A Complete Guide to Corporate Tax and Tax Compliance When Establishing a Local Entity in Indonesia

For Japanese executives and managers setting up a local company (PT PMA) in Indonesia, this article provides a detailed explanation of Indonesia’s tax system. In this article, we explain the corporate income tax (Pajak Penghasilan Badan), value-added tax (VAT/PPN), import duties and taxes, local taxes on services, and tax handling for outsourced employees. We’ve organized the content by topic to help support your business operations in Indonesia.

 

Indonesia’s Corporate Tax (PPh Badan) – Basic System

Tax Rates and Taxable Income

The standard corporate income tax (PPh Badan) rate in Indonesia was set to 22% in 2022 and applies to domestic companies (companies established in Indonesia) and permanent establishments (foreign company branches).

• Listed companies that meet conditions (e.g., 40% of shares are publicly traded on the Indonesia Stock Exchange) qualify for a reduced rate of 19% .
• Small and medium-sized enterprises (SMEs) with annual taxable income up to IDR 480 million receive a 50% tax reduction (effective rate of 11% ).
  • Companies with revenue below IDR 480 million can apply the 11% rate to their full taxable income.
  • For companies with revenue between IDR 480 million and IDR 5 billion, the first IDR 480 million is taxed at 11%, and the remainder at 22%.
• Final Tax Regime : Small businesses meeting specific conditions can pay a final tax of 0.5% on gross revenue for up to 3–4 years. This simplified regime is available to PT (limited liability companies) in the first three years, though many foreign companies choose to follow the standard 22% rate.

 

Definition of Taxable Income

Corporate taxable income (Penghasilan Kena Pajak) is calculated as adjusted accounting net profit, meaning it’s based on income recognized for tax purposes after deducting allowable expenses.

Key points:

• Worldwide income is taxed if the company is classified as a tax resident.
• Losses can be carried forward for up to 5 years.
• Tax applies to economic benefits from both Indonesia and abroad , excluding certain non-taxable income like donations or inheritances.

Fiscal Year and Filing Obligations

• The tax year (Tahun Pajak) follows the calendar year (January–December) unless changed via formal application.
• Companies must prepare and maintain double-entry accounting records in Indonesian Rupiah (or English with approval).
• Financial statements must comply with Indonesian Accounting Standards (SAK) after the fiscal year ends.
• Transfer pricing regulations apply to related-party transactions (not detailed here).

 

 

Corporate Tax Payment Schedule and Online Procedures

Tax Payment Schedule

Indonesia uses a split payment system :

1. Monthly advance payments (PPh Article 25) based on previous year’s estimates.
   • Due by the 15th of the following month (e.g., Jan tax due by Feb 15).
   • Adjust for weekends/public holidays.
2. Annual final filing (SPT Tahunan PPh Badan) by April 30 (four months after year-end).
   • Adjust advance payments and settle any underpayment/refund.
3. Extensions : A 2-month filing extension is available with formal notification, but no extension for tax payment deadlines . Even with an extension, estimated tax must be paid by the original deadline (usually April 30), and any shortfall will incur interest.

Digital Tax Filing and Payment System

Indonesia has digitized tax procedures:

1. NPWP (Taxpayer ID) : Obtain this after company registration.
2. e-Billing : Generate a payment code via the Directorate General of Taxation (DJP) portal.
   • Example: Log in to DJP Online , select “BAYAR” (pay), enter tax details to generate a 16-digit Billing ID .
3. Bank Payment : Use the Billing ID to pay at banks or online payment platforms.
4. NTPN (Payment Confirmation Number) : Automatically issued after payment, serving as proof of tax payment.
5. e-Filing : Submit annual returns via DJP’s system.
   • Form 1771 is completed online with attached financial statements.
   • e-FIN (filing identification number) is required for first-time filers and can be obtained at the tax office.

Companies are required to file and pay withholding tax on salaries (PPh21) and VAT returns online. Indonesia has made great progress in digitalizing tax procedures, so establishing these electronic systems quickly after setting up a local entity is crucial.

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Penalties for Non-Compliance with Corporate Tax

Late Filing Fees

• IDR 1,000,000 fixed fine per late corporate tax return (SPT Tahunan).
• IDR 100,000–500,000 for mid-year filings (e.g., monthly PPh21 or VAT).

Late Payment Interest

• 2% monthly interest (approx. 15% annually ) applies to overdue taxes.
• Capped at 24 months of interest, though rates may adjust based on market conditions.
• Example: A 1-month delay incurs 2% interest , regardless of actual days.

Underreporting or Non-Reporting Penalties

• 100% penalty on unpaid taxes for self-reported underreporting.
• 50–100% penalty for tax authority audits.
• Criminal liability for intentional tax evasion.

Failure to comply results in strict penalties , including interest and fines. Collaborate with local accountants/tax advisors to ensure compliance and sustainable operations.

Overview of Value Added Tax (PPN/VAT) and Registration Requirements

Basic VAT Rules

• Standard rate: 11% (to rise to 12% in 2025 ).
• Zero-rated for exports to maintain competitiveness.
• Exempt items: Fresh food, education, healthcare, and financial services.
• Restaurant/hotel food is VAT-exempt but subject to local taxes.

PKP (Taxable VAT Entrepreneur) Registration

• Mandatory for companies with annual revenue > IDR 480 million .
• File monthly VAT returns (SPT Masa PPN) by the 20th of the following month .
• Input tax credits : Recover VAT paid on purchases against output VAT.

 

 

Import Duties (Bea Masuk) and Associated Taxes

Customs Duties

• Rates vary by HS code and origin. Japan benefits from the Japan-Indonesia Economic Partnership Agreement (EPA) for preferential rates.
• Calculated on CIF value (cost + insurance + freight) + customs duty.
• Example:
  • CIF value: USD 1,000 (approx. IDR 14 million ).
  • Duty rate: 7.5% → USD 75 (IDR 1.05 million ) in customs duty.

Import VAT (PPN Impor)

• 11% on CIF + customs duty (e.g., IDR 3.036 million for the above example).
• Input VAT credit : Deductible in subsequent VAT filings if used for taxable sales.

Import Withholding Tax (PPh Article 22 Impor)

• 7.5% for companies with NPWP; 15% for those without.
• Example:
  • Tax base: IDR 276 million (CIF + duty).
  • PPh22: IDR 20.7 million .
• This tax is credited against annual corporate tax.

Other Import Taxes

• Luxury tax (PPnBM) : Up to 125% for luxury goods (e.g., cars).
• Excise (Cukai) : Applied to tobacco and alcohol.
• Clearance fees : Additional administrative charges during customs processing.

Local Taxes (Pajak Daerah) for Service Businesses

Key Local Taxes

1. Hotel Tax (Pajak Hotel) : Up to 10% on accommodation charges (e.g., Jakarta applies 10% ).
2. Restaurant Tax (Pajak Restoran) : 5–10% on food/beverage sales.
3. Entertainment Tax (Pajak Hiburan) : 5–75% (e.g., nightclubs: high rate, cinemas: low rate).
4. Advertising Tax (Pajak Reklame) : Up to 25% (e.g., Jakarta applies 25% on billboard costs).
5. Lighting Tax (Pajak Penerangan Jalan) : 2.4–3% of electricity bills.
6. Parking Tax (Pajak Parkir) : 20% of parking fees.
7. Land & Building Tax (PBB P2) : 0.1–0.3% of property value (annual).
8. Land Acquisition Tax (BPHTB) : 5% of transaction value (after exemptions).

Compliance Notes

• Local taxes are administered by regional governments (Provinsi/Kabupaten).
• Example: Jakarta’s hotel tax is 10% , restaurant tax is 10% .
• Tax obligations vary by business type, so review local regulations (Perda) before operations.
• Local taxes are usually filed monthly or quarterly.

 

 

Conclusion

Establishing a local entity (PT PMA) in Indonesia requires thorough understanding of:

• Corporate tax (PPh Badan) : 22% standard rate with SME incentives.
• VAT (PPN) : 11% rate with export exemptions.
• Import taxes : Customs duty + VAT + PPh22.
• Local taxes : Hotel, restaurant, and advertising taxes.
• Double taxation avoidance : Japan-Indonesia tax treaty reduces withholding rates on dividends, interest, and royalties.

Failure to comply results in strict penalties , including interest and fines. Collaborate with local accountants/tax advisors to ensure compliance and sustainable operations.

Glossary of Key Terms

FAQ

Q1. Must we file corporate tax returns even if the company is in deficit?
A1. Yes. Annual filing (SPT Tahunan ) is mandatory, regardless of profit/loss.

Q2. Are VAT and local taxes both shown on invoices?
A2. VAT is applied to most goods/services, while local taxes (e.g., restaurant tax) are levied separately.

Q3. Do we need to submit DGT forms annually?
A3. Yes. Failure to submit results in losing treaty benefits (e.g., 10% vs. 20% withholding tax).

Q4. Can import VAT be treated as an expense?
A4. Yes. Input tax credits are available if used for taxable sales.

Q5. Who handles tax obligations for outsourced employees?
A5. The outsourcing company (penyedia jasa ) withholds PPh21, while the client company withholds 2% PPh23 on service fees.

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Tax Regulations When Employing Outsourced Workers in Indonesia

In Indonesia, many companies source labor through outsourcing agencies. There are several important tax considerations when utilizing outsourced labor:

Withholding Tax on Outsourcing Services (PPh Article 23)

When a company engages an outsourcing provider and pays fees for their services, a withholding tax under Income Tax Article 23 (PPh Pasal 23) applies. Under Indonesian tax law, outsourcing services are categorized as “labor provision services,” and the receiving company (the client) has an obligation to withhold and remit 2% of the service fee to the government (4% if the outsourcing company doesn’t have an NPWP taxpayer ID ).

However, the taxable base for PPh23 is calculated by excluding the portion of the payment that corresponds to actual wages paid to workers by the outsourcing company. This special provision was established under the 2015 Ministry of Finance Regulation (PMK 141/2015). If the outsourcing company can provide documentation like payroll records, then only the margin or management fees (not the wage portion) are subject to 2% taxation. For example, if an outsourcing invoice shows:

• Wages: IDR 20 million
• Service Fee: IDR 2 million
• Total: IDR 22 million

Then only the IDR 2 million service fee would be taxed at 2%, resulting in IDR 40,000 in withholding tax .

If no clear breakdown is provided, the full amount is taxed at 2%.

PPh23 must be paid by the 10th of the following month and declared by the 20th of the following month to the tax authorities.

Withholding Tax on Employee Income (PPh Article 21)

For the wages and bonuses received by the outsourced workers themselves, the responsibility falls on the outsourcing company , which acts as the formal employer. They are required to apply PPh Article 21 — withholding tax based on progressive rates (5–35%) for residents or a flat 20% for non-residents.

The client company (the one using the outsourcing service) does not typically have PPh21 obligations since they don’t pay wages directly to workers. However, if the client provides direct allowances or reimbursements (e.g., transportation allowances) to outsourced workers, these must be included in taxable income and properly handled by the outsourcing provider.

 

Social Security and Other Considerations

Even for outsourced workers, Indonesian social security regulations apply:

• BPJS Kesehatan : Health insurance
• BPJS Ketenagakerjaan : Employment-related social insurance (pension, workplace injury, etc.)

Typically, the outsourcing company registers workers with BPJS and bears the insurance costs. However, some arrangements may shift this responsibility to the client company. From a tax perspective:

• BPJS contributions are tax-deductible for corporations
• Considered non-taxable benefits for employees

 

Key Tax Compliance Points When Using Outsourcing

To ensure compliance:

1. The client company must correctly apply and remit PPh23 at 2% on outsourcing fees
2. Confirm that the outsourcing company is properly handling PPh21 on employee wages

Include clear tax responsibilities in contracts between client and outsourcing companies to ensure consistency during audits.

 

 

Japan-Indonesia Tax Treaty (Double Taxation Avoidance)

A bilateral Double Taxation Avoidance Agreement (DTAA) was signed between Japan and Indonesia in 1982 and came into force in 1983. This treaty ensures fair taxation of cross-border business activities and prevents double taxation.

Some key benefits for Japanese companies operating in Indonesia include:

Reduced Withholding Tax on Dividends, Interest, and Royalties

Under Indonesian domestic law, a flat 20% withholding tax (PPh Article 26) applies to payments made to non-residents. However, under the Japan-Indonesia tax treaty , reduced rates apply:

• Dividends :
  • 10% if the recipient owns ≥25% of voting shares for ≥1 year
  • 15% cap for general cases
• Interest :
  • 10% for general interest payments
  • 0% for interest paid to the Japanese government or public institutions
• Royalties :
  • Maximum 10% withholding tax

For example, a Japanese parent company receiving dividends from its Indonesian subsidiary (PT PMA) can benefit from a 10% tax rate instead of the standard 20%. Additionally, Japan allows for foreign tax credits , so the withheld Indonesian tax can be credited against Japanese corporate tax.

To benefit from these reduced rates, the DGT form (Dokumen Keabsahan Terkait PPh) must be submitted to Indonesian tax authorities. This includes:

• A Tax Residency Certificate issued by the Japanese National Tax Agency
• Completed DGT-1 or DGT-2 forms by the Indonesian payer

Failure to submit these documents results in the default 20% withholding tax.

Business Profits and Permanent Establishment (PE)

Under the treaty, business profits of a Japanese company are only taxed in Indonesia if a Permanent Establishment (PE) exists in the country.

If a Japanese company operates in Indonesia without a PE (e.g., just exporting goods), profits remain taxable only in Japan.

In contrast, if a PT PMA (foreign-invested company) is established, it is treated as a domestic Indonesian entity , and the parent company in Japan avoids direct taxation. However, if a Japanese employee works in Indonesia for over 183 days and conducts business independently of the PT PMA, they may be considered a PE, triggering additional tax obligations.

 

Elimination of Double Taxation

The core purpose of the treaty is to prevent double taxation . If income is taxed in one country, the other country allows for a foreign tax credit so the same income isn’t taxed twice.

For example:

• A Japanese parent company receiving dividends or interest from its Indonesian subsidiary can claim a credit for taxes withheld in Indonesia.
• An Indonesian resident earning income in Japan can claim a credit for taxes paid to Japan when filing in Indonesia.

This ensures that businesses and individuals aren’t taxed twice on the same income.

Other Provisions of the Treaty

The treaty also includes:

• Exchange of tax information between Japan and Indonesia
• Non-discrimination clauses (no unfair tax treatment of foreign taxpayers)
• Mutual agreement procedures for resolving disputes

Both countries have also agreed to the Multilateral Instrument (MLI) under OECD’s BEPS framework, which may lead to future updates to the treaty. While the Japan-Indonesia agreement is relatively old, its core provisions — especially reduced withholding tax rates — remain effective and important for cross-border business.

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Conclusion

For Japanese companies establishing a local entity (PT PMA) in Indonesia, understanding the tax system is crucial. This includes:

• Corporate income tax (PPh Badan): Standard 22% rate, with reduced rates for listed companies or SMEs
• VAT (PPN): Standard 11% rate, rising to 12% in 2025
• Local taxes: Hotel tax, restaurant tax, entertainment tax, etc., vary by region
• Withholding taxes: 2% PPh23 on outsourcing fees, and PPh21 on employee wages
• Social insurance: BPJS Kesehatan (healthcare) and BPJS Ketenagakerjaan (employment insurance)

Using the Japan-Indonesia tax treaty can significantly reduce withholding taxes on dividends, interest, and royalties. Proper filing of DGT forms and maintaining documentation proves essential for claiming treaty benefits.

To ensure compliance and sustainable operations, it’s advisable to work with local accounting and tax advisors who understand both Japanese and Indonesian regulations.

Frequently Asked Questions (FAQ)

Q1. Must we file corporate tax returns even if the company is in deficit in its first year?
A1. Yes. SPT Tahunan PPh Badan (annual corporate tax return) is mandatory regardless of profit or loss.

Q2. Are VAT and local taxes both shown on invoices?
A2. It depends on the transaction. Some sectors like restaurants and hotels are exempt from VAT but subject to local taxes (e.g., 10% restaurant tax in Jakarta). Which applies depends on the industry and registration status.

Q3. Do we need to submit DGT forms annually?
A3. Yes. Failure to submit results in losing treaty benefits (e.g., 10% vs. 20%). You must obtain an annual Tax Residency Certificate from Japan and submit the appropriate DGT-1 or DGT-2 form in Indonesia to qualify for reduced rates.

Q4. Can import VAT be treated as an expense?
A4. Yes. Import VAT (PPN Impor) is eligible for input tax credit if used for taxable sales. It functions more as a temporary cash outflow rather than a final cost.

Q5. Who is responsible for tax compliance when using outsourced workers — client or outsourcing company?
A5. The outsourcing company handles PPh21 on worker wages, while the client pays PPh23 at 2% on service fees. Clearly defining tax responsibilities in the contract is highly recommended.

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