A Complete Guide to Indonesia Withholding Tax
Have you ever heard of the term "tax retention"? Or a third-party tax cut? If you've heard of both, then at least you already know a little about withholding tax (WHT). Here’s a review:
The government trusts taxpayers to carry out their obligations to withhold or collect taxes on income paid to recipients while depositing it into the state treasury. One can also interpret the withholding tax system as a tax payment made by a third party. The amount deducted for this WHT is the amount of income tax that must be paid by the employee for one year.
Implementation of WHT in Indonesia
WHT in Indonesia is often applied following several standard regulations, including withholding Income Tax (PPh) 21, PPh 23, PPh 26, PPh 22, withholding PPh 4 paragraph (2), and Value added Tax (VAT). In general, Law No. 36 of 2008 Concerning Income Tax regulates this tax topic.
The involvement of third parties, which are generally companies where taxpayers work, can make it easier for the tax office and taxpayers as they don’t need to calculate their accumulated tax payable at the end of the year, and it is more convenient to apply it every month.
In practice, withholding tax is intended to automate the process of receiving large amounts of tax by minimizing the process of collecting taxes by the government. In addition, the withholding tax maximizes state revenue from taxpayers by reducing the potential for non-compliance.
Definition of Income Tax Withholding and Collection in the Withholding Tax System
Self-assessment and the withholding tax system are not interchangeable concepts. Self-assessment places full faith in taxpayers to determine, remit, and record their tax liabilities rather than the tax liabilities of third parties.
Please be aware that all revenue from business activities in Indonesia is subject to the withholding tax system, as specified in the Director General of Taxes Regulation Number Per-70/PJ/2007.
Withholding tax is regarded as follows under the Law on Income Tax (PPh), as specified in Law Number 7 of 1983:
- Payment of tax installments (advanced payment)
- The last tax collector
Income Categories Subject to Withholding Tax
The forms of income—both those that are classified as mass installments and final tax—for which tax obligations are carried out using a withholding tax system have been established by the government. According to the articles in the Income Tax Law, the following types of income are subject to withholding tax:
1.Article 4 on Income Tax Withholding
Income paid in connection with specific services and sources, such as construction services, land and building rent, transfers of land and building rights, lottery winnings, and others, is deductible under income tax Article 4 Paragraph 2 or PPh Article 4 Paragraph 2. The following are the tax objects of PPh article 4 paragraph 2:
- The process of selling, exchanging, agreements to transfer rights, releasing and transferring rights, auctions, grants, inheritance, and other ways according to the agreement are all examples of income from the transfer of rights over land and/or buildings that is subject to tax. In cases where land is acquired for the public good, the tax rate is 0% or about 2.5% of the transfer value.
- Rent on property and/or buildings; this tax item comprises land, homes, apartments, workplaces, etc. The tax percentage is roughly
- Rent on property and/or buildings; this tax item comprises land, homes, apartments, workplaces, etc. The tax percentage is roughly 10% of the rental value.
- Income from construction implementation The tax rates for implementing contractors range from 2% for small businesses, 3% for medium- and large-sized businesses, and 4% for those who do not meet the requirements for businesses.
- Interest on bonds, deposits, and income from winnings from lotteries and other contests are further examples of interest.
2. Article 15 on Income Tax Withholding
The tax object of PPh Article 15 is imposed, among other things, on the process of transporting people and/or goods, including chartering ships, from ports in Indonesia to other ports in the country, from Indonesia to foreign countries, from abroad to Indonesia, and from outside Indonesia to outside Indonesia.
3. Article 15 on Income Tax Withholding
It is an article that regulates deductions from basic salaries by several parties, such as employers, treasurers or government treasury holders, pension funds, honoraria payers, and activity organizers. Taxpayers who are subject to PPh 21 WHT are taxpayers with an annual income listed on the link.
4. Article 22 on Income Tax Withholding
Deductions in this market are made on income paid in the form of prizes, dividends, interest, royalties, and so on. The general rate charged is 2% of the gross (gross) amount, excluding value-added tax.
5. Article 23 on Income Tax Withholding
Collection of taxes on income paid related to the practice of purchasing goods, as well as payment for delivery of goods and activities in the import sector or business activities in other fields. The discount rate charged is 1.5% of the purchase price.
6. Article 26 on Income Tax Withholding
Income tax levied or withheld on earnings derived domestically in Indonesia or acquired by international taxpayers who do not have a permanent establishment there. The tax treatment of a permanent establishment (BUT) is the same as that of a tax subject that takes the form of an entity. 20% of the gross amount of the taxpayer's income, including dividends, interest, royalties, prizes, gifts, pension benefits, and insurance premiums, must be withheld.
Avoid Severe Penalties for Tax Non-compliance in Indonesia
A wide range of foreign clients are served by Moores Rowland in Indonesia and Praxity businesses, which offer both domestic and international tax services. Along with local businesses and private individuals, we collaborate with publicly traded European firms and multinational owner-managed businesses. We can therefore provide you with local and international counsel no matter where you are.
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