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Tax Reform Under Omnibus Law: A ‘Significant’ Change?

By : Marion Elisabeth, Edwin Giovan Santoso, Bianca Timothie

07-Dec-2020

INTRODUCTION

The Law No. 11 of 2020 on Job Creation (Undang Undang Cipta Kerja) or also known as the Omnibus Law (“Omnibus Law”) is a comprehensive set of laws, issued by the Legislation Body of the House of Representative of the Republic of Indonesia (Dewan Perwakilan Rakyat – DPR), on behalf of the Indonesia government, to address several complex issues by amending numerous laws and regulations.

As a part of tax reform program, the Omnibus Law changes (or introduces) certain tax provisions, as follows:

A. Income Tax – currently the general provisions regulated under the Law Number 7 of 1983 as lastly amended by the Law Number 36 of 2008 on Income Tax (“Income Tax Law”);

B. Value Added Tax (“VAT”) – currently the general provisions regulated under the Law Number 8 of 1983 as lastly amended by the Law Number 42 of 2009 on VAT of Goods and Services and Sale Tax of Luxury Goods (“VAT Law”);

C. General Tax Provisions – currently the general provisions regulated under the Law Number 6 of 1983 as lastly amended by the Law Number 16 of 2009 on General Provisions and Procedures of Taxation (Undang-Undang Ketentuan Umum Perpajakan (KUP) – the “KUP Law”); and

D. Local Tax and Retribution Law – currently the general provisions regulated under the Law No. 28 Year 2009 on Local Tax and Local Retribution (“Local Tax and Retribution Law”).

 

INCOME TAX

1. Individual Tax Subject

Omnibus Law amends and clarifies that (i) a foreign citizen can be qualified as resident tax subject (subjek pajak dalam negeri), and (ii) an Indonesia citizen can be also qualified as non-resident tax subject (subjek pajak luar negeri). 

Omnibus Law has expanded the definition of individual as the ‘non-resident tax subject (subjek pajak luar negeri)’, which includes any Indonesian citizen residing outside the territory of Indonesia. The relevant clause shall be read as follows:

a. any individual residing outside the territory of Indonesia;

b. any foreign citizen residing within the territory of Indonesia less than 183 days within a period of 12 months; or

c. any Indonesia citizen residing outside the territory of Indonesia more than 183 days within a period of 12 months,

who carries out business activity or gains any income sourced from territory of Indonesia, either through permanent establishment (bentuk usaha tetap) (“PE”) or else.

Specifically for item (c) above, such Indonesia citizen may only be treated as the non-resident tax subject if he/she has satisfied the following requirements: (i) residence; (ii) center of main activity; (iii) place of habit practices; (iv) status of tax subject; and/or (v) other certain conditions as set out by the Minister of Finance (“MoF”) Regulation.

Consequently, any Indonesian citizen residing outside Indonesia, who is the beneficial owner of Indonesian companies, can be subject to income tax (through his/her Indonesian companies/PE).

 

2. Tax Exemption for Foreign Citizen qualified as Resident Tax Subject

Prior to Omnibus Law, in general, the resident tax subject (regardless his/her citizenship) shall be imposed with income tax against his/her income which is sourced from both Indonesia and overseas. Omnibus Law exempts a foreign citizen (who is qualified as resident tax subject) from income tax, provided that the taxable income will be only the income of such foreign citizen that is sourced from Indonesia – irrespective of the country where such income will be  paid – in relation to his/her work, service, and activity in Indonesia.

However, the above tax exemption shall apply with following conditions: (i) any overseas income will be subject to income tax only AFTER the period of 4 fiscal years as of he/she has become a resident tax subject; (ii) the relevant foreign citizen has particular expertise (will be regulated further under the Government Regulation); and (iii) he/she does not benefit from any provision of double taxation avoidance under certain tax treaty (Persetujuan Penghindaran Pajak Berganda) where Indonesian government is the contracting State.

 

3. Non-Taxable Object Expanded

The Omnibus Law sets out new provisions on tax exemption/reliefs for dividend and income as follows:

a. For dividends sourced from the territory of Indonesia, the exemption applies to:

1. the resident individual tax subject (subjek pajak orang pribadi dalam negeri), provided that such dividends are invested in the territory of Indonesia; or
2. the resident entity tax subject (subjek pajak badan dalam negeri).

By having this new provision under Omnibus Law, any dividend distributed by any Indonesian incorporated entity to (i) an Indonesian company is not taxable, and (ii) an Indonesian individual is not taxable (under condition that he/she will invest such dividends in the territory of Indonesia).

 

b. For (1) dividends gained from any offshore entity, and/or (2) the net incomes (after tax) of the offshore PE – which are received by the resident tax subject (both individual and entity), the exemption applies so long as the dividends or incomes are invested in or used to support other business interests in Indonesia within a certain period, under the below conditions:

1. such dividends and net incomes (after tax) shall be invested in the territory of Indonesia for at least 30% of the total earnings (after tax);
2. specifically for dividends distributed by unlisted offshore entity, such dividends shall be invested in the territory of Indonesia prior to the issuance of tax assessment letter on dividend by the Directorate General of Tax (DGT);
3. if the total investment as mentioned in item (i) above is less than 30% of total earnings (after tax), then:

1. the actual investment shall not be subject to the income tax;

2. any shortage difference (between the minimum 30% threshold and the actual investment) shall be subject to the income tax; and

3. the remaining amount of total earnings (after tax) shall not be subject to income tax.

 

c. For the net incomes (after tax) from the non-PE located offshore, which are received by the resident tax subject (both individual and entity), the exemption applies so long as the net incomes (after tax) is invested in or used to support other business interests in Indonesia within a certain period, under the below conditions:

(i) the income originates from active business activities overseas; or

(ii) the income does not originate from any offshore entity duly owned by such resident tax subject.

 

We are looking forward to see the relevant MoF implementing regulation(s) pertaining to the forms, procedures, and periods of investing back in Indonesia.

Aside to dividends and incomes as elaborated above, Omnibus Law also adds new non-taxable objects, including:

1. deposits of the Hajj Implementation Fees (Biaya Penyelenggaraan Ibadah Haji – “BPIH”) and/or a special BPIH, and the income originates from the development of Hajj finance in certain fields or financial instruments received by the Haji Financial Management Agency (Badan Pengelola Keuangan Haji - BPKH); and
2. the excess of funds received by a social and religious body or institution registered in the authorized agency, which is reinvested in the form of social and religious facilities and infrastructure within a maximum period of 4 (four) years from the time such excess was obtained, or placed as eternal funds.

 

4. Withholding Tax Rate for Interest-Kinds of Income received by the Non-Resident Tax Subject

Under the Income Tax Law, any non-resident tax subject (which does not run a business through PE in Indonesia – but merely receives income from Indonesia) is subject to a withholding tax with the rate of 20% for any of its Indonesia-sourced incomes. In practice, this 20% rate of withholding tax can still be subject to a reduced rate under a bilateral tax treaty (if any).

Whereas under the Omnibus Law, despite the non-existence of bilateral tax treaty, specifically for the gross incomes in the form of interest (including premium, discount, or any compensation to secure loan repayment), the 20% tariff may be subject to a lower rate under the relevant Government Regulation.

 

VAT

1. Transfer of Taxable Goods (Barang Kena Pajak)

Pursuant to Omnibus Law, the definition of transfer of taxable goods (penyerahan barang kena pajak) has omitted the following: “the taxable goods delivered via consignment”. Hence, it is no longer subject to VAT.

In addition, any inbreng transaction between taxable entrepreneurs is also not subject to VAT under the Omnibus Law.

2. Coal is No Longer Non-Taxable Goods

The scope of non-taxable goods in the Omnibus Law excludes the coal mining products from the list. It will be the key changes in the Indonesian mining business.

 

3. Tax Credit

Under Omnibus Law, all taxable entrepreneur may claim the right to credit input tax, provided that such taxable entrepreneurs have to transfer their taxable goods/services within a period of 3 years (extendable depending on the business sectors), starting when the input tax has been credited/claimed. If such taxable entrepreneur failed to do so then he/she must repay (return) the credited input tax back to the government.

The said requirement to return the credited input tax will also be triggered, if within such period of 3 years, (i) there is a dissolution of business/entity; or (ii) the status as taxable entrepreneurs has been revoked.

Furthermore, under the Omnibus Law there are also new reliefs on tax credit, as follows:

1. Before the entrepreneurs are legally registered as taxable entrepreneurs, they are already allowed to credit (set-off) the input tax over the acquired/imported goods and/or services, against the maximum 80% of the collected output tax;
2. if the input tax over acquired/imported goods and/or services has not been reported in the VAT Periodic Tax Return (Surat Pemberitahuan Masa PPN), and/or is found during the tax audit, the taxable entrepreneurs are still allowed to credit such input tax; and
3. if the outstanding input tax (over acquired/imported goods and/or services) is invoiced by the issuance of a tax assessment letter, the taxable entrepreneurs are still allowed to credit such input tax, so long as the outstanding input tax under the said tax assessment letter has been paid in full and no legal remedy has been made.

 

GENERAL PROVISIONS AND PROCEDURES OF TAXATION

The Omnibus Law has made quite amendments on the existing penalties under the KUP Law (becoming more interest-based calculations).

Essentially, the Omnibus Law changes the period and calculation method on the imposition of tax penalty by (i) capping the monthly interest penalty at the maximum period of 24 months (for both payments pursuant to a tax assessment letter and voluntary payment by a taxpayer), and (ii) calculating the penalty amount in accordance with the benchmark interest rate determined by the MoF.

The summarized relevant violations and penalty under the Omnibus Law are as follows:

 

Violations	Penalty
Taxpayers correcting the annual Tax Return (Surat Pemberitahuan – “SPT”) or periodic SPT with their own initiative, which results in the higher amount of tax debt.	The calculation is based on the benchmark interest rate plus 5% and divided by 12 as of penalty calculation date.
Taxpayers stating/disclosing for their failure to submit SPT or stating the incorrect data/information in the SPT.	Repayment of the actual outstanding tax debt, along with 100% penalty.
Outstanding tax debt arising under the disclosure of corrected SPT submitted by the taxpayers.	The calculation is based on the benchmark interest rate plus 10% and divided by 12 as of penalty calculation date.
The late payment of (i) outstanding tax debt from the due date of a tax period (or any date determined by MoF), or (ii) outstanding tax debt based on the due date of the SPT of annual income tax.	The calculation is based on the benchmark interest rate plus 5% and divided by 12 as of penalty calculation date.
The outstanding tax debt pursuant to the underpayment tax assessment letter (Surat Ketetapan Pajak Kurang Bayar ­– “SKPKB”).	The calculation is based on the benchmark interest rate plus 15% and divided by 12 as of penalty calculation date.
The outstanding tax debt pursuant to the tax collection letter (Surat Tagihan Pajak – “STP”).	The calculation is based on the benchmark interest rate plus 5% and divided by 12 as of penalty calculation date.   Additionally, the Directorate General of Tax will not be able to issue STP after 5 (five) years upon due date of the tax or the end of the Tax Period, the Fiscal Year, or fraction of the Fiscal Year.
The issuance of SKPKB or Additional SKPKB, Correction Decree, Objection Decree, Appeal Decision, or Judicial Review, which causes the increase of the outstanding tax debt.	The calculation is based on the benchmark interest rate divided by 12 as of penalty calculation date.
Under the circumstances where the taxpayers are allowed to pay the outstanding tax debt in instalments or postpone the payment of outstanding tax debt.

 

OTHER RELEVANT TAX-RELATED ISSUES

1. Royalty Payment

Omnibus Law will bring significant impact to mining industry. Under the current Minister of Energy and Mineral Resources (MEMR) Regulation No. 26 Year 2018 concerning the Implementation of Good Mining Principles and the Supervision of Minerals and Coal Mining, any mining company holding IUP for Operation Production shall be imposed with the dead rent and royalty payment.

By the enactment of Omnibus Law, any mining company that can create an added value to its coal (e.g. processing and/or refining its coal) shall obtain special treatment from the State. This special treatment can be in the form of a waiver from the obligation to pay the royalty payment. For the relevant mining company, State can impose 0% rate of royalty payment.

It is clear that Indonesian government will fully support any coal mining company which starts focusing on or investing to its downstream business project (hilirisasi).

 

2. Central Government’s and Local Authorities’ Discretion on Tax Rate and Fiscal Incentives

Omnibus Law has come up with new additional provisions to the Local Tax and Retribution Law providing authority to the central government in doing certain adjustments to local tax and local retribution determined by the local government. These adjustments can be in the form of varying the local tax rate and local retribution rate with a nationally applicable rate(s).

In addition, Omnibus Law also provides authority to the relevant governor, regent, and mayor to grant some fiscal incentives to any business doer in their area. The foregoing fiscal incentives shall include the deduction, reliefs, exemption, or write-off of a tax principal amount and/or its sanctions. 

 

3. Omission of Nuisance Permit 

Under the Omnibus Law, the Nuisance Permit is omitted from the Local Tax and Retribution Law. As such, any Indonesian company may no longer need to process this Nuisance Permit.

 

This summary only highlights certain tax issues under the Omnibus Law and may not be complete and comprehensive.

For more specific inquiry regarding the tax section of Omnibus Law or other emerging legal issues in Indonesia, please contact the following lawyers:

• Marion Elisabeth (marion@aymp.law)
• Edwin Giovan Santoso (edwin@aymp.law)
• Bianca Timothie (bianca@aymp.law)

 

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