Enhanced Expatriate and Corporate Income Tax Benefits Expected in Tax Omnibus Law Being Drafted
In a press conference last month, the Finance Minister, Sri Mulyani Indrawati, stated that the Government is finalizing the draft Tax Omnibus Law, which has become its priority legislation. Currently, the Government has not yet released any drafts pertaining to the proposed Tax Omnibus Law. It is hoped that the draft will be completed this month and submitted to the House of Parliament to be included as its first agenda item for discussion in January 2020.
The Indonesian Government is planning to include tax reforms in the Tax Omnibus Law; however, given that the draft has not been completed, the information that we have obtained so far is only its general framework.
One of the key intentions of the tax reform is to improve Indonesia’s investment climate by attracting more foreign investment and foreign experts to the country.
The Tax Omnibus Law is expected to include a change in the tax regime from a worldwide to a territorial tax system for foreign individual tax residents, meaning foreign individual tax residents would no longer be subject to Indonesian income tax on their overseas income (i.e., income sourced from outside Indonesia).
Another important point expected to be included relates to a decrease of the corporate income tax rate from the current 25% to 22% and then later on to 20%.
• Currently we are unable to provide more insight on this matter. As soon as the draft law is released or available, we will issue an update.
• The newly appointed Director General of Tax has expressed his concern that tax revenue will decrease due to this proposed tax reform. However, to date the government does not intend to revise the 2020 tax budget, which remains at IDR1,643 trillion (4,12% higher than the 2019 budget).
• The change from worldwide income taxation to territorial based taxation should be welcome news for both new and current investors sending short-term expatriates to Indonesia, given that it would greatly simplify the assignees’ tax reporting. Hopefully, the shift from the previous system to the new one will be painless for both the tax authorities and the taxpayers alike.
• In addition, the proposed change to a territorial tax system will be certainly welcome news for foreign individual tax residents as the Automatic Exchange of Information (AEOI) that Indonesia has signed would seem to focus mainly on Indonesian nationals.
• Some tax specialists believe that the territorial taxation may be applicable only to foreigners who reside in Indonesia for less than a specified number of years and not applicable to “long-term” assignees or Indonesian nationals who are tax residents of Indonesia;
• It is also unclear whether the new Income Tax Law may implement the “sourcing principle” so all income (including equity compensation) related to employment and/or services provided within the country will be taxable; and
• In the event of a split payroll arrangement where partial payment of salary is paid offshore, the tax authority may require a minimum deemed income amount based on position held in Indonesia, similar to the guidelines currently followed by the Tax Office.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
