Indonesia has a very favourable income tax system for small businesses.
Right now 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 capitalise on it and what are some of the tactics you can use to optimise your taxes if you are already a medium-sized business.
NEW REDUCED INCOME TAX RATE IN INDONESIA
According to government regulation (Peraturan Pemerintah, 23/2018), a new tax rate is about to be applied for income tax. The current rate is down from one percent to half a percent for both individual taxpayers as well as companies with gross income below Rp4.8 billion a year (US$339,029). 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 (Rp4.8 billion per year) during this time, you must stop using the reduced income tax rate. However, if your company income stays within 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 long as you stay in the gross income limit. If your income exceeds Rp4.8 billion by the end of 2019, you are prohibited from using the new income tax rate again in 2020.
The regulation changes show further flexibility in tax liability. If your annual gross income is not above Rp4.8 billion, then you may choose between two taxes:
- Income tax rate (half a percent from gross income)
- General tax rate (12.5 – 25 percent of 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.
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 Rp4.8 billion. For example, if you set up a PT Prima Satu and a PT Prima Dua you can have a total income of Rp9.6 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 headquarters, 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 rate is possible.
So if PT Prima Satu is the headquarters and PT Prima Dua is the branch, then you may combine their incomes. But 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 half a percent 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 tax residents in Indonesia not to lose sight of their tax commitments. Find out below what the difference is between personal and corporate income tax. If you wish to get better at planning your taxes in Indonesia, make sure to look up the Emerhub tax planning guide online.
PERSONAL AND CORPORATE INCOME TAX
Companies with domicile in Indonesia must also comply with Indonesian tax obligations. There are exceptions, although the standard corporate income tax in Indonesia is 25 percent.
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 (five percent to 30 percent):
|Annual Income||Personal Income Tax Rate|
|Up to IDR 50,000,000||5 percent|
|Above IDR 50,000,000 Up to IDR 250,000,000||15 percent|
|Above IDR 250,000,000 up to IDR 500,000,000||25 percent|
|Above IDR 500.000.000||30 percent|
|Without NPWP||Rate is 20 percent higher than for those with NPWP
Emerhub offers various accounting and tax services to businesses of all sizes. Reach out to us for professional reporting services and assure your payroll taxes and tax reporting are in compliance with the law.