Law No. 6 (General Provisions and Procedures) and Law

No. 7 (Income Tax) of 1983. The Directorate General for Taxes (DGT) in the

Ministry of Finance has since issued a number of regulations, circulars, and

informal statements intended to clarify various aspects of the new laws.

While the DGT's administration of these laws is still evolving, they will

likely affect the income tax obligations of most U.S. citizens working in

Indonesia:

�� With few exceptions, resident expatriates working in Indonesia are

now required to register with the Tax Office and file annual income tax

returns (see Section III).

�� For most expatriates working in Indonesia, the net effect of the

tax

law changes will likely be significantly higher Indonesian income tax

obligations beginning in tax year 2001 (see Section IV).�� The higher tax

obligations result from:

1.�� Law 17 increased the number of tax brackets from three to five and

raised the rate on the top bracket (applicable to annual income above Rp 200

million) from 30 to 35 percent.

2.�� The DGT appears set to implement a provision of Indonesian tax law

mandating the taxation of worldwide income (WWI).� Previously, the DGT's

standard practice was to tax income received from an individual's job in

Indonesia only.��

�� There are significant unresolved tax policy and administration

issues that could further affect the income tax obligations of expatriates,

including U.S. citizens, working in Indonesia (see Section V).

�� As of March 2001, there is no longer a blanket income tax exemption

for contractors, consultants, and suppliers working on government projects

funded by foreign loans and grants (see Section VII).�� Government

Regulation

43/2000 dated June 23, 2000 has deleted the express exemption from income

taxes for individuals working on loan-funded government projects. Subsequent

regulations have affirmed the income tax exemption for contractors,

consultants and suppliers under grant-funded government projects while

imposing taxes on their personnel, sub-contractors, sub-consultants and

sub-suppliers.�� U.S. citizens working on such projects should contact their

tax advisors for further information.

This paper provides informal, background information on key points of

Indonesia's evolving income tax regime for the use of U.S. citizens living

in, or considering moving to, Indonesia. The Embassy provides this

information with no warranty of any kind, and does not warrant that the

information will meet your specific requirements. The Embassy also assumes

responsibility for the accuracy of the information. This paper does not

represent an official U.S. Government position on any issue of Indonesian

income tax policy or administration. American citizens should consult their

tax advisors for more detailed information.

Section VIII provides contact numbers for sources of more detailed

information on Indonesia's income tax regime and its implications for filers

of U.S. income tax returns.

II.� Tax Subjects vs. Non-Tax Subjects and Resident vs. Non-Resident Taxable

Persons

Indonesian law divides foreigners into two groups, tax subjects and non-tax

subjects.� According to Article 3 of Law No. 17, the following individuals

are not considered tax subjects:

Members of foreign diplomatic missions;

Officials of certain international organizations, subject to certain

conditions set out in Minister of Finance Decree 574/KMK.04/2000

The information in this paper does not apply to individuals in the above

groups.

Indonesian law further divides tax subjects into two categories, resident

and

non-resident taxable persons.�� Taxable persons can be either individuals or

other taxable entities, such as corporations or certain inheritances.� The

information in this paper applies to individual, resident taxable persons

only.

Article 2(3) of Law No. 17 defines a Resident Taxable Person as an

individual

residing in Indonesia or present in Indonesia for more than 183 days in any

12 month period, or an individual residing in Indonesia during a tax year

and

intending to reside in Indonesia.

III.� Registration and Filing Requirements

Registration Requirements

According to DGT decision number Kep-516/PJ/2000, dated December 4, 2000, an

individual taxpayer who is engaged in business or who is self-employed, or

who obtains income that exceeds the non-taxable income allowance (Rp 2.88

million per year with an allowance for dependents) must register for the

purpose of obtaining a Taxpayer Identification Number (NPWP).� Expatriates

living in Jakarta should register at the Tax District Office for Foreign

Companies and Foreigners (BADORA); individuals living in other areas should

VIII for contact information for selected local tax offices).

The above DGT decision also stipulates that individual taxpayers engaged in

trade or business activities or who are self-employed are obliged to obtain

Taxpayer ID number not later than one month after the business activity has

occurred.� Individual taxpayers who are not self-employed or engaged in

trade

or business activities but receive income above the non-taxable income

threshold must obtain a Taxpayer ID number not later than the end of the

following month after the receipt of the income.

BADORA informs that in order to register, expatriate taxpayers should fill

out a registration form available at each tax office and submit it with the

following documents, as appropriate:

a)�� A photocopy of the taxpayer's passport.

b)�� If the taxpayer is employed, a photocopy of the Expatriate

Employment

Permit.

c)�� If the taxpayer is an employee, a photocopy of the Taxpayer ID

Number

of his or her employer.

d)�� If the taxpayer is self-employed or runs a business, his or her

Business Permit.

Indonesian law carries heavy criminal and civil penalties for failure to

taxpayer deliberately fails to obtain a Taxpayer ID number, with the result

that losses may accrue to the state, then he or she shall be guilty of a

criminal offense punishable with a maximum term of imprisonment of 6 years

and a maximum fine of 400 percent of the tax owed.

When a registered taxpayer intends to permanently depart Indonesia, he or

she

must also submit an application to cancel his or her Taxpayer ID Number.

DTG officials have warned that failure to cancel the Taxpayer ID Number

could

expose taxpayers to contingent tax liabilities in the event they return to

Indonesia.

Annual Filing Requirement

Indonesia taxes on a calendar year basis.� Individual taxpayers are required

to pay tax due by March 25 and file Form SPT 1770� (Annual Tax Return) by

March 31 of the year following the taxable year.� Form 1770 must be filled

out in Indonesian, with amounts listed in rupiah, and submitted to BADORA or

the appropriate local tax office.�� In many cases, expatriates may also need

to file one or more of the following supporting schedules or documents:

a)�� Form 1770-I:�� Domestic (Indonesia) Net Income Calculation

b)�� Form 1770-II:� Income Tax Withheld/Collected by Third Parties

(including foreign tax returns and other documents supporting the

calculation

and payment of foreign taxes)

c)�� Form 1770-III:� Income Which Has Been Subject to Final Tax, Separate

Income Tax, and Excluded Income

d)�� List of Taxpayer's Dependents

e)�� Tax Payment Slip(s)

f)�� Copy of Form 1721-A1 and/or 1721-A2 (for taxpayers receiving

employment income)

g)�� Financial statements for taxpayers who chose to maintain full

accounting records.

h)�� A photocopy of the taxpayer's Restricted Residency Permit (KITAS).

Family units (including dependents) are required to file a single tax return

unless the tax office grants permission for separate filings by each spouse.

Monthly Filing Requirement

In addition to the annual filing requirement, many expatriates may also be

required to file monthly tax returns and pay monthly tax installments.

Individual taxpayers required to file monthly must do so by the 20th day of

the following month.� Tax installments must be paid by the 15th of the

following month.

Minister of Finance Decree No. 522/KMK.04/2000 specifies that individual

taxpayers who are not engaged in business or who are not self-employed shall

not be required to submit monthly tax returns.� There is some confusion

about

whether taxpayers who are not required to file monthly returns must

nonetheless make monthly tax payments.�� As of February 2001, the Tax Office

seems to hold the view that taxpayers should make monthly tax payments even

if they are not required to file monthly tax returns.

Minister of Finance Decree No. 522/KMK.04/2000 also establishes the method

for calculating the amount of monthly income tax installments taxpayers must

pay.� According to this decree, taxpayers who filed returns in the previous

tax year should pay an installment equal to 1/12 of their previous year's

tax

due on regular income after deducting income tax withheld and creditable

income tax accrued or paid abroad.� There are also guidelines for irregular

sources of income.� For new taxpayers, the amount is calculated based on the

application of the general tax rate to annualized net monthly income

(divided

by 12), after the deduction of the tax-free allowance from annualized net

monthly income.�

Filing Extensions

Individuals may request a filing extension for three to six months from

BADORA or the appropriate local tax office.� If the taxpayer does not

receive

a response within one month, the request is considered approved.� However,

the extension applies only to the legal filing requirement; individuals must

still pay all tax due by the March 25 deadline.� Interest on unpaid tax

bills

accrues at 2% per month up to a maximum of 24 months.

IV.� New Tax Rates and the Taxation of Worldwide Inc ome

For most expatriates working in Indonesia, including U.S. citizens, the net

effect of Laws No. 16 and 17 and subsequent DGT implementing decrees will

likely be significantly higher Indonesian income tax obligations beginning

tax year 2001.�� The higher tax obligations result from reconfigured and

steeply progressive tax rates applicable to returns beginning in 2001, and

the apparent implementation of a worldwide income taxation system.

�

New Tax Rates

Law 17 reconfigured Indonesia's tax brackets, increasing the number of

brackets from three to five and raising the rate on the top bracket

(applicable to annual income above Rp 200 million) from 30 to 35 percent.

The following table compares the tax rates applicable to taxable income in

2000 and previous years with the new rates applicable to tax year 2001.

Taxable Income

�2000 Tax Rate

�2001 Tax Rate

�

Up to Rp 25 million

�10%

�5%

�

Rp 25 million to Rp 50 million

�15%

�10%

�

Rp 50 million to Rp 100 million

�30%

�15%

�

Rp 100 million to Rp 200 million

�30%

�25%

�

Above Rp 200 million

�30%

�35%

The effect of the new tax brackets on an individual's tax obligations

obviously depends on a variety of factors, including the amount of taxable

income earned, the currency in which the individual earns his income, and

the

exchange rate.� However, the following example illustrates the potential

effect of the new tax rates on the Indonesian tax obligations of

higher-income individuals.�� An individual (expatriate or Indonesian)

earning

$200,000 in wages and taxable benefits in tax year 2000 would be assessed a

tax of approximately Rp 561.2 million or $59,079� (at Rp 9,500/$), before

allowable credits and other adjustments.� However, in tax year 2001, the tax

assessment on the same amount of taxable income would rise to approximately

or Rp 631.2 million or $66,447.

Worldwide Income

A second development that could lead to significantly higher Indonesian tax

obligations for expatriates living in Indonesia is the DGT's apparent

intention to enforce a provision of Indonesian tax law mandating the

taxation

of worldwide income (WWI). Previously, the DGT only sought to tax income

received from an individual's job in Indonesia, not passive income from

investment, rental properties, or other sources outside of Indonesia.

According to information provided by the DGT, residents of Indonesia are

"...subject to tax on the basis of worldwide income principle, [which]

comprises any increase in economic prosperity received or earned, whether

originating from within Indonesia or outside Indonesia...." Despite this

clear-cut statement, the DGT has issued conflicting public statements in

2000

and 2001 about the extent to which it will enforce the WWI provision.

U.S. citizens should be aware that unlike in the U.S., Indonesian law does

not provide a special tax rate for long-term capital gains (the U.S.

currently taxes long-term capital gains at a 20% rate).� All forms of active

and passive income, including long-term capital gains, are taxed at the

rates

shown in the table above. It is thus likely that beginning in 2001, U.S.

citizens whose marginal income is above the Rp 100 million threshold for the

25% tax bracket (currently $10,526) and who have significant long-term

capital gains, will face higher Indonesian tax obligations.

V. Unresolved Tax Policy and Tax Administration Issues

Despite the passage of Laws No. 16 and 17 and the issuance of various DGT

and

MOF implementing decrees, there remain significant unresolved tax policy and

administration issues that have the potential to further affect the income

tax obligations of expatriates working in Indonesia, including U.S.

citizens.

The DGT has not yet developed detailed guidance on these issues, most of

which are related to the taxation of worldwide income. U.S. citizens living

in Indonesia should consult with their tax advisors about the status of

these

issues.�

As of February 2001, some of the most significant unresolved tax policy and

administration issues requiring resolution or clarification are as follows:

�� Losses on Passive Income: DGT officials have made conflicting

statements about whether and how the DGT will recognize passive losses.� As

result, it is not clear how individuals should report losses from sources of

passive income, such as capital losses or rental losses (see below).� In the

past, the DGT generally permitted taxpayers to offset foreign losses against

foreign income on a per country basis, but only to the extent of the income

earned in that country.

�� Taxation of Overseas Rental Income: DGT officials have given

conflicting advice about how the DGT will tax rental income.� Indonesian

rental income is subject to a final tax of 10% of gross rent, and some

commentators have suggested that the same taxing method should be applied to

foreign rentals.�� In the past, the DGT accepted that, in the case of

foreign

rentals, taxpayers could deduct rental expenses against rental income to

arrive at net taxable income or loss.

�� Taxation of the Sale of a Residence: In most instances, capital

gains from the sale of a primary residence are not subject to U.S. income

tax

or reported on U.S. Form 1040.� However, capital gains from the sale of a

residence would appear to meet the definition of "income" under Indonesian

law, even if the residence is in the U