Things are changing fast in Indonesia. Just two months after President Jokowi announced his administration would be introducing something called the Omnibus Law we're already getting a taste of things to come.

Sri Mulyani, Indonesia's Finance Minister, told local news wires last week that the government's planned tax reforms would include "relaxing income tax for Indonesian and foreign expatriates as well as eliminating dividend tax in addition to a reduced corporate income tax and a new digital economy tax," said The Jakarta Post.

Attracting foreign investment

The intention is clearly to make good on promises to improve Indonesia's investment climate by making it more attractive for foreigners.

The government is proposing to change the country's tax regime into a territorial system, which would mean foreigners working in Indonesia as well as Indonesians working abroad would no longer be taxed on income earned outside Indonesia's borders.

Income tax for expatriates relaxed

Foreigners, for example who work for more than 6-months a year in Indonesia will be taxed only on the income they earn in the country, while Indonesians working abroad for the same period will be exempt from paying income tax in Indonesia.

The current Income Tax Law requires expatriates to pay tax on incomes earned in Indonesia and abroad as everyone, including foreigners, who live in Indonesia for more than 6-months a year is considered a domestic taxpayer.

This currently also includes anyone who has resided in the country for a full tax year and who intend to stay longer.

Dividend Tax to be axed

Sri Mulyani also said the government would be axing the Dividend Tax for those entities that have less than 25-percent shares in a company. “Normally, we don’t tax companies with more than 25-percent share ownership, especially the dividends of companies outside the country. If you invest overseas, you will be taxed under the existing [regulation],” she said. “Now we want to make it equal, no [overseas dividends] will be taxed,” she said.

Tax penalties

Tax penalties are also being reviewed. “We will also reduce the [interest] penalty from 2-percent per month [after the tax due date] by adjusting the penalty to the interest rate. Now it will be fair." Mulyani said. "The penalty will be as much as the [market] interest rate, which is currently low. But if the underpayment is criminal and deliberate, there will be an additional 5-percent to 10-percent charge. Quite fair.”

Corporate Income Tax

Corporate Income Tax is also being reviewed. “We will also gradually reduce the Corporate Income Tax from 25-percent to 20-percent, as we are planning to impose [a corporate income tax of] 22-percent in 2021 and then 20-percent in 2023,” Mulyani said.  

In addition, if a company decides to 'go public' there will be an additional 3-percent reduction for a period of 5-years on corporate income tax.

Digital Economy Tax

Perhaps one of the most significant revisions to the tax laws takes aim at the digital economy. Gapura Bali has been reporting on the rise of Indonesia's eConomy, which has the largest Internet user base in the region (150-million users in 2018), and the largest (USD 27-billion in 2018) and fastest growing (49-percent CAGR 2015-2018) Internet economy in the region. Reports suggest this is poised to grow to USD 100-billion by 2025, accounting for USD 4 of every USD 10 spent in Southeast Asia.

Taxing digital companies such as Amazon, Netflix, Google, Facebook and Twitter therefore, is likely to be a major source of tax revenue. “They have an economic presence in Indonesia, although they have no physical presence. We will ask that they [pay taxes] in Indonesia,” Mulyani said, underlying the fact they benefit financially from the country's enormous market.

Netflix Law

According to an article from The Insider Stories, digital-based companies "would be declared a foreign tax subject, which mandates them to collect value-added tax from economic activities conducted in Indonesia and deposit taxes with the tax authority."

Indonesia's current tax code has a loophole according to the article, meaning only companies actually domiciled in Indonesia are obliged to pay taxes on money earned in the country and this allows a range of media services to stream movies and offer services to local customers without collecting value-added taxes, which their locally -based counterparts have to do.

The Insider Stories suggest the revised tax code would mean Indonesia would be "following in the footsteps of Singapore and Australia, countries that have implemented the so-called Netflix Law. Governments around the world are banding together to try to find a way to collect tax from over-the-top media streaming services and other companies of their ilk."

Even though details of these proposed tax changes are still being reviewed, observers are generally upbeat about the positive impact they are likely to have on Indonesia's investment climate.

Sources: The Jakarta Post, The Insider Stories, Gapura Bali

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