By Michael S. Carl and Charvia Tjhai
The COVID-19 pandemic has slowed the Indonesian economy, cut state revenue and forced increased state spending and financing. In response, the Indonesian government has issued a new regulation aimed at providing tax relief for the coronavirus-battered economy.
The new regulation lowers corporate tax rates, imposes tax on electronic transactions by foreign tax subjects, extends tax filing deadlines and empowers the Ministry of Finance to waive import duties in the context of responding to the COVID-19 pandemic and/or in responding to a threat to the economy or national stability.
This article takes a closer look at the implications of the new tax policies contained in Government Regulation in Lieu of Law No. 1 of 2020 regarding State Financial Policy and Financial System Stability for the Management of the Coronavirus or COVID-19 Pandemic and/or in Facing Threats to the National Economy and/or Financial System Stability (March 31, 2020) (\"GR 1/2020‚Äù).
Lower Tax Rates for Domestic Companies
GR 1/2020 reduces tax rates for domestic corporate taxpayers and permanent establishments from 25% to 22% applicable for the 2020 and 2021 tax years, and to 20% starting in the 2022 tax year.
A further reduction of 3% will apply for any domestic taxpayers that meet the following criteria: (i) in the form of a publicly listed company; (ii) trade at least 40% of their shares through the Indonesia Stock Exchange; and (iii) meet certain other conditions to be further regulated by or based on government regulations.
Tax Treatment for Electronic Transactions
GR 1/2020 provides a tax treatment for Trade Through Electronic Systems (Perdagangan Melalui Sistem Elektronik or \"PMSE‚Äù) that is intended to increase state revenue. This includes imposing value added tax (\"VAT‚Äù) on intangible taxable goods and/or taxable services originating from outside Indonesia and utilized inside the country as part of PMSE activities.
VAT will be imposed subject to the provisions of Law No. 8 of 1983 regarding Value Added Tax for Goods and Services and Sales Tax on Luxury Goods, as lastly amended by Law No. 42 of 2009 (the \"VAT Law‚Äù). The VAT on PMSE activities is to be collected, deposited and reported by foreign traders, foreign service providers, foreign electronic system trade providers (Foreign PPMSE) and/or domestic electronic system trade providers (Domestic PPMSE), appointed by the Minister of Finance.
Electronic system trade providers, or PPMSE, as referred to above, are business actors that provide electronic systems used for trade transactions. Foreign traders and foreign service providers are individuals or entities residing or domiciled outside Indonesia that engages in transactions with buyers of goods or recipients of services in Indonesia through an electronic system.
GR 1/2020 also imposes income tax or electronic transaction tax on PMSE activities carried out by foreign tax subjects that meet certain criteria. Foreign traders, foreign service providers and Foreign PPMSE deemed to have a \"significant economic presence‚Äù in Indonesia can be treated as a permanent establishment subject to income tax. Significant economic presence is determined by sales in Indonesia, number of active users on digital media and the consolidated gross turnover of the business group.
If foreign traders, foreign service providers or Foreign PPMSE are determined to have a significant economic presence but cannot be treated as a permanent establishment due to the application of agreements with other governments in the context of avoiding double taxation, they will be subject to electronic transaction tax. This tax shall be imposed on the sale of goods or services from outside Indonesia through PMSE activities to buyers or users in Indonesia by foreign tax subjects, either directly or through a Foreign PPMSE.
Income tax or electronic transaction tax on PMSE activities is to be paid and reported by foreign traders, foreign service providers and Foreign PPMSE. Note that they may appoint representatives domiciled in Indonesia to collect, deposit and report VAT owed and/or to fulfill their income tax or electronic transaction tax obligations.
Failure to fulfill the above provisions shall be subject to administrative sanctions as provided by the VAT Law. Additional government regulations will be issued as necessary to further regulate the imposition, calculation, collection and other matters related to the above taxes.
Tax Filing Deadlines Extended
GR 1/2020, in light of the COVID-19 outbreak, provides extensions for the fulfillment of tax obligations, as follows:
- the deadline for a taxpayer to file an objection as referred to in Article 25 (3) of Law No. 6 of 1983 regarding General Provisions and Procedures on Tax, as lastly amended by Law No. 16 of 2009 (the \"KUP Law‚Äù), is extended by six months;
- the deadline for filing a request for the return of tax overpayment as referred to in Article 11 (2) of the KUP Law is extended by one month; and
- the deadline for taxpayers to apply for the return of tax overpayment as referred to in Article17B (1) of the KUP Law, file an objection letter as referred to in Article 26 (1) of the KUP Law, or apply for the reduction or cancellation of administrative sanctions or incorrect tax assessment or the cancellation of examination results, as referred to in Article 36 (1) KUP Law, is extended by six months.
These extensions are subject to future changes based on the situation with the coronavirus outbreak.
Ministry of Finance Empowered to Provide Customs Facilities
Lastly, GR 1/2020 authorizes the Minister of Finance to provide customs facilities in the form of exemption or relief of import duties, which is to be further regulated by Minister of Finance regulations. (April 9, 2020)
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