Problems relating to Trade and Investment on Indonesia
14. Taxation Systems |
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Issue |
Issue details |
Requests |
Reference |
| (1) Nebulous Denial/ Additional Tax/ Arbitrary Nature of Tax Investigation | - Due to the high rates of the pre-paid income tax upon import, frequently a member firm files request for tax refund. Tax payers, who request tax refund, always should subject to tax investigation from tax authorities. It may be probably unwilling to make full-refund, at their sole discretion, with an extraordinary interpretation of tax laws and regulations. Consequently, the possibility for additional tax and penalty collection is higher than that of tax refunds. Request for reinvestigation, tax court proceedings, etc. are all time consuming and costly, and can easily interfere with business performance. - Payment made under "the Advance Payment Scheme of Corporate Income Tax (APSCIT)" based on the income of the preceding year, without exception, meets with tax investigation by tax investigators. However their knowledge and skill vary from one to the other. Probably due to the state target on tax revenue, more often than not, the results of tax investigation are irrational. In short, investigators tend to deny the income tax refund. - A huge amount of capital fund would be freezed due to exorbitant tax levy by the denial of royalty, trademark fees and so on, transfer pricing tax system, unrealistic denials or else When a member firm request for reinvestigation, tax court proceedings, etc. its capital fund would be freezed for a long time. Tax auditors deny deduction from taxable income of royalty and trademark fees without exchange of due explanation and discussions with taxpayers. - There exist tax rules physically impossible to follow. In addition, the business faces obstacles because tax authority's officials collect tax or impose a penalty, with ambiguous interpretation of tax law and under no fulfillment codes. - In the context of Transfer Price Taxation System (TPTS) investigation, the GOI tax authority denied deductible expense and collected back tax on the expense of the instructions and debt guarantee provided by the parent company to its subsidiary, because the authority considered them as dividends from subsidiary to its parent company. Member firm and MFS both observe to the letter carefully the documentation requirements at high cost. It would seem the tax investigator just levied the back tax, without delving fully into the documents prepared and submitted/shown to the GOI investigators. - Nebulous taxation administration. At the sole discretion of the tax investigators, deductible expenses are denied. Application for tax refund triggers tax investigation, which sometimes extend to several years. |
- It is requested that GOI: -- harmonizes interpretation of Laws -- brings up the ethics of tax auditors, -- streamlines the taxation system, and -- implements adequate tax auditing. - In the light of helping the business development, It is requested that GOI takes step to: -- review APSCIT, -- enhance professional quality of tax investigators, -- put a stop to investigators' unreasonable questions, -- enhances transparency, and foreseeability of tax investigation, and -- makes fair decision after exhausting reasonable questions and answers. - It is requested that TA makes a fair judgement after making available ample opportunity for explanation and exchange of dialogue with taxpayers. The Head Office Accounting Department of the member firm has provided full explanation about the existing status to Japan's National Tax Agency, etc. to bring the issue up on the agenda for dialog between GOI and GOJ. - It is requested that taxation authority: -- overhauls taxation system including implementing detailed registrations, and -- provides a forum to exchange dialogues with business operators, industrial associations, etc., affording training programmes to taxation officials, and giving an opportunity for enterprises' case study. - It is requested that GOI gives explanation in the manner taxpayers can understand, after completing sufficient verification of the TPTS documents. - It is requested that GOI takes step to: -- overhaul the legislative provisions, and -- implements tax investigation in all fairness. |
- Various Acts and Regulations - Minister of Finance Decree No73/ PMK03/2010 (on VAT) - Regulation of the Directorate General of Tax No. PER-45/PJ/2013 (Amending Minister of Finance Regulation No. 163/PMK.03/2012, etc.) - Indonesian Income Tax Law, Article 18.3 - SPT Articles 25/29, Income Tax Act |
| (Action) - In November 2000, it was announced by the government that a severe legal measures would be taken to collect tax from those found to have been evading tax. - At the 6th General Conference to Exchange Dialogues on Policy Matters held in July 2003 between the Jakarta Japan Club ("JJC") and the Indonesian government it was confirmed that the new regulation (KEP-220/PJ/2002) had resolved the ambiguous interpretation by the tax officials concerning the treatment of the cost of office cars and cellular phones as deductible expenses. It is now clearly defined in the new registration. - The bill to amend Income Tax Act that passed the Parliament on 2nd September 2008 introduces the measure to levy extra withholding tax on non-holders of NPWP (tax-file number= Nomor Pokok Wajib Pajak) to tighten tax collection. - The bill to amend income tax due for enforcement from 1 January 2009 passed the Parliament on 2 September 2008. The progressive tax rate has been unified to 28% in 2009, and 25% in 2010. Income tax on dividend received is subject to final tax of 10% maximum as separate withholding tax. |
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| (Improvement) - At the 6th General Conference to Exchange Dialogues on Policy Matters held in July 2003 between the Jakarta Japan Club ("JJC") and the Indonesian government, it was confirmed that a special team was established within the General Taxation Bureau to deal with the administrative protest by taxpayers. - President Yudoyono assuming the administration in 2004 has taken steps aimed at fair tax collection, for example, by directing investigation of the enterprises that are the top 200 highest taxpayers. - In Jan. 2004, the Press Release of the CMEA reported the progress of the implementation of PI No.5/2003 on the "Measures to Reform Tax and Customs Administration," that: "The Director General for Tax (DGT) has issued a Directive on Charter of Taxpayers' Rights as part of the Government's effort to improve tax administration and quality of service to taxpayers". - The Report of the "Taxation Sub-Committee" lists the following results obtained on the request to GOI (as of March 2004): 1) Shortening of the serviceable life of the computer related assets; 2) Simplifying the application procedure for the other assets classified under the Group III (with serviceable life of 16 years); 3) Clarification on the deductible expenses concerning company cars and cell phones; 4) Establishment of the special-service window for consultation at the General Taxation Office; 5) Clarification on the rules for inclusion in expenses the costs for cell phones and sedans used for the company. 6) Provision of an orientation period for the new laws and regulations, and GOI's commitment to exert its effort to thoroughly educate officials on the implementing regulations. 7) Clarification has been secured on the effective date for the laws and regulations, and GOI will exert its efforts to abolish irrational interpretation and to provide a thorough training and education to officials. 8) Reduction of the tax rate on the withholding tax for Maklon (indented processing) service was made possible; and 9) It was clarified that the offshore transactions are not subject to VAT. - As of August 2004, the CMEA's Press Release reported the following progresses of the implementation of PI No.5/2003 which address the transparency issue: 1. Establishment of tax website: (http://www.pajak.go.id/); the establishment of National Ombudsmen Committee to address complaints. 2. Internal workshops designed to clarify and to socialize the interpretations of tax regulation: 40 times, while 200 external workshops designed for the same purposes had been conducted. - New Regulation and new standard are issued for Tax Investigation Method on Tax Investigation. (SIAP Report 2006). - Administration of taxation in Indonesia has shown improvement in each year, with the refund period reduced to half-year or so. Points put forth by Officials' are within reason. Since 2007, no demand for bribery has been made. - The New Customs Tariff General Rules, enforced from the beginning of 2008, provide that tax levy is not compelled during the period of protest. |
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| (2) Irrational Personal Income Tax Calculation on Expatriates | - GOI applies progressive tax levy calculation method of calculating personal income tax in Indonesia. The engineering company (for water treatment equipment that our member firm owns in Indonesia, namely, MFS) completed the procedures for tax payment by calculating the personal income tax rate during January through March 2013 (a) for its expatriate, who returned to Japan in March 2013. In return, GOI instructed MFS to pay the tax amount (b), which is obtained by quadrupling the personal income of January through March 2013 to obtain the annual personal income amount (APIA) and apply one-fourth of the applicable tax rate on APIA to obtain the amount of the personal income tax (b), which is payable. Under this calculation method (b), the amount of personal income tax payable becomes higher than (a). MFS requested the Tax Authority to show the legislative provisions, directing this calculation method. However, it remains in the dark. Repeating the same question to the competent authority seems to have only added fuel to the fire in past investigations involving other firms. MFS is at a loss what to do next. | - It is requested that GOI identifies the calculation basis for the personal income tax payable by expatriates returning to Japan in Mid-term of the Fiscal Year. | - Income Tax Law, Article 17.1(a) |
| (3) The risk of PE Tax Levy Due to Deficiency in Tax Treaty | - Under tax treaties after methods for elimination of double taxation of the OECD Model Tax Convention (such as the Tax Treaty between Japan-Singapore) normally exclude "storage", "display" and "delivery", regarding them as business activities not corresponding to PE. However, the Tax Treaty of neither Japan/Indonesia nor Singapore/ Indonesia includes "delivery" in the "business activities not corresponding to PE" so that while the mere domestic storage of goods in the premise within Indonesia owned by an enterprise would not amount to PE (permanent establishment), should an enterprise deliver the goods, as if to run a warehouse, or to handle VMI (vendor managed inventory), such enterprise can be considered as PE. | - It is requested that GOJ and GOI take steps to add "delivery" in the business activity not corresponding to PE in the Tax Treaty. | |
| (4) Default, Opaqueness, and Delays Inextricably tied to VAT Refund | - VAT 10% is premised on the conditions that the total VAT amount paid gets refunded in satisfaction of the requisite requirements. However, it takes a long time before the refund materialises from the filing date of application. The refund amount can be reduced on the ground of deficiency, etc. in the submitted documents. - In business with GOI, member film's subsidiary (MFS) is responsible as contractor for payment of VAT 10% which is refunded later. However, it takes a long time to get the refund, for maximum one year, materially affecting MFS's cash flow. In constructing industries, income tax payable is 4% for our member firm in Japan, and 3% for MFS locally incorporated. The prevailing circumstances make it difficult for MFS to yield profit required for payment of income tax. - GOI implements the scheme for advance payment of income tax. If the amount of advance payment is larger than the amount of tax return, filing of refund application follows. In such cases, tax investigation takes place. Due to the administration's arm-twisting levy of additional tax, no refund becomes receivable. (Recently, in many cases, no refund is available, due to the transfer price taxation system.) - While VAT refund is usually executed upon filing application in the event of importing equipment under investment application, in the event the regional tax revenue is behind the taxation bureau's schedule, such application gets denied or extended for an indefinite period without approval. |
- It is requested that upon change in taxation system and/or tax rates, in order to ensure transparency, GOI: -- provides FFEs with opportunities for exchange of dialogue, and -- gives sufficient and adequate explanation. - It is requested that GOB takes steps to: -- overhaul its legislation, and -- conduct tax investigation in all fairness and correctness. - It is requested that the taxation authority executes VAT Refund as written into the legislative provisions. |
- Income Tax Law No.51/2008, etc. |
| (Action) - Directorate of General Customs (DGC) Regulation No.PER-122/PJ/2006 was promulgated on 15 August 2006, followed by DGC Regulation No. PER-176/PJ./2006 promulgated on 19 December 20906. Presidential Directive No. 6/2007 on "New Investment Policy Package" of 7 June 2007, GOI committed to expedite the VAT refund procedure. - On 16 September 2009, the Bill for the 3rd Amendment (Act No. 42 [2009]) of Act No.8 [1983] on Value Added Tax for goods and service and luxury tax passed the House of Representative. On 15 October 2009, President Yudoyono promulgated the same Act. Act No. 42 expands the definition of taxable and non-taxable items, while mainlining the VAT rate at 10%. The same Act also raises the maximum rate of luxury tax from 75% to 200%. The classification of luxury tax and the respective tax rate per item will be clarified in the implementing regulations that MOF publishes later. A few implementing regulations will be promulgated before the effective date of the Act (1 April 2010), according to some experts. - On 31 March 2010, MOF promulgated MOF Decree No. 75/PMK.03/2010 (enforced from 1 April 2010) stipulating 11 items of goods/services subject to new value added tax (VAT) and the respective taxable base for each item. New goods and service subject to VAT are: (1) goods and services for own consumption, (2) goods and services obtained as gift or for free, (3) Audio-video recording equipment, (4) movie films, (5) tobacco products, (6) inventory assets due to enterprise liquidation, (7) intra-company transfer of goods between head and branch offices, (8) goods obtained from intermediary dealers/brokers, (9) goods obtained by auction, (10) parcel delivery service, and (11) travel and tourism agencies. The tax bases of the 11 categories of goods and services are as follows: Taxable Goods and Services under Decree 75 ---- Tax Base (1) Goods and services for own consumption ---- Cost of the sales of the goods for own-use (2) Donated or free goods and services ---- Cost of sales of the free gifts or donated goods and services (3) Audio and video recording equipment ---- Estimated average selling price for the audio and video recording equipment (4) Movie films ---- Average yield per film title (5) Tobacco products ---- Retail selling price (6) Inventory and assets, originally intended for sale, during a company's liquidation ---- Market value of the remaining inventory of taxable goods and sale of non-inventory assets that were originally not intended for sale at a company's liquidation (7) Intra-company transfer of goods between headquarters to branch offices or vice-versa ---- Cost of sales or acquisition cost of the transferred goods (8) Goods delivered through an intermediary trader or broker ---- Agreed price for the deliveries of taxable goods through an intermediary trader or broker (9) Goods delivered through auction ---- Auction price for the deliveries of taxable goods through an auction officer (10) Parcel shipment and delivery services ---- 10 percent of the actual billing for parcel shipment and delivery services (11) Travel and tourism agency services ---- 10 percent of the actual billing for tour and tourism agency services - The 2012 Budget fails to identify the timing on GST introduction that consolidates the indirect taxes. However, the pilot test for the GST Network System is due for implementation by August 2012 in plural Provinces. - On 9 May 2014, Ministry of Finance promulgated Finance Minister Regulation (PMK) Number 151/PMK.011/2013 that begins "The e-invoice imposition of Value Added Tax (VAT_PPN) on 1 July 2014 in stages. (http://www.kemenkeu.go.id/Berita/kemenkeu-berlakukan-faktur-pajak-elektronik) (Bahasa Indonesia) (http://www.kemenkeu.go.id/en/Berita/mof-enforces-electronic-tax-invoice) (English) |
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| (Improvement) - As a result of the talk between JJC (Jakarta Japan Club) and General Taxation Bureau in Jakarta, it has been made possible, upon presentation of the documents evidencing the transactions, to seek refund of value added tax resulting from mistakes such as purchasers' omission of filing tax returns or from delays in tax payment. - Pursuant to the revised Value Added Tax Act, from 1 January 2001, it has become possible: (1) to file every month request for refund, if the VAT paid exceeded the VAT invoiced, whereas such refund request was previously only possible at the year end; (2) to substitute the VAT invoices with commercial invoices; and (3) to receive the VAT refund within one month for corporate tax payers satisfying certain conditions and for lawful tax payers. - At the 6th General Conference to Exchange Dialogues on Policy Matters held in July 2003 between the Jakarta Japan Club ("JJC") and the Indonesian government, it was confirmed that the refund procedure for the value added tax would be expedited as a concrete example of improvements. It was confirmed that the corrected tax invoice could be replaced, before the tax examination begins, with the ones containing minor errors, such as typographical errors, incorrect address, which, Japan requested, should not be a cause for penalty or refusal of refund. Return of refund for the value added tax is a matter of great concern for the JJC members, involving enforcement issues, and it was reconfirmed that this matter would be closely monitored by JJC. - According to the "Taxation Sub-Committee" Report, GOI introduced a new computer system (PMPK System) for the VAT procedure to improve the service efficiency. However, the authority continues to demand severely correction of entry errors on bills and vouchers. - According to the questionnaire survey involving 587 enterprises in the major cities by Social-Economic Research Institute of Universitas Indonesia during June through August 2006, the number of days required for receipt of VAT refund is reduced from 6.3 months in 2005 to 5.1 months in 2007, while the bribery payment rate was only slightly reduced from 57% to 53%. - The period from filing request to actual receipt of VAT refund has been shortened according to a good number of answers received by JCC to its questionnaire sent out in September 2007. |
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| (5) Application of Deemed Corporate Income Tax Rates to Construction Enterprises | -The tax rate of 3% (25% corporate tax against deemed profit of 12%) is extremely high, and does not reflect the real state of affairs. | - It is requested that GOI reduces the tax rate in line with the actual profit rate. | - Corporate Income Tax (2008) No.51, Article 3.1 |
| (6) Difficulty in Obtaining the VAT Code Number | - GOI refuses to issue PKP (Pengusaha Kena Pajak or taxable companies/ entrepreneur code number) in the absence of genuine transactions, resulting in anomaly that our member firm is unable to execute its tax deduction right (SPPKP) from the prospective business profit in the future. This implementation is extremely harsh on new entrants that have just established their enterprises in Indonesia. These entrants must incur unnecessary expense and labour for establishment of temporary offices in order to obtain the permanent legal addresses, etc. |
- It is requested that that GOI either synchronises acquisition of VAT code number with NPNW (Nomor Pokok Wajib Pajak=taxpayer code number) or synchronises issuance of PKP/SPPKP simultaneously with issuance of WPNW. | - It appears that issuance of PKP is not stipulated into law but is governed by Tax Directorate General Brochure: "Sudah Punya NPWP - Segara Sampaikan SPT Tahunan PPh Anda (Do you have a tax number - File your Tax Return Now)" |
| (7) Nebulous Basis of implementing and administering Regulations of Tax Law | - Certain parts of provisions and expressions are nebulous on the New Decree promulgated on Income Tax including tax on transfer of Upstream Rights and Interests for petro-gas. The Firm is at a loss how to deal with the New Decree in regard to its transfer projects, etc. - Stringent operation of the taxation scheme. - In December 2014, new regulation was promulgated concerning the VAT refund. While the research is now under way, its economic impact may be a matter of concern upon the going project. |
- It is requested that GOI: -- provides opportunity to exchange dialogues with enterprises and business associations, etc., including FFEs in its effort to overhaul the taxation system, and -- provides and sufficient and clear explanation on the grey areas. - It is requested that GOI enhances transparency in the taxation scheme operation. - In introduction of new taxation scheme or before effecting tax rate change, it is requested that GOI ensures to maintain transparency by providing opportunities for exchange of dialogues with FFEs, gives sufficient and justifiable explanation, etc. |
- Regulation on Collection of Cost and Income Tax (No.79, 2010) - Act No.36 (2008)(The 4th Amendment of Income Tax Act, Article 31D) - Finance Minister Decree No.218/ PMK02/2014 (VAT Refund) - Tax Treaty Regulation |
| (8) Nebulous Transfer Pricing Taxation System and Its Arbitrary Implementations | - Compared to other ASEAN Member States, the legislative overhaul remains insufficient concerning Transfer Price Taxation System (TPTS), while the government employees' grasp of TPTS is not deep enough. Nevertheless, due to the severe tax levy order from the top, tax investigators, on site, keep issuing recklessly correction notices. In the latter half of 2010, some progress took place, such as publication of Guidelines on Transfer Price Taxation System and Bilateral Consultation. However, there remain ample rooms for further improvement. Although, Guideline on Transfer Price Taxation System was published on 6 September 2010, it fails to follow the OECD Guidelines on Transfer Price Taxation System, while leaving nebulous areas. There have been cases, where GOI issued invoices for additional tax levy upon Japanese Affiliated Enterprises. - Our member firm in Japan gave managerial instructions and debt guarantee to its subsidiary located in Indonesia (MFS). GOI has rejected regarding as 'deductible expenses' the consideration that MFS paid to our member firm for the managerial instructions and the debt guarantee that MFS received from our member firm. By insisting its position that such payment amounts to dividends, GOI has levied additional tax upon MFS. MFS has incurred huge cost to satisfy and perfect the documentation requirements under TPTS in every detail. However, it seems, in reality, GOI levies additional tax without giving deep analysis in the course of its tax investigation. - Operation of TPTS is arbitrary in Indonesia. -- In 2013, ITO (Indonesian Tax Office) changed the auditing standard (from all taxes to single tax). Under the single taxation system, completion of single tax investigation does not mean completion of investigation for all taxes. -- Due to the change in the definition of "consolidated companies", companies without any shareholding can be subject to consolidation. |
- It is requested that GOI upgrades the level of TPTS investigators in knowledge, expertise and judgement power to level with that of leading countries. - It is requested that GOI: -- spares no effort in giving sufficient verification on the TPTS documentation the taxpayer has prepared, and -- be sure to provide unambiguous, clear-cut explanation for tax levy in the language and manner understandable to taxpayers. |
- Directorate General Taxation Decree (2010) No.43 on Application of Arm's Length Pricing Principle - Directorate General Taxation Circular (PER-22/PJ/2013) - Directorate General Taxation Circular (PER-11/PJ/2013) - PSAK Revision 2013 |
| (9) Double Taxation Risk of TPTS | - Especially as regards TPTS a member firm, as a group of companies, faces the risk of double taxation. | - It is requested that GOI: -- overhauls its legislative provisions in line with the world standard TPTS (such as guidelines), and -- enriches advance price agreement system (APA). |
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| (Action) - Ministry of Finance, Indonesia, promulgated Regulations on Implementation of Mutual Agreement Procedure (MAP) and Advance Price Agreement (APA). (MAP enforced on 22 December 2014, APA on 12 January 2015). |
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