OPERATING EXPANSES (OPEX)

Notes:

1. This covers earnings of landowners from Build-Operate-Transfer (BOT) agreements.
2. Profits from transferring real estate assets to a Real Estate Investment Fund (Kontrak Investasi Kolektif - Dana Investasi Real Estate or KIK-DIRE) are taxed at a rate of 0.5%.
3. Different rates are applicable for interest earned from time deposits funded by export earnings (Devisa Hasil Ekspor).
4. This scheme is elective for eligible taxpayers and is valid for a specified duration depending on the taxpayer category. Resident companies, Permanent Establishments (PEs), representatives of foreign companies, organizations, and designated individuals are responsible for deducting the aforementioned final tax from the gross payments to resident taxpayers and PEs.

**Law Number 7 of 1983 regarding Income Tax as amended several times, lastly by Law Number 6 of 2023.

5.2 Capital Gains

Capital gains, typically assessed alongside ordinary income, are subject to taxation at the standard Corporate Income Tax (CIT) rate. However, profits derived from the sale of land and buildings are not subjected to regular CIT; instead, they are liable for final income tax at a rate of 2.5% of the transaction value or the government-assessed value, whichever is greater.

Proceeds from the sale of shares listed on the Indonesian stock exchange do not incur standard CIT. Instead, they are solely subject to a final Withholding Tax (WHT) of 0.1% of the gross sales consideration. In addition, an extra tax of 0.5% applies to the share value of founder shares during an initial public offering, regardless of whether the shares are retained or sold. Shareholders have the option to waive this tax, in which case any actual gains will be subject to standard tax upon the eventual sale of the shares.

5.3 Employee Taxes

5.3.1 Article 21 employee income tax (EIT)

An employer is obliged to withhold and remit EIT to the State Treasury on remunerations (including cash allowance) as well as certain performance fees accrued or paid to the following individuals:

• Employees;
• Recipients of severance payments, pensions or pension benefits, and old-age benefits, including their heirs;
• Freelancers;
• Members of board of commissioners or executive boards that are not permanent employees in the same company;
• Ex-employees; and
• Event participants.

** Government Regulation Number 68 of 2009 Article 4, Income Tax Law (UU PPh) Article 17 paragraph (1) letter a, PMK No 16/PMK.03/2010 Article 1 Paragraph 4

5.3.2 Benefits-in-Kind (BIK) Taxation

Taxation of BIK received by employees (unless exempt as per MoF regulation).

In principle, BIK are taxable for employees. BIK that are not taxable for employees are limited to:

• Food and beverages provided to all employees;
• Certain facilities, infrastructure and/or facilities at the employer’s work site for employees and their facilities, provided that the work site that has been approved as a remote area by the DGT;
• BIK necessary to carry out work assignments;

** Government Regulation (PP) Number 55 of 2022.

5.3.4 Personal Tax Reliefs (Penghasilan Tidak Kena Pajak/PTKP)

• Taxpayer: IDR 54 million per year
• Spouse: IDR 4.5 million per year (additional IDR 54 million if the wife's income is combined with the husband's)
• Dependents: IDR 4.5 million per dependent, up to three dependents
• Occupational expenses: 5% of gross income, up to IDR 6 million
• Pension costs: 5% of gross income, up to IDR 2.4 million
• Employee contributions to approved pension funds (e.g., BPJS Ketenagakerjaan): Actual amount
• Compulsory tithe (Zakat) or religious contributions: Actual amount with valid supporting evidence and if all requirements are met

** PMK 101/2016

5.4 Article 22 income tax

Article 22 income tax is imposed on various transactions and collected by different authorities:

• State or regional government treasurers on the purchase of goods.
• Specific institutions appointed to collect tax from taxpayers involved in import activities or certain business operations.
• Certain corporate taxpayers when selling luxury goods.

Generally, with the exception of certain final taxes, Article 22 income tax withheld is creditable against the taxpayer's Corporate Income Tax (CIT).

5.4.1 Major Types of Payments Subject to Article 22 Income Tax

The following table outlines major types of payments subject to Article 22 income tax and their applicable rates:

• Import of certain consumer goods with or without Importer Identification Number (API): Import Value: 7.5%/10%
• Import of soybean, wheat, and wheat flour with API: Import Value: 0.5%
• Import of other goods (not listed as certain consumer goods, soybean, wheat, and wheat flour) with API: Import Value: 2.5%
• Import of other goods (not listed as certain consumer goods, soybean, wheat, and wheat flour) without API: Import Value: 7.5%
• Import of auctioned goods: Auctioned Price: 7.5%
• Export of commodities such as coal and metal and non-metal minerals, except when exported by taxpayers under a mining cooperation or CoW arrangement: Export Value: 1.5%
• Purchase of goods by state and regional treasurers or certain government institutions with payments made by the State Treasury and specific state-owned enterprises (with certain exceptions): Purchase price (excluding VAT): 1.5%
• Sale of fuel oil to Pertamina fuel stations: Selling price (excluding VAT): 0.25%
• Sale of fuel oil to non-Pertamina fuel stations: Selling price (excluding VAT): 0.3%
• Sale of fuel gas: Selling price (excluding VAT): 0.3%
• Sale of lubricants: Selling price (excluding VAT): 0.3%
• Sale of cement to distributors: Selling price: 0.25%
• Sale of paper products to distributors: Selling price: 0.1%
• Sale of steel products to distributors: Selling price: 0.3%
• Sale of certain automotive products to distributors: Selling price: 0.45%

This comprehensive list highlights the different scenarios where Article 22 income tax is applicable and specifies the withholding tax base and rates for each type of transaction.

** Income Tax Law (Law No. 7 of 1983 as amended by Law No. 36 of 2008)

**Minister of Finance Regulation No. 154/PMK.03/2010 (as amended by several subsequent regulations 

5.5 Article 23/26 Income Tax (PPh 23/26)

Article 23/26 Income Tax (PPh 23/26) encompasses withholding tax obligations within Indonesia. For domestic transactions, Article 23 withholding tax is imposed at a rate of 2% for most service payments involving Indonesian residents, while it stands at 15% for various payments to resident entities and individuals.

Non-residents are subject to Article 26 withholding tax at a rate of 20%. However, for non-resident entities receiving bond interest income, along with associated capital gains (such as premium and discount) upon disposal, a reduced withholding tax rate of 10% may apply. Additionally, through the provisions of tax treaties, reduced rates may be applicable, typically at the following levels:

Notes:

Service fees, encompassing technical, management, and consulting services rendered within Indonesia, incur withholding tax (WHT) at varying rates: 5% for Switzerland and the United Arab Emirates; 7.5% for Germany; 10% for Cambodia, India, Luxembourg, Papua New Guinea, Venezuela, and Zimbabwe; and 15% for Pakistan.

VAT exemptions reciprocally apply to income generated from the operation of ships or aircraft in international routes.

The treaty remains silent regarding the Business Profit Tax (BPT) rate. The Indonesian Tax Office (ITO) interprets this to mean that the tax rate stipulated in Indonesian Tax Law (20%) should be enforced.

Benefits under the tax treaty are not extended to Labuan offshore companies governed by the Labuan Offshore Business Activity Tax Act 1990. An amended protocol was signed on 20 October 2011 and ratified on 4 August 2017, pending the exchange of ratification documents.

Ratified but pending enforcement, awaiting the exchange of ratification documents.

Regarding interest:

1. Exemption applies if paid to the government.
2. Exemption is granted if paid to a bank under a government loan agreement or specific financial institutions/banks.

Royalties cover the use or rights to use various intellectual properties or commercial knowledge. Definitions include copyrights, patents, designs, industrial or scientific equipment, and supply of technical information.

Permanent Establishments (PEs) reinvesting their after-tax profits in Indonesia within the same year or by the following year are exempt from BPT on these profits (see Tax credits and incentives section).

The concept of beneficial ownership has become a focus of the tax office. For treaty WHT rates to apply to passive income like interests, dividends, and royalties, the recipient must be the beneficial owner. Additionally, they must furnish a Certificate of Domicile (CoD) in the prescribed format, certified by their home country tax authority, confirming their tax residency. The use of a CoD prepared by the other country's tax authority is limited. Moreover, the CoD form entails declarations by the recipient, affirming that the treaty jurisdiction was not exploited solely for treaty benefits. These requirements impose obligations on both Indonesian payers and recipients. Without a certified CoD, a WHT rate of 20% applies. These considerations are crucial when remitting income of this nature.

5.6 Interest Income

Income generated from interest, whether from time or savings deposits or Bank of Indonesia Certificates (SBIs), received by a resident company or a Permanent Establishment (PE), incurs a final tax rate of 20%. Conversely, interest income from bonds is subject to a final income tax rate of 10%.

Interest income from sources other than those mentioned above is taxable and is subjected to taxation through a Withholding Tax (WHT) mechanism. For resident taxpayers, the WHT rate on interest is 15% of the gross amount, while for non-resident taxpayers, it is 20% of the gross amount, or the reduced rate stipulated in a tax treaty. The WHT on domestic interest can be utilized as a tax credit against the standard income tax rate of 22% for corporate taxpayers and/or up to 35% for individual taxpayers.

5.7 Royalty Income

Revenue generated from royalty payments is taxable and is subjected to taxation through a Withholding Tax (WHT) mechanism. For resident taxpayers, the WHT rate on royalty income is 15% of the total amount, while for non-resident taxpayers, it is 20% of the gross amount, or the reduced rate as specified in a tax treaty. The domestic WHT applied to royalty income can be utilized as a tax credit against the standard income tax rate of 22% for corporate taxpayers and/or up to a maximum of 35% for individual taxpayers.

5.8 Exchange gains and losses

Gains and losses arising from currency fluctuations are generally recognised on an accrual basis in accordance with the prevailing Indonesian Accounting Standards, which resemble International Accounting Standards in most respects.

5.9 Foreign Income

Foreign income from a controlled foreign company (CFC) is subject to deemed dividend regulations in Indonesia. This income encompasses dividends, interest, rentals, royalties, and profits from asset sales or transfers, with specific restrictions. A CFC refers to a foreign entity that is owned at least 50% by an Indonesian taxpayer or collectively by Indonesian taxpayers. Additionally, CFC income extends to earnings from indirectly owned CFCs, where ownership reaches a minimum of 50% by another CFC, collective ownership by an Indonesian taxpayer's CFC, or collective ownership by multiple CFCs (under the same or different Indonesian taxpayers).

The determination of CFC status relies on the ownership percentage at the conclusion of the Indonesian taxpayer's fiscal year, based on either the percentage of paid-up capital or the percentage of paid-up capital with voting rights. Exceptions to these regulations apply solely when the shares of the CFC are listed on a recognized stock exchange.

Apart from foreign dividends, other types of income may also qualify for exemption if reinvested or used for business purposes in Indonesia within a specified timeframe. These include income received by an Indonesian taxpayer from a foreign permanent establishment (PE) and active business income received by an Indonesian taxpayer from abroad, excluding income from a PE or foreign subsidiary.

5.10 Foreign Tax Credit

Foreign tax credit (FTC) allows for the offsetting of tax paid or due in foreign countries against the tax liability in Indonesia within the same fiscal year, pertaining to income earned from abroad by a resident taxpayer.

The eligible FTC amount is determined as the lesser of the actual tax paid or due, or a calculated amount based on FTC regulations ("certain amount"). Additionally, under the new tax regulations, there is an added constraint based on the applicable tax treaty rate. If the tax treaty specifies that the taxing authority for certain income lies solely with Indonesia, any FTC for such income cannot be credited. Consequently, three amounts (actual FTC amount, certain amount, and tax treaty rate) must now be considered to ascertain the minimum amount for determining the allowable FTC.

5.11 Tax Exemptions for Dividend Reinvestment

Minister of Finance (Menkeu) Sri Mulyani Indrawati officially exempts income tax (PPh) on dividends with the condition that a minimum of 30% of post-tax profits is reinvested in Indonesia. The Minister regulates types of reinvestment instruments that can be chosen before receiving this fiscal incentive.

This policy is stipulated in Minister of Finance Regulation (PMK) Number 18/PMK.03/2021 regarding the Implementation of Law Number 11 of 2020 concerning Job Creation in the Field of Income Tax, Value Added Tax, and Luxury Goods Sales Tax, as well as General Provisions and Taxation Procedures. The regulation was signed by the Minister and became effective on February 17, 2021.

Reinvestment Instruments for Tax Exemption:

• Indonesian Government Securities (Surat Berharga Negara Indonesia)

These are debt securities issued by the Indonesian government to finance its budget deficit or development projects. Investors purchasing Indonesian Government Securities are essentially lending money to the government and receive interest payments over a specified period.

• Bonds issued by State-Owned Enterprises (SOEs) (Obligasi Badan Usaha Milik Negara)

State-Owned Enterprises issue bonds to raise funds for various purposes, such as infrastructure development or business expansion. These bonds are supervised by the Financial Services Authority (OJK) to ensure compliance with regulatory requirements.

• Bonds issued by Government-Owned Financial Institutions (Obligasi Lembaga Keuangan Milik Pemerintah)

Government-owned financial institutions, such as state-owned banks or development banks, issue bonds as a means of raising capital. These bonds are also regulated by the OJK to safeguard investor interests.

• Financial Investments in Banks, including Islamic Banks (Investasi Keuangan pada Bank, termasuk Bank Syariah)

Investors can allocate funds to financial instruments offered by banks, including savings accounts, time deposits, or investment products such as mutual funds. Islamic banks offer Sharia-compliant financial products that adhere to Islamic principles.

• Bonds from Private Companies (Obligasi dari Perusahaan Swasta)

Private companies issue bonds to raise funds for business operations, expansion, or capital investment. Investors purchasing these bonds receive periodic interest payments and repayment of the principal amount upon maturity.

• Infrastructure Investment through Public-Private Partnerships (Investasi Infrastruktur melalui Kemitraan Publik-Swasta)

Public-private partnerships involve collaboration between government entities and private sector companies to develop infrastructure projects such as toll roads, airports, or power plants. Investors can participate in these projects through equity investments or financing arrangements.

• Real Sector Investments based on Government Priorities (Investasi Sektor Riil Berdasarkan Prioritas Pemerintah)

These are investments in sectors identified as priorities by the government, such as manufacturing, agriculture, or technology. These investments contribute to economic growth, job creation, and the development of key industries.

• Equity Participation in Newly Established Companies in Indonesia (Penyertaan Modal pada Perusahaan yang Baru Didirikan di Indonesia)

Investors can acquire ownership stakes in newly established companies in Indonesia through equity participation. This can involve purchasing shares or providing capital in exchange for ownership rights and a share of future profits.

• Cooperation with State Wealth Funds (Kerjasama dengan Dana Kekayaan Negara)

State wealth funds are investment vehicles established by the government to manage national assets and invest in strategic sectors. Investors can collaborate with these funds to participate in large-scale projects or strategic investments.

• Investments Supporting Other Business Activities in Indonesia (Investasi yang Menunjang Kegiatan Usaha Lainnya di Indonesia)

This category encompasses investments that support various business activities in Indonesia, including those aimed at promoting micro, small, and medium-sized enterprises (MSMEs). These investments contribute to economic development and job creation.

• Other Legitimate Investments according to Statutory Regulations (Investasi Sah Lainnya sesuai Peraturan Perundang-Undangan)

Apart from the specific instruments mentioned above, investors can explore other legitimate investment opportunities in accordance with statutory regulations. These may include investments in sectors not explicitly listed or innovative financing arrangements.

5.12 Corporate Branch Tax

Profits derived from branch operations are liable to the standard Corporate Income Tax (CIT) rate of 22%. Following taxation, the remaining profits are subjected to a withholding tax (WHT), commonly known as branch profits tax (BPT), set at 20%, irrespective of repatriation to the parent company's domicile. Nevertheless, a reduced WHT rate might be applicable under certain circumstances outlined in tax treaties (refer to the Withholding Taxes section for comprehensive details). Should profits be entirely reinvested within Indonesia, the BPT could potentially be waived (refer to the Tax Credits and Incentives section for more elaborate information).

5.13 Value-Added Tax (VAT)

According to the latest Harmonized Tax Law (UU HPP), there have been changes in the regulations governing VAT in Indonesia. As of 1 April 2022, the general VAT rate applicable to the sale of goods and services within Indonesia is 11%. This adjustment also includes provisions for the rate to potentially increase to a maximum of 12% starting 1 January 2025.

Notably, VAT on the export of goods is zero-rated, while imported goods are subject to an 11% VAT rate starting 1 April 2022. Exported services also qualify for zero-rated VAT, although subject to certain limitations set by the Ministry of Finance (MoF).

Here's a table summarizing the expanded scope of services eligible for 0% VAT effective from 1 April 2019 and the final VAT mechanism introduced from 1 April 2022:

Expanded Scope of Services Eligible for 0% VAT (Effective 1 April 2019)

Final VAT Mechanism on Deliveries (Effective 1 April 2022)

5.14 Value-Added Tax (VAT) Imposition Base

VAT is applied based on the VAT imposition base, which includes the selling price, compensation price, import value, export value, or another specified value.

Types of Delivery and Special VAT Imposition Base

**Law Number 8 of 1983 regarding Value Added Tax on Goods and Services and Luxury-goods Sales Tax as amanded several times, lastly by Law Number 6 of 2023

**Law Number 2 of 2020 regarding Stipulation of Government Regulation in Lieu of Law Number 1 of 2020 regarding State Financial Policy and Financial System Stability for Handling Covid-19 Pandemic and/or in the Context of Facing Threats that Harm National Economy and/or Financial System Stability to Become Law as amended by Law Number 7 of 2021 regarding Law on Harmonization of Tax Regulations.