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Tax Flash KIB Consulting Dec 19

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“Synergy, transformation, and
innovation”

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Tax Flash KIB Consulting Dec 19

  1. 1. TAX FLASH “To manage assets amounting to IDR 8,200 trillion, I need solid team- work comprising not only smart people but also those with good morals” ~ Erick Thohir —Minister of State Enterprise In This Issue • USD IDR historical record in 2019 • DER (Debt to Equity Ratio) • Omnibus Law • Season’s Greetings • Our Involvement USD IDR Jan-Dec 4, 2019; sources: TradingEconomics; Bank Indonesia. “Synergy, transformation, and innovation” Perry Warjiyo emphasized the importance of having all three in confronting the impact of the diminishing of globalization and the rise of digitalization. Source: an opinion article - abridge from the Governor of Bank Indonesia (BI)’s speech at BI’s annual meeting on Nov. 28 - the Jakarta post KIB E-newsletter Dec 2019 IDR had gained 2.44 percent (year-to- date) against the USD as of the end of Octo- ber. The strong rupiah has been supported by maintained foreign capital inflows together with a well-functioning foreign exchange sup- ply and demand mechanism from the busi- ness sector.
  2. 2. DER (Debt to Equity Ratio) Income Tax Law art. 18 (1) Minister of Finance Regulation no. 169/PMK.010/2015 Key Points: 1. Maximum DER for corporate taxpayers (established or carrying out activities in Indonesia is 4:1— one for equity and four for debt). 2. Will impact on both domestic and foreign companies doing business in the country. The DER rules will require taxpayer to review existing funding arrangements that determine rel- evant interest under the DER rules for tax purposes. 3. Any borrowing cost on debt which exceeds the ratio will not be tax deductible for corporate income tax purpose. It is important to note that the rule applies to both related-and third – party debt, whether foreign or domestically availed. “The avoidance of taxes is the only intellectual pursuit that carries any reward.” -John Maynard Keynes 4:1 Objectivity: To tackling the taxation of multinationals and the global tax base erosion and profit-shifting problem. To collect more tax due from companies with DER higher than the prescribed limit. Background: DER rules are made in many countries since the tax authorities find tax avoidance with exces- sive interest charges on loans from affiliated parties, especially those residing abroad and not made because of concerns over foreign debt. DER rules also aimed to address tax avoidance through excessive interest charges
  3. 3. DER (Debt to Equity Ratio) Definition: “ The income tax created more criminals than any other single act of government.” -Barry Goldwater Long-term and short-term debts, including any account payable with interest EQUITY Equity or capital is determined by the applicable financial accounting standards and non interest-bearing loans from parties that have special relationships with the corporate taxpayers. Corporate taxpayer Business entity which is established and/ or carrying business in Indonesia Exempted from DER 4:1 Bank Insurance Subject to Final income tax Finance Mining *) Infrastructure *) Mining, oil and gas companies that are bound by production sharing contract, contract of work, or coal con- tract of work which itself governs the DER. If the contract does not include a provision for the DER or the con- tract has expired, PMK-169 will prevail The basis of calculation: A. The average debt or equity balance at the end of each month in the relevant fiscal year; or B. The average debt or equity balance at the end of each month of a part of the relevant fiscal year. Taxpayers who have zero or less than zero equity balance, the entire borrowing expense will be disallowed for income tax calculation purpose. Taxpayers with negative retained earnings could reduce the amount of deductible borrowing expenses.
  4. 4. DER (Debt to Equity Ratio) Cost of Borrowing “ A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” -Anonymous PMK—169 Interest*) Discount and premiums in connection with the debt Additional costs incurred in relation to the arrangement of borrowings Finance charges on lease financing Guarantee fee Foreign exchange differences arising from loans in foreign currencies as long as the differences are adjustments to the interest expense and other expenses as referred to the above 5 *) Any interest expense from related-party debt must also comply with arm’s length principle in Indonesia, which includes the requirement to document the need for the debt, the existence test, and analyzing the arm’s length basis of the applied interest rate. Corporate Tax Payer ? Consist of capital (equity shares) ? Deduct cost of borrowings into corporate income tax calcula- tion ? Have foreign private debts? Yes Required to submit Debt to Equity report (attached to Annual Corporate Tax Return)
  5. 5. Omnibus Law Draft law—the substantive: “The avoidance of taxes is the only intellectual pursuit that carries any reward.” -John Maynard Keynes Objectivity: Background: Global Economy Slowdown Economy Stagnant Middle - income trap Boost Investment competitiveness Business attractiveness Economy growth Legal stability Knowledge transfer Tax payer compliance Fairness to businesses in both locally and internationally to increase National Development Economy Growth Investment Funding Taxation System Tax Compliance Tax facility Business Fairness Income tax tariff regulation: A. Decreasing tariff gradual- ly B. Eliminating dividend tax A. Determining tax subject (resident & foreign) B. System im- plementation 1. Relaxing tax credit input for Taxable Business (PKP) 2. Lower tax penalty Digital Economy Taxation: A. Appoint VAT collector B. SPLN taxable income A. Tax Holiday B. Super deduc- tion C. For Special economic zones D. Govt. bond
  6. 6. Omnibus Law “The best things in life are free, but sooner or later the government will find a way to tax them.” -Anonymous No. Subject Now Omnibus Tax Law (DRAFT) 1 Corporate income tax a Reduction in Corporate Income Tax 25% 2021-2022 = 22% 2023 onwards = 20% b Newly listed companies on the Indo- nesia Stock Exchange, that meet cer- tain requirements, would be reduced by a further 3%, for the first five years of listing 5% lower than normal tariff 3% lower than normal tariff Valid for up to 5 years 2 Tax exemption on dividends received by domestic taxpayers a Indonesian-sourced dividends re- ceived by resident taxpayers will be exempted from tax *)if reinvested in Indonesia for a certain period. Ownership interest: >= 25% = 0 <25% = normal tariff Ownership interest: >= 25% = tariff 0% < 25% =normal tariff* Individual taxpayer = 10% final* b Foreign-sourced dividends, or the after-tax profits of a permanent es- tablishment, which is earned by resi- dent taxpayers (either listed or non- listed) will also be exempted *)if rein- vested in Indonesia for a certain peri- od, Normal tariff Detail to be specified* 3 Territorial basis in calculating tax- able income of individual taxpay- ers —subject to time test WNI (Indonesian Citi- zenship) = Tax resident WNA (Foreign Citizen- ship / foreign taxpayer) > 183 days = tax resi- dent WNI and/or WNA: • >183 days = Tax resident • <= 183 days = Non Tax Resident 4 Relaxation on creditable Input VAT for VAT-able Entrepreneurs a Input VAT on Taxable goods and ser- vices, before becoming VAT-able En- trepreneurs Non creditable Creditable, provided with Tax Invoice
  7. 7. Omnibus Law “We must care for each other more, and tax each other less.” -Bill Archer No. Subject Now Omnibus Tax Law (DRAFT) b Unreported Input VAT found in tax audit Non creditable Creditable, provided with tax invoice c Payable input VAT with STP (Surat Teguran Pajak) Non creditable Creditable only at tax principle d Payable of Input VAT on taxable goods and services before goods and service delivery takes place Creditable only for capital goods Creditable. If there is an over- paid tax (LB), it then can be carried forward to the following period and returnable at the end of the fiscal year 5 Administrative sanctions to increase voluntary tax compliance a Interest penalty on underpaid tax due to tax return correction 2% per month from the underpaid tax Monthly penalty = (interest rate + 5%)/12, the Minister of Finance will determine the in- terest rate and penalty b Interest penalty on underpaid tax due to SKP (Notice of Tax As- sessment) 2% per month from the underpaid tax Monthly penalty = (interest rate + 10%)/12, the Minister of Finance will determine the in- terest rate and penalty c Penalty on improper issuance of VAT invoices 2% from the taxable base 1% from the taxable base d Penalty for not registering as VAT-able Entrepreneurs None 1% from the taxable base, in conformity with VAT—able En- trepreneurs who does not is- sue VAT invoice or who issue VAT invoice improperly 6 Integrating Tax facilities into the Tax Law a Tax Holiday Given to Corporate tax payer in pioneering industries as regulated in Capital investment law jo. PMK 1) Given to corporate taxpay- er in pioneering industries 2) For main activities in Spe- cial Economic Zone 3) Recent development on designated industries
  8. 8. Omnibus Law “The purpose of a tax cut is to leave more money where it belongs: in the hands of the working men and working women who earned it in the first place.” - Bob Dole No. Subject Now Omnibus Tax Law (DRAFT) 7 Taxation on E-commerce v Conventional commerce PMSE (Perdagangan Melalui Sistem Elektronik) PP 80/2019 a VAT withholding and pay- ment on imported goods and service Being withheld by the im- porter with SSP (Surat Setoran Pajak) Referring to: 1. SPLN (Foreign Tax Payer) - Merchants, Service Provider , Platform, have to withhold, pay, and report their VAT. 2. SPLN to appoint its repre- sentative in Indonesia to with- hold, pay, and report their VAT on their behalf b Taxable electronic trans- action being done in Indo- nesia by SPLN, who does not have physical pres- ence in Indonesia Not yet regulated a. Redefining BUT (Badan Usaha Tetap) to not only based on its physical presence. but also shall be based on its significant eco- nomic presence b. Tariff and tax base will be ad- justed in accordance with the in- come tax law. b Super deduction Given to corporate taxpay- er: a) who organize vocation- al activities, research and development b) Capital investment in labor-intensive indus- try—PP 45/2019 Given to corporate taxpayer: a) who organize vocational activi- ties, research and development b) Capital investment in labor- intensive industry c Special Economic Zone Reducing net income to max. 30%; shorten depre- ciation timeline; additional loss compensation to max. 10 years; dividend tax 10% Reducing net income to max. 30%; shorten depreciation time- line; additional loss compensation to max. 10 years; dividend tax 10% d Government securities traded in the international market Lower tariff Exemption/ reduced income tax on interest yield / discount
  9. 9. “Christmas is not a time nor a season, but a state of mind. To cherish peace and goodwill, to be plenteous in mer- cy, is to have the real spirit of Christmas.” -Calvin Coolidge “At this special time of the year, we would like to thank our clients and partners, with whom we grow our business together. Thanks for a great year, and we wish you all the best as we embark on the successful 2020. From all of us at KIB Consulting”
  10. 10. Tax Dialogue at DGT head office, December 10, 2019 With API (Asosiasi Pertekstilan Indonesia) addressing investment issues & solution Our Involvement
  11. 11. At the kick-off meeting of KADIN & Government joint task force on Omnibus Law, 6 December 2019 Contact Us Phone: (62-21) 2929 5870-73 Bambang B. Suwarso bambang.suwarso@kib- consulting.com Rachmat Kurniawan rachmat@kib- consulting.com Yosefine Amelia yosefine@kib- consulting.com Raden Roro Ratna Indah Wulandari wulan@kib- consulting.com Addresses: North Jakarta —144550 Indonesia The Koppel Building Suite IB. Jalan Pluit Selatan Raya no. 10 Gold Coast Tower Eiffel Unit N Pantai Indah Kapuk www.kib-consulting.com Disclaimer: The facts and opinions stated or expressed in this publication are for information purposes only, and are not necessary and/or must not be relied upon as being to those of the publisher or of the institu- tions for which the contributing authors work. Although every part of content has been taken to ensure the accuracy of the information contained within this publication, it should not be by any person relied upon as the basis for taking any action or making any decision. KIB Consulting and its representative, cannot be held liable or otherwise be responsible in anyway for any advice, action taken or decision made on the basis of the facts, surveys, and opinions stated or expressed within this publication. KADIN Trade & Investment Acceleration Task Force Our Involvement

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