Introducing the New Income Tax Law – Part Three (新所得税法のご紹介 -パート3)

20060813015313011The third part of this article is to finalize the discussion over the new Income Tax Law. The changes regarding the provision of special relationship, Income Tax Article 21, 22, 23, 25, and 26, including the last articles of the Law.

Special Relationship

特別な関係

The Directorate General of Taxes (DGT) has long indicated that whenever a transaction occurs under special relation, there will be a potential of unfairness in price determination. Upon such potential, the Article 18 of the current Income Tax Law has stipulated that the Director General of Taxes may rectify income amount, deductions and loans as capital for taxpayers having special relationship. It is just that what has long been in question by taxpayers is which method used for the rectification. Now, after the issuance of the new Income Tax Law, it gets clearer that the methods used are: 1) price comparison from transactions between independent parties; 2) resale price, 3) cost-plus; or other methods.

Further, due to the increasing number of special purpose company (spc) establishments, for the purpose of eliminating negative implications from transactions under special relationship and spc establishment practice, the Article 18 of the new Income Tax Law stipulates that taxpayers who make purchase of company’s shares/assets through a spc may be determined as the party actually making the purchase. However, this condition applies when there are unfairness of price determination and special relationship between the taxpayer and the spc established. Moreover, company’s share sales/transfer between the spc established/located in a tax heaven country and having special relationship with a body/permanent establishment in Indonesia, may be determined as share sales/transfer of the body/permanent establishment in Indonesia.

Another matter regarding special relationship, total income acquired by any individual resident taxpayer from an employer having special relationship with another company outside Indonesia, may be rectified if the related employer transfers all/part of income of the individual taxpayer into expenditure paid to the company outside Indonesia.

Income Tax Article 21

所得税法 第21

The only one yet significant change in Income Tax Article 21 is the imposition of a 20% tariff increment for any individual having no Taxpayer Identification Number (TIN). For example, if an employee with no TIN earns income up to IDR 50 million, by calculating the tariff increment from the tarif under the Article 17 of the Income Tax Law, the effective tax tariff that is actually imposed on the income is 6%, compared to those having TIN who are only imposed with 5%.

When an employee bears his/her own tax, this tariff discrimination is clearly a costly burden for himself/herself. The case would be quite different in the impact if the tax is borne by the employer. As expected, the tariff increment has urged many companies to require and collectively register their employers for obtaining TIN. Even for employees who are not willing to obtain TIN, some companies which have the policy in bearing their employees’ income tax, have chosen to require such employees to individually bear the 20% tariff increment.

The tax tariff discrimination seems to be quite devastating for employees. However, since even the criminal sanction regulated in the Law of General Tax Provisions and Procedure (UU KUP) has never been an effective method to improve the awarness of having TIN, this policy would be another strategy applied by the DGT which may not be overwhelming considering the situation in the past .

Income Tax Article 22

所得税法 第22

In the Article 22 paragraph (1) of Income Tax Law, there is a new provision stating that:, “the Finance Minister may determine:

(c) Certain corporate taxpayers to withhold tax from buyers of good categorized very luxurious.”

This new provision brings the new phase of Income Tax Article 22 imposition where now the objects are not only related to imports, and good sales or purchases to or from certain parties. It is clearly shown that any purchase of luxury goods is not only subject to Value Added Tax and Sales Tax on Luxury Goods, but also Income Tax Article 22.

For certain buyers of luxury goods, spending extra money level may not be a big deal. What is truly considered a great deal is the categorization of luxury goods. Which are they? And, which entities can withhold the tax? The questions should be answered with a careful understanding of Finance Minister Regulation Number 253/PMK.03/2008. It is how to avoid any unnecessary tax payment made. According to the said regulation, the party having the obligation to perform withholding is a corporate taxpayer conducting sales of goods categorized as very luxurious.

Almost similar with the change in Income Tax Article 21, tax tariff discrimination for Non TIN holder is also applied in Income Tax Article 22 imposition. The difference is in the tariff increment of Income Tax Article 22 which is 100% from the normal tariff.

Income Tax Article 23

所得税法 第23

Tax tariff increment for Non TIN holder becomes uniformity among Income Tax withholding. The tariff increment in Income Tax Article 23 imposition is 100%, similar with that of in Income Tax Article 22 imposition. However, Income Tax Article 23 tax tariff on fee is reduced into 2% from the gross fee amount. By contrast, the tax tariffs on fee regulated by the previous Income Tax Law are mostly 4,5% imposed on a gross basis. Other type of services as objects of Income Tax Article 23 under the New Income Tax Law is stated explicitley in the Finance Minister Regulation Number 244/PMK.03/2008.

Further, the tax tariff on rental of land transportation and rental of other assets (other than land and or building) will be 2% on a gross basis, higher than the previous tariff of 1,5% and 4,5% on a gross basis, on rental of land transportation and rental of other assets (other than land and or building), respectively under the previous Income Tax Law.

In line with the tariff reduction, there is an additional Income Tax Article 23 object. Interest from bond received by a mutual fund company is now officially subject to Income Tax Article 23, whereas previously it is exempted from Income Tax Article 23 imposition during the first five year period of establishment of the related mutual fund company. On the other side, income paid/owed to a business entity on financial services of loan lending and/or financing will be exempted from Income Tax Article 23 imposition. In addition, dividend received by an individual will no longer be subject to this tax withholding.

The last change is regarding taxation on interest from deposits paid by a cooperative to its members. Such income received by a cooperative member is officially subject to Income tax Article 4 paragraph (2) whereas previously it would only be subject to Final Income Tax Article 23 if it exceeds a certain limited amount.

Income Tax Article 25

所得税法 第25

Under the new Income Tax Law, certain individual entrepreneur taxpayers, that are those conducting business activities in consumer good retail/wholesale through business place/counter spreading in different locations-not including sales of motor vehicle and restaurants-, will be granted a dispensation in Income Tax Article 25 payment. If previously they should pay Income Tax Article 25 at 2% per month from their gross business turnover, now they will only have to pay it at a maximum of 0,75%.

Moreover, this Article also affirms the exemption of Exit Tax for individual residents above 21 years of age when they are going to travel abroad if they own TIN. Since 1 January 2009, Exit Tax will be charged only to those having the age of 21 years above with no TIN. However, the paragraph (8) of this Article states that the Exit tax will no longer be applied pursuant to year 2010.

Income Tax Article 26

所得税法 第26

Other hedge transactions and gain from loan write off are now objects of Income Tax Article 26. The tariff applied is also 20% on a gross basis, similar with other objects of this Income Tax. Previously, the premium taxed was only swap premium.

Further, if a resident taxpayer feel uncertain in determining the country of domicile of the non resident taxpayer receiving income from Indonesia not through a permanent establishment in Indonesia, the New Income Tax clarifies that the term of country of domicile is the country in which a non resident taxpayer actually receiving the benefit from the income (beneficial owner) is domiciled or located. Later, if there is a share sales/transfer between a conduit company/special purpose company established/domiciled in a tax haven country having a special relationship with the entity established/domiciled in Indonesia or the permanent establishment in Indonesia, income related to the share sales/transfer is subject to Income Tax withholding at 20% from estimated net income.

Other Matters

その他

The crucial changes stipulated in the last articles in the New Income Tax Law are, among others, are the elimination of provisions concerning business loan restructuring through a special institution established by the Government. In addition to that, now it is affirmed that a Government Regulation will regulate/base taxation in the industries of natural gas and oil mining try, geothermal, general mining including coal mining and syariah based business. Lastly, there is a new provision stating that taxation on interest or discount from State Bond traded in another country based on a mutual agreement with the other country will be regulated under a Government Regulation.

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