Introducing the New Income Tax Law (Part Two) (新所得税法のご紹介 (パート2))

financialAs part of the previous article on the changes of Income Tax provisions under Law No. 36 Year 2008, this part two article specifically discusses the changes in deductible and non deductible expenses, Non Taxable Income (PTKP), separate tax imposition on husband-wife’s income, net income calculation norm, and tax tariffs. What and how significant are the changes? Here it is to find out.


BUSINESS EXPENSES

事業活動費


The new Income Tax Law (Law
No.36 Year 2008) has been quite fair by not only adding income as Tax Objects, but also by adding type of expenses as deductible expenses. Comparing the list in the Article 6 of the current prevailing Income Tax Law (Law No.17 Year 2000) with that of in the new Income Tax Law, new expenses are provided on the following page.

Table: New Expenses

課税・非課税対象の追加

No

Type of Expense

Article

1.

Promotional and Sales expenses further to be regulatedwith Finance Minister regulation.

Article 6 paragraph (1) letter a angka 7

2.

Donation in relation to national disaster recovery program further to be regulated with Government regulation.

Article 6 paragraph (1) letter i

3.

Donation in relation to
Research and Development conducted in
Indonesia further to be regulated with Government regulation.

Article 6 paragraph (1) letter j

4.

Donation in form of educational facilities further to be regulated with Government regulation.

Article 6 paragraph (1) letter l

5.

Donation in relation to sport management further to be regulated with Government regulation.

Article 6 paragraph (1) letter m

6.

Social infrastructure construction expenses further to be regulated with Government regulation.

Article 6 paragraph (1) letter k


The first new expenses in the list are promotional and sales expenses, which are not listed explicitly in the Article 6 of the  current Income Tax Law
. In practice, expenses related to marketing activities are most likely subject to corrections by the Tax Auditor (treated as non deductible expenses). This is due to the fact that the wide range of promotional and sales expense types so much depends on the nature of businesses engaged by taxpayers. Accordingly, to minimize potential disputes between the Tax Officers and the Taxpayers in expenditure recognition, these frequently incurred expenses are stated explicitly as deductible expenses whose recognition is stipulated with a Finance Minister regulation, including the limitation of expense amount.


Further, significantly different to the current Income Tax Law prevailing since year
2000 up to 1 January 2009, some donations as mentioned in the above table are going to be calculated as deductible expenses. By contrast, in the current Income Tax Law, donations could not be recognized as expenses. The only types of donation once allowed to be deductible expenses were those for Tsunami disaster recovery in Aceh and earthquake disaster recovery in Yogyakarta. The regulation for these donations was not event stipulated under the Law, but only under a Finance Minister Regulation. With such significant changes, Taxpayers are expected to actively participate in the efforts of disaster victim recovery, life quality improvement and national achievement.


As lastly listed in the Table, social infrastructure construction expenses can be recognized as deductible expenses
. Currently, any expenditure in relation to philanthropy or CSR (Coorporate Social Responsibility) is similarly treated as donation which absolutely could not be treated as deductible expense. This tends to make some taxpayers hesitate to contribute themselves in developing their social environment, especially if they must allocate extra fund to do so. With this change, it is not impossible to expect the rising contribution by taxpayers in philanthropy or CSR activities in the near future.


Another good news, besides the additional list of deductible expenses
, is that the new Income Tax Law simplifies the provisions related to loss recognition on uncollectable receivables and fund reserves. This results significant changes to the treatments on the expense recognition on uncollectable receivables and fund reserves as stipulated in the Article 9 of The new Income Tax Law.


Particularly regarding the recognition of uncollectable receivables
, the requirements to recognize them as expenses are now being simplified. Taxpayers will still be required to already expensed in the commercial income statement and to submit the list of uncollectable receivables to the Directorate General of Taxes. However, the announcement  of uncollectible receivables in public or exclusive publications is optional, since it can be replaced with the following:

1. The collection case has been filed to the State Court/the government institution handling the state receivable;

2. There is a written agreement with the related debtor;

3. There is a statement from the debtor confirming the loan write-off.


For small debtors who wish to recognize uncollectable receivable expenses, it is not necessary to fulfill the above conditions which are optional
.


Regarding the fund reserve, the type of industries that are allowed to establish fund reserve will no longer be limited to banks, financial leasing, insurances and mining. Starting from year 2009, taxpayers which are
1) business entity providing credits; 2) consumer financing companies; 3) factoring companies; 4) Social Security Management Body; 5) Fund Guarantor Institutions; 6) Forestry companies; and 7) industrial waste management companies, are allowed to establish fund reserves. There are particular purposes underlying this significant change. First, the Government tries to give similar treatments to business entities providing credits. Second, the Government wishes to accommodate the establishment of national security insurance system and Fund Guarantor institutions. And, the Government wishes to accommodate fund reserve obligations that should be allocated by taxpayers engaged in the industries of mining, forestry, and industrial waste management, other than those already allowed to do so.


Table: Non Taxable Income Comparison

課税・非課税対象の追加


Description



Current Provision (IDR)


Upcoming Provision (IDR)

For a taxpayer

13,200,000

15,840,000

Addition for taxpayer’s marital status

1,200,000

1,320,000

Addition for  a wife whose income is aggregated with the husband’s;

13,200,000

15,840,000

Addition for every family member by blood and by marriage in one straight line, including adopted child, as fully dependant, max. 3 person per family

1,200,000

1,320,000

Note:
according to Finance Minister Decree No.137/PMK.03/2005


NON TAXABLE INCOME

非課税所得


The new Income Tax Law regulates an additional amount of Non Taxable Income for individual taxpayers of IDR2
20,000 per month, whereas the additional amount is only IDR10,000 per month for one dependant and marital status, respectively. The detail comparison table of Non Taxable Income per year based on the current Income Tax Law and the upcoming one is provided below.


SEPARATE TAX IMPOSITION

分離課税


Separate tax imposition which has been so far regulated with the current Income Tax Law is in the event that a husband and a wife live in a separate life
. Another condition on which separate tax imposition is applied is when there is a separate asset and income agreement in written made by a marital spouse.


Using the reason to synchronize the fact where there are wives who wish to register their own taxpayer identification number using their own names, the upcoming Income Tax Law effective per 1 January 2009 regulates that separate tax may be imposed for wives who choose to perform their tax rights and obligations
separately
. The procedure of Income Tax due calculation is similar with those having asset and income
separation agreement.


NET INCOME CALCULATION NORM

純利益計算基準


Currently, individual taxpayers conducting business/independent professionals own a similar obligation with corporate taxpayers that is maintaining bookkeeping consistently and in truth
. Those who can be free from the bookkeeping obligation -which is relatively distressful for taxpayers- are only individual taxpayers of entrepreneurs/independent professionals having business turnover less than IDR1,8 billion a year (as referred to in Finance Minister Regulation No. 01/PMK.03/2007). After filing an application for recording to the Directorate General of Taxes, an individual can use the right for not maintaining bookkeeping and being allowed to only conduct recording.


Fortunately, such right can be enjoyed by individual taxpayers of entrepreneurs/independent professionals having business turnover less than IDR
4,8 billion/year starting from 01 January 2009. This change is certainly to adapt to the recent economic condition, plus to anticipate a common fraud practice. It is a fact that certain taxpayers tend to falsely report their business turnover less than IDR 1,8 billions only to avoid bookkeeping obligation.


Table: Tax Tariff for Individual Taxpayers

課税・非課税対象の追加

Law
No. 17/2000


Upcoming Provision
(IDR)

Taxable Income

Tax
Tariff

Taxable Income

Tax
Tariff

Up to IDR 25 million

5%

Up to IDR 50 million

5%

> IDR 25 million – IDR 50 million

10%

> IDR 50 million – IDR 250 million

15%

> IDR 50 million – IDR 100 million

15%

> IDR 250 million – IDR 500 million

25%

> IDR 100 million – IDR 200 million

25%

> IDR 500 million

30%

> IDR 200 million

35%


TAX T
ARIFF

税率表


Besides adding the deductible expenses for taxpayers, this new Income Tax Law also reduce the tariffs commonly called the Article 17 tariffs. The lowest tax tariff for individual taxpayers is still 5% but the highest one is now only 30%, compared to the current Income Tax Law which still applies 35%. On the other hand, if an individual taxpayer acquires income in form of dividend, income tax imposed particularly upon the said dividend is at the maximum tariff of 10% and final.


It is clearly noted that not only reducing the tariff, the new Income Tax Law also lowers the brackets of Taxable Income
. As a result, the benefit gained by certain groups of  taxpayers will be quite significant. The individual taxpayers with income of IDR200 million-IDR 250 million can enjoy the tariff reduction up to 20%. Unfortunately, the individual
taxpayers within income bracket up to IDR25 million will not experience any reduction.


Different from those imposed on individual taxpayers with the highest tariff of 30%, a single tariff of 28% will soon be applied for corporate taxpayers. Also, with the purpose of increasing competitive ability among other countries in attracting foreign investments
, per year 2010 the tariff will be even lowered to 25%. Further, the small scale corporate taxpayers, with business turnover up to IDR 50 billion, will be  entitled to 50% reduction of the tariff as determined on Taxable Income from part of business turnover up to IDR 4,8 billion. Meanwhile, the go public corporate taxpayers, whose a minimum of 40% of total shares paid are sold in stock exchanges in Indonesia and which meet other certain requirements, may obtain tariff reduction at 5%.

Next, the third part of this article will discuss about special relationship, withholding taxes, tax installment for current year (Income Tax Article 25), and other matters stipulated in the last articles of Income Tax Law, on which other significant changes will be noted.

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