ld2-pptslide

Lecture Notes on:
INCOME TAXATION
(Philippine Tax System with Comparative
Notes for Indonesia and ASEAN
Countries)

LECTURE NOTES IN INCOME
TAXATION

PRINCIPLES OF
TAXATION
Taxation is the power by an independent
state,
through its law making body
to raise revenue from its inhabitants
to pay the necessary expenses of the
government

The inherent power of the state are the following:
Inherent power of sovereignty
Essentially a legislative function
For public purpose
Territorial in operation
Tax exemption of the government
The strongest power of the government
Subject to constitutional and inherent
limitations

TAXATION
“Privity of relationship” exists where the state can still
exercise its taxing power over its citizens OUTSIDE of
its territory
INTERNATIONAL COMITY meaning the tax laws are not
applicable to the property of foreign government. It is
the courteous recognition, friendly agreement,
interaction and respect accorded by one nation to the
laws and institutions of another.
EXEMPTIONS FROM TAXATION is a grant of immunity
to particular persons or corporation from a particular
class of tax. The state cannot be taxed without its
consent

INHERENT LIMITATIONS
INHERENT LIMITATIONS are the natural
restrictions to safeguard and ensure that taxation
shall be exercised by the government only for the
betterment of the people’s welfare.
These are:
Taxes may be levied only for public purpose
Taxation may not be delegated
Tax power is limited to territorial jurisdiction
of the state
Taxation is subject to international comity
Government entities are generally exempt

CONSTITUTIONAL
LIMITATIONS
CONSTITUTIONAL LIMITATIONS limit the
exercise of taxation as follows:
Due process
Equal protection of the law
Rule of uniformity and equity
President’s power to veto separate items in
revenue or tariff bills.

LIMITATION:
Exemptions from tax by religious, charitable
institutions or educational entities,
non profit cemeteries, churches and covenants
thereto.
No money shall be appropriated for religious
purpose
Majority of members of Congress granting tax
exemption

“EQUALITY IN
TAXATION”
“EQUALITY IN TAXATION” means tax
laws and their implementation must
be fair, just, reasonable, and
proportionate to one’s ability to pay.

TAXATION:
WITHOUT REVENUE, THERE CAN BE NO
CONTINUING GOVERNEMENT.
WITHOUT GOVERNEMENT THERE
CANNOT BE ANY CIVILIZATION
WITHOUT TAXATION, POLICE AND
EMMINENT POWERS OF GOVERNMENT
WILL BE PARALYZED

BASIS FOR TAXATION:
Based on reciprocal duties.
Based on benefits-received theory, the
government, collects taxes in order that it
may be able to perform its functions

TAXATION:
Revenue purpose
Regulatory purpose to regulate: Inflation,
achieve economic and social stability, and serve
as an instrument for social control
Compensatory purpose (like compensatory for
the use of the road by payment of gasoline tax)

OBJECTS OF TAXATION
OBJECTS OF TAXA TION may refer to the subject to
which taxes are imposed. Taxes are generally
imposed on the following:
1. Persons whether natural or juridical persons
a. Natural persons – refer to individual taxpayers
b. Juridical persons -CORPORATIONS,
PARTNERSHIPS, & ANY ASSN.

OBJECTS OF TAXATION
•2. Properties whether real, personal, tangible, or
intangible properties
• a. Real properties are immovable properties such
as land and house and lot
• b. Personal properties such as cars, and other
personal belongings
• c. Intangible properties are the “rights” rather
than physical properties such as patents,
copyright, franchises, etc.

TAXATION
3. Excise objects such as:
a. Transaction – act of conducting activities
related to any business or profession
b. Privilege – benefit derived through transfer
of properties due to death or in donation
c. Right - a power, faculty, or demand
inherent in one person to another
d. Interest – an advantage accruing from
anything

As to Determination of amount
Ad Valorem taxes are fixed amount in proportion to
the value of the property
Specific are fixed amount imposed and based on
some standard weight or volume and measurement
As to scope or authority collecting the tax:
National
Local or municipal

PENALTY is any sanction imposed, as a punishment for
violations of law or acts deemed injurious
REVENUES refer to all funds or income derived by the
government whether from tax or other sources
DEBT – an obligation to pay or render service for a
definite future period based on contract.
TOLL is a compensation for the use of somebody else’s
property determined by the cost of the improvement

LICENSE FEE – is a contribution imposed by the government
primarily to restrain and regulate business or occupation
CUSTOMS DUTIES – are imposition on imported goods
brought into the country to protect local industry
TARRIF - is a schedule of rate, duties, or taxes imposed on
imported goods.
MARGIN FEE is a tax on foreign exchange designed to curb the
excessive demands upon our international reserves.

DOUBLE TAXATION
DOUBLE TAXATION – taxing twice for
the same purpose in the same year
upon the same property or activity
of the same person, for the same
purpose and with the same kind of
character tax.

ESCAPE FROM
TAXATION
Tax Evasion – the taxpayer uses unlawful means to avoid
or lessen the payment of tax.
Example: Non-inclusion of sales, deliberate fabrication of
expenses, and forming an artificial person to evade
taxation or or to deliberately reduce taxable income.
Tax Avoidance - is also called tax minimization using legal
means to reduce tax payments.

Forms of tax avoidance
Tax option – Taxpayers choose to pay lower tax rate
in some transactions
Shifting – Transfer tax burden to another without
violating the law. (Ex. VAT)
Transformation – The producer absorbs payment of
tax to reduce prices and to maintain market share.
Exemption – denotes a grant of immunity

Situs of Taxation – refers to
the place of taxation, or the
state or political unit which
has jurisdiction to impose
tax over its inhabitants

NATURE OF TAXES:
Taxes are forced burdens, charges, or contributions
assessed in accordance with some reasonable rule,
upon person, property or rights exercised within its
jurisdiction,
for the purpose of public expenses

ESSENTIAL CHARACTERISITICS OF
TAXES:
Enforced contribution
Imposed by a legislative body
Proportionate in character
Payable in terms of money
Imposed for raising revenue
Used for public purpose
Enforced on some persons, properties, or rights
Commonly required to be paid at regular intervals
Imposed by a sovereign state within its jurisdiction

Part 2 GROSS INCOME
It includes all income from whatever source ( unless
exempt by law):
Compensation for services in whatever form
Gross income from conduct of trade
Gains from dealing in property
Interests
Rent
Royalties Dividends Annuities Prizes and winnings
Pensions Partner’s distribution of profits

PART 1
PHILIPPINE TAXATION
The Philippines taxes its resident citizens on their worldwide income.
Non-resident citizens and aliens, whether or not resident in the
Philippines, are taxed only on income from sources within the
Philippines.
Rates of tax on income of aliens, resident or not, depend on the nature
of their income (i.e. compensation income, income subject to final tax,
or other income).

Compensation tax rates
For resident aliens and non-resident aliens doing
business and receiving compensation income,
the tax rates are as follows:
Taxable income (PHP*)
Tax on column 1 (PHP) Tax on excess (%)
Over Not over
0 10,000 - 5
10,000 30,000 500 10
30,000 70,000 2,500 15
70,000 140,000 8,500 20
140,000 250,000 22,500 25
250,000 500,000 50,000 30
500,000 125,000 32
* Philippine pesos

Fringe benefits tax (FBT)
Fringe benefits furnished to managerial and supervisory-level
employees by the employer are subject to a final FBT of 32% (in general)
on the grossed-up monetary value of the benefits. Managerial
employees are those who may mandate and execute management
policies to hire, transfer, suspend, lay off, recall, discharge, assign, or
discipline employees. Supervisory employees are those who effectively
recommend such managerial actions if the exercise of authority on
behalf of the employer is not merely routine or clerical in nature but
requires the use of independent judgment. The FBT is a final tax payable
on a calendar quarterly basis by the employer and deductible as part of
fringe benefit expense. Benefits subjected to FBT are not included in
employees’ taxable income.

Tax rates for income subject to final tax
For resident and non-resident aliens engaged in trade or business in the
Philippines, the maximum rate on income subject to final tax (usually
passive investment income) is 20%. For non-resident aliens not engaged
in trade or business in the Philippines, the rate is a flat 25%.

Tax rates for business
income
For an individual, whether citizen or resident alien, who is self-
employed or practices a profession, the tax rates are the same as the
compensation tax rates (see above). An individual with taxable
compensation income of PHP 1,082,500 and taxable business or
professional income of PHP 1,082,500 will have a total taxable income of
PHP 2,165,000 and will pay a total individual income tax of PHP 657,800.
In the case of non-resident aliens not doing business in the Philippines,
the tax rate is a flat 25% of the gross income received from all sources
within the Philippines.

Taxation of expatriates
Expatriates employed by certain entities or industries enjoy certain tax
concessions. These expatriates include alien executives of offshore
banking units, service contractors and subcontractors engaged in oil
exploration activities, and regional headquarters and regional operating
headquarters of multinational companies. They are taxed at 15% on
their gross compensation income.
The applicable FBT rate is also 15%. The grossed-up monetary value is
determined by dividing the actual value of the benefit by 85%.
The FBT imposed on fringe benefits enjoyed by non-resident aliens not
engaged in trade or business within the Philippines is 25% of the
grossed-up monetary value of the fringe benefit. The grossed-up
monetary value is determined by dividing the actual value of the benefit
by 75%.

Taxation of expatriates
A resident alien is an individual who is stateless or is a national of another
country and who lives in the Philippines with no definite intention as to length
of stay, but who is not a mere transient or sojourner. An expatriate working in
the Philippines on a contract for an indefinite period potentially falls into this
category.
Most expatriates will be classified as non-resident aliens because their contract
will be for a specified period of engagement. A non-resident alien individual
who comes to the Philippines and stays for more than 180 days during any
calendar year will be deemed a non-resident alien engaged in trade or
business in the Philippines. If the aggregate stay in the Philippines during any
calendar year covered by the assignment period does not exceed 180 days, the
individual may be deemed a non-resident alien not engaged in trade or
business in the Philippines.
Expatriates assigned in the Philippines for a definite period are generally
regarded as non-residents engaged in trade or business in the Philippines.

Social security contributions
The maximum annual social tax payable by a taxpayer is PHP 13,425.60.
Social taxes consist of contributions to the Social Security System (SSS),
Philippine Health Insurance Corporation (Philhealth), and Home
Development Mutual Fund (HDMF).

Consumption taxes
Value-added tax (VAT)
A 12% VAT is imposed on services performed in the exercise or practice
of profession or calling, including entertainers, musical, radio, movie,
and television and stage directors; and professional athletes, as well as
services rendered by customs, real estate, stock, immigration, and
commercial brokers. The VAT is based on the gross receipts representing
the contract price, compensation, service fee, rental, or royalty,
including the amount charged for materials supplied with the services
and deposits and advanced payments actually or constructively received
during the taxable period/quarter for the services performed or to be
performed for another person, excluding VAT.

Employment income
An alien, whether resident or not, is taxed on compensation income
earned from services rendered in the Philippines regardless of where
payment is made and whether it is remitted into the Philippines. A non-
resident alien is not taxed on compensation income from services
performed outside the Philippines. Employment income, from the point
of view of a non-resident alien engaged in trade or business in the
Philippines, includes all payments for services rendered in the
Philippines, such as salaries and bonuses, regardless of where payment
was made.
Social security contributions, up to the prescribed amount of maximum
mandatory contributions, and union dues paid by employees are not
included in gross income and are exempt from taxation.

Fringe benefits
Fringe benefits furnished to managerial and supervisory-level
employees by the employer are subject to FBT (see the Taxes on
personal income section). Benefits subjected to FBT are not included in
employees’ taxable income.
‘Fringe benefits’ are defined as any goods, services, or other benefits
furnished or granted in cash or in kind by an employer to an individual
employee, except rank and file employees, such as, but not limited to,
the following:
Housing.
Expense account.
Vehicles of any kind.

Fringe benefits
Household personnel (e.g. maid, driver).
Interest on a loan at less than the market rate (currently set at 12%) to
the extent of the difference between the market rate and the actual rate
granted.
Membership fees, dues, and other expenses borne by the employer for
the employee in social and athletic clubs and similar organisations.
Expenses for foreign travel.
Holiday and vacation expenses.
Educational assistance to the employee and dependants.
Premiums for life insurance, health and other non-life insurance, and
similar amounts in excess of what the law allows.

Fringe benefits
The monetary value of benefits in the form of motor vehicles used for
both personal and business purposes and housing is equal to 50% of the
lease payment or the depreciation value of the property, whichever is
applicable. However, if the housing unit is situated in or adjacent (within
50 metres) to the business premises, the benefit is not taxable. Likewise,
a motor vehicle used normally for business purposes is not taxable.

Fringe benefits
The following fringe benefits are not taxable:
Fringe benefits required by the nature of or necessary to the trade, business,
or profession or for the convenience or advantage of the employer.
Benefits authorised by and exempted from tax under special laws.
Employer contributions for the benefit of the employee to retirement,
insurance, and hospitalisation benefit plans.
Benefits given to rank and file employees, whether or not granted under a
collective bargaining agreement. However, these are subject to withholding tax
on compensation, unless otherwise tax exempt.
De minimis (small value) benefits as defined and enumerated in the rules and
regulations.

Fringe benefits
In general, if a fringe benefit is granted in money or directly paid for by
the employer, the value of the fringe benefit is the amount granted or
paid for. If furnished in property and ownership thereof is transferred to
the employee, the value of the fringe benefit is the fair market value of
the property as determined by the Commissioner of Internal Revenue,
pursuant to the Commissioner’s power to prescribe real property
values. If the fringe benefit is granted or furnished by the employer in
the form of a property but ownership is not transferred to the
employee, the value of the fringe benefit is equal to the depreciation
value of the property.

Capital gains and investment
income
Non-resident aliens are taxed on Philippine-source capital gains,
irrespective of their period of stay in the Philippines. The rates are 0.5%
of the gross sales for those shares of stocks listed and traded in the
stock exchange; 5% on the first PHP 100,000 and 10% on the excess of
the net capital gains for unlisted shares of stock, including shares of
publicly listed companies that failed to comply with the minimum public
ownership (MPO) requirement; and 6% of the higher of the gross sales
price or fair market value of real property sold, withheld at the time of
sale. Capital losses are deductible only from capital gains. In computing
net capital gains or losses from other capital assets, only 50% of the gain
or loss is to be taken into account if the capital asset has been held for
more than 12 months; otherwise, 100% of the gain or loss is to be
considered.

income
A non-resident alien is also taxed on Philippine-source investment
income, such as interest, dividends, and royalties, at the rate of 20% (for
those engaged in trade or business in the Philippines) or 25% (for those
not engaged in trade or business in the Philippines) as a final tax (or a
lower treaty rate). The tax is withheld at source, and the income is not
subject to the graduated rates.

income
Resident aliens are taxed on their Philippine-source income at
graduated rates. However, Philippine-source interest and royalties are
taxed at 20%. Interest on residents’ deposits under the expanded
foreign currency deposit system (FCDU) accounts is taxed at 7.5%, while
interest on long-term deposits or investment in the form of savings,
common or individual trust funds, and other investments evidenced by
certificates, and so on, is exempt from tax, subject to certain conditions.
Interest income on FCDU accounts of non-residents is tax exempt.
Royalties on literary works and musical compositions are subject to a
final tax of 10%. Dividend income received from a domestic corporation
is taxed at 10%. Tax rates for capital gains from shares of stock and real
property are the same as those for non-resident aliens.

Employment expenses
Aliens, whether residents or not, who are receiving only salary or
compensation income are not allowed any deduction against such
income.

Personal deductions
Home mortgage interest, medical expenses, contributions, and other
personal expenses cannot be claimed as deductions for income tax
purposes. However, social security contributions, up to the prescribed
amount of maximum mandatory contributions, are excluded from gross
income.
A family with combined gross income of not more than PHP 250,000 for
the year may deduct premium payments for health/hospitalisation
insurance up to a maximum of PHP 2,400 per annum.

Personal allowances
Resident aliens and, subject to certain conditions, non-resident aliens
engaged in trade or business in the Philippines, are allowed a personal
exemption of PHP 50,000. An additional exemption of PHP 25,000 for
each qualified dependent child (not to exceed four dependants) is
allowed. These personal and additional exemptions take the form of
deductions instead of tax credits.

Business deductions
In the case of individuals engaged in business or the practice of a profession, the following
expenses are allowed as deductions from gross income:
All ordinary and necessary expenses paid or incurred during the taxable year in connection
with the trade, business, or profession, including raw materials, supplies, and direct labour.
Wages and other forms of compensation for personal services actually rendered, including
the grossed-up monetary value of fringe benefits and travel expenses incurred in the
pursuit of the trade or profession.
Business rentals.
Interest paid or incurred within a taxable year in connection with the conduct of a
taxpayer’s profession, trade, or business, less an amount equal to a certain percentage of
the interest income subject to final tax.
Entertainment, amusement, and recreation expenses, not to exceed the following ceilings:
0.50% of net sales for taxpayers engaged in sale of goods or properties.
1% of net revenue for taxpayers engaged in sale of services, including professionals and lessors of
properties.

Business deductions
Taxes.
Losses.
Bad debts.
Depreciation.
Charitable and other contributions, subject to certain limitations.
Research and development (R&D) expenditures.
In lieu of these allowable deductions, an individual other than a non-
resident alien may elect a standard deduction not exceeding 40% of
gross business or professional income.

Foreign tax relief
Aliens deriving income from foreign sources are not allowed a tax credit
for foreign income taxes against Philippine income tax.

Tax treaties
Countries with which the Philippines currently has double taxation agreements (DTAs):
here are no other significant tax credits or incentives for individuals in the Philippines.
Australia Hungary Pakistan
Austria India Poland
Bahrain Indonesia Romania
Bangladesh Israel Russia
Belgium Italy Singapore
Brazil Japan Spain
Canada Korea Sweden
China Kuwait Switzerland
Czech Republic Malaysia Thailand
Denmark Netherlands United Kingdom of Great Britain and
Northern Ireland
Finland New Zealand United Arab Emirates
France Nigeria United States of America
Germany Norway Vietnam

Individual - Foreign tax relief and tax
treaties
A domestic corporation is subject to tax on its
worldwide income. On the other hand, a foreign
corporation is subject to tax only on income
from Philippine sources (see the descriptions of
Resident foreign corporations and Non-resident
foreign corporations below).

Domestic corporations
Income CIT rate (%)
In general, on net income from all sources. 30
Minimum corporate income tax (MCIT) on gross income, beginning in the fourth taxable year following
the year of commencement of business operations. MCIT is imposed where the CIT at 30% is less than
2% MCIT on gross income.
2
Proprietary educational institutions and non-profit hospitals, on net income if gross income from
unrelated trade, business, and other activities does not exceed 50% of the total gross income from all
sources.
10
Non-stock, non-profit educational institutions (all assets and revenues used actually, directly, and
exclusively for educational purposes) and other non-profit organisations.
Exempt
Certain passive income from domestic sources is subject to final tax rather than ordinary income tax (see
the Income determination section).
The following corporate income tax (CIT) rates apply to domestic corporations:

Improperly accumulated earnings tax
An improperly accumulated earnings tax of 10% is imposed on
improperly accumulated income. The tax applies to every corporation
formed or used for the purpose of avoiding income tax with respect to
its shareholders, or the shareholders of any other corporation, by
permitting earnings and profits to accumulate instead of being divided
or distributed. Exceptions are made for publicly held corporations, banks
and non-bank financial intermediaries, and insurance companies.

Resident foreign
corporations
Resident foreign corporations (i.e. foreign corporations engaged in trade
or business in the Philippines through a branch office) are taxed in the
same manner as domestic corporations (except on capital gains on the
sale of buildings not used in business, which are taxable as ordinary
income), but only on Philippine-source income.
International carriers are subject to an income tax of 2.5% on their gross
Philippine billings unless a lower rate is available under an existing tax
treaty. Exemption from this tax is also available under international
agreements to which the Philippines is a signatory or on the basis of
reciprocity in cases where the home country of the international carrier
grants income tax exemption to Philippine carriers.

Resident foreign
corporations
Income of offshore banking units (OBUs) and foreign currency deposit
units (FCDUs) of depository banks from foreign currency transactions
with non-residents, other OBUs, or FCDUs and local commercial banks
(including branches of foreign banks) authorised by the Bangko Sentral
ng Pilipinas (central bank) to transact business with OBUs and FCDUs are
exempt from all taxes except net income specified by the Secretary of
Finance upon recommendation of the Monetary Board. Interest income
from foreign currency loans granted to residents other than OBUs or
local commercial banks shall be subject to a 10% final income tax.

Resident foreign
corporations
Regional or area headquarters of multinational corporations that do not earn
or derive income from the Philippines, and that act as supervisory,
communications, and coordinating centres for their affiliates, subsidiaries, or
branches in the Asia-Pacific region and other foreign markets are not subject to
CIT.
Regional operating headquarters (ROHQ) pay a tax of 10% on their taxable
income. An ROHQ is a branch established in the Philippines by a multinational
company that is engaged in any of the following services: general
administration and planning, business planning and coordination, sourcing and
procurement of raw materials and components, corporate finance advisory
services, marketing control and sales promotion, training and personnel
management, logistic services, research and development services and
product development, technical support and maintenance, data processing
and communication, or business development.

Non-resident foreign
corporations
In general, non-resident foreign corporations are taxed on gross income
received from sources within the Philippines at 30%, except for reinsurance
premiums, which are exempt. Interest on foreign loans is taxed at 20%.
Dividends from domestic corporations, however, are subject to a final
withholding tax (WHT) at the rate of 15% if the country in which the
corporation is domiciled does not impose income tax on such dividends or
allows a tax deemed paid credit of 15%.
Lower rates or exemption on the above income may be available under an
applicable tax treaty.
Rentals and charter fees payable to non-resident owners of vessels chartered
by Philippine nationals are subject to a final tax of 4.5%. Rentals, charters, and
other fees derived by non-resident lessors of aircraft, machinery, and other
equipment are subject to a final tax of 7.5%.

Corporate - Significant
developments
A domestic corporation is a corporation that is
created or organised under Philippine laws. A
foreign corporation that is duly licensed to
engage in trade or business within the
Philippines is referred to as a ‘resident foreign
corporation’

(PE)
The business profits provision in most Philippine treaties permits the
Philippines to tax only those profits attributable to a PE. While
Philippine treaties adopt the United Nations (UN) Model Convention,
Organisation for Economic Co-operation and Development (OECD)
commentaries have often been cited by tax authorities to support their
interpretation of treaty provisions. The main implication is that most
Philippine treaties contain a rule deeming a PE to arise when services
are performed in the Philippines for a specified period of time.

Value-added tax (VAT)
VAT applies to practically all sales of services and imports, as well as to sales,
barter, exchange, or lease of goods or properties (tangible or intangible). The
tax is equivalent to a uniform rate of 12%, based on the gross selling price of
goods or properties sold, or gross receipts from the sale of services. On
importation of goods, the basis of the tax is the value used by the Bureau of
Customs in determining tariff and customs duties plus customs duties, excise
taxes, if any, and other charges. Where the valuation used by the Bureau of
Customs is by volume or quantity, the VAT basis is the landed cost plus excise
taxes, if any.
Certain transactions are zero-rated or exempt from VAT. Export sales by VAT-
registered persons are zero-rated.
Certain sales of services exempt from VAT, including services provided by
financial intermediaries, are subject to percentage taxes based on gross sales,
receipts, or income. A 3% percentage tax also applies to persons who are not
VAT-registered because their annual sales or receipts do not exceed PHP
1,919,500.

Customs duties
The Philippines adopts the World Trade Organization (WTO) Valuation
Agreement, where the declared invoice price is used as the basis for
determining customs duties.
As a protective measure, the Philippines retains higher tariff rates (20%
to 50%) on sensitive agricultural products, such as grains, livestock and
meat products, sugar, certain vegetables, and coffee. A few agricultural
commodities are subject to minimum access volumes, but these
represent less than 1% of all tariff lines.

Customs duties
In view of the existing free trade agreements in the region, such as the
ASEAN Free Trade Area (AFTA), ASEAN-China Free Trade Area (ACFTA),
ASEAN-Korea Free Trade Area (AKFTA), the ASEAN-Australia-New
Zealand Free Trade Area (AANZFTA), the ASEAN-Japan Comprehensive
Economic Partnership Agreement (AJCEPA), and the ASEAN-INDIA Free
Trade Area (AIFTA), the Philippines has taken steps to progressively
eliminate tariffs. Tariff reductions for the Philippines range from 10% to
35% for most products included in the Normal Track list.

Excise taxes
Excise tax is payable at varying rates on alcohol products, tobacco
products, petroleum products, mineral products, and automobiles.
Excise tax is also payable on all goods commonly or commercially known
as jewellery, whether real or imitation; perfumes and toilet waters; and
yachts and other vessels intended for pleasure or sport at 20% of the
wholesale price or value of the importation used by the Bureau of
Customs in determining tariff and customs duties.
Documentary stamp tax (DST)
DST is payable at varying rates on various documents and transactions.
The following table contains selected examples:

Documentary stamp tax (DST)
Taxable document/transaction (tax base) DST rate
Original issue of shares PHP 1 for every PHP 200 or fractional part of par value
Sale, barter, or exchange of shares of stock listed and traded through
the local stock exchange
Exempt
Other sales agreement, agreement to sell, memoranda of sales,
delivery or transfer of shares or certificates of stock
PHP 0.75 for every PHP 200 or fractional part of par value
Certificate of profits, interest in property or accumulations PHP 0.50 for every PHP 200 or fractional part of face value
Non-exempt debt instruments PHP 1 for every PHP 200 or fractional value of the issue price.
Bank check, draft, certificate of deposit not bearing interest, other
instruments
PHP 1.50 for each instrument
Life insurance policy PHP 10 to PHP 100 depending upon the amount of insurance
Lease/hiring agreement
PHP 3 for the first PHP 2,000 or fractional part of amount stipulated in
contract, and PHP 1 for every PHP 1,000 or fractional part in excess of
PHP 2,000 for each year of contract term
Mortgage, pledge, deed of trust
PHP 20 for the first PHP 5,000 of amount secured, and PHP 10 for every
PHP 5,000 or fractional part in excess of PHP 5,000
Deed of sale, conveyance of real property
PHP 15 for each PHP 1,000 of consideration/value or fractional part
thereof

Capital gains tax
• Capital gains arise from the sale or exchange of ‘capital assets’. Capital
assets are property held by the taxpayer (whether or not connected with
its trade), other than the following:
• Inventories or property held primarily for sale to customers in the ordinary
course of business.
• Real property or depreciable property used in trade or business.
• Property of a kind that would be included in the inventory of the taxpayer
if on hand at the close of the taxable year.
• Capital losses are deductible only to the extent of capital gains.
• There are no holding period requirements for capital assets of
corporations.

Capital gains tax
• A 6% final tax is imposed on the higher of the gross selling price or fair market
value upon the sale, exchange, or disposition of land or buildings not actually
used in the business of a corporation. The tax is withheld by the buyer at the time
of sale.
• Net capital gains derived from the sale, exchange, transfer, or similar transactions
of shares of stock not traded through a local stock exchange are taxed at 5% on
the first PHP 100,000 of gains, and 10% on gains in excess of PHP 100,000. Sales
of shares of stock listed and traded on a local stock exchange, other than the sale
by a dealer in securities, are subject to a stock transaction tax of 0.5% based on
the gross selling price, provided the listed corporation observes a minimum
public ownership of at least 10% based on the company’s issued and outstanding
shares, exclusive of any treasury shares or such percentage as may be prescribed
by the Securities and Exchange Commission (SEC) or Philippine Stock Exchange
(PSE), whichever is higher; otherwise, the 5%/10% tax shall apply.

Capital gains tax
• Capital gains from the sale of bonds, debentures, or other certificates of
indebtedness with a maturity of more than five years are exempt from tax.
• A tax is levied on every sale, barter, exchange, or other disposition through
an initial public offering (IPO) of shares of stock in closely held
corporations. A ‘closely held corporation’ is any corporation of which at
least 50% in value of the total outstanding capital stock, or at least 50% of
the total combined voting power of all classes of stock entitled to vote, is
owned directly or indirectly by, or for, not more than 20 individuals. The tax
rates provided hereunder are based on the proportion of the gross selling
price, or gross value in money, of the shares of stock sold, bartered,
exchanged, or otherwise disposed of to the total outstanding shares of
stock after listing on the local stock exchange.

Capital gains tax
Proportion of sale to
total shares
Tax rate (%)
25% or less 4
Over 25% but not over
33.33%
2
Over 33.33% 1

Fringe benefits tax
• A final tax of 32%, payable by the employer, is imposed on the
grossed-up monetary value of fringe benefits (e.g. housing, expense
accounts, vehicles of any kind, household personnel, interest on loans
at lower than market rates [the current benchmark rate is 12%],
membership dues for social and athletic clubs, foreign travel
expenses, holiday and vacation expenses, educational assistance,
insurance) furnished or granted to managerial or supervisory
personnel by the employer. An exception is for fringe benefits
required by the nature of or necessary to the trade, business, or
profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer.

Fringe benefits tax
• The following fringe benefits are not subject to the tax:
• Those authorised and exempted from tax under special laws.
• Contributions of the employer for the benefit of the employee to
retirement, insurance, and hospitalisation benefit plans.
• Those granted to rank-and-file employees (however, the employees
may be subject to WHT on compensation).
• Those of relatively small value or de minimis benefits.

Fringe benefits tax
• The fringe benefits tax is payable on a calendar quarter basis and is an
additional deductible expense for the employer. Fringe benefits
already subjected to fringe benefits tax will no longer form part of the
employee’s taxable income.
• The grossed-up monetary value of the fringe benefit is generally
computed by dividing the actual monetary value of the benefit by
68%.

Payroll taxes
• Social security contributions
• Corporations doing business in the Philippines must be registered with
social institutions, such as the Social Security System (SSS), Home
Development Mutual Fund (HDMF), and Philippine Health Corporation
(PHIC), upon employment of any employee and prior to the due date of the
remittance of any social contributions.
• Employee contributions for social security are deducted from the
employee’s salary payments. For 2015, the maximum monthly deductions
are PHP 581.30 for SSS, PHP 100 for HDMF, and PHP 437.50 for PHIC.
• Employers are also required to make contributions. Employers’ maximum
contribution for each employee is PHP 1,208.70 per month. Employer
contributions for HDMF and PHIC are generally of the same amount as the
employee contributions.

Local government taxes
• Local government units impose local business taxes, which are
generally based on the gross sales or gross receipts of the prior year,
and real property taxes, which are levied annually on the basis of a
fixed proportion of the value of the real property (taxable value). The
local business tax rate varies depending on the location of the
business, but generally shall not exceed 3%. Real property located in a
province may be subject to real property tax of not more than 1% of
its taxable value, while real property in a city (or municipality in
Metro Manila) may be subject to real property tax of not more 2% of
its taxable value.
•

Corporate - Corporate residence
• The income tax rate on branch profits is the same as on corporate
profits. In general, profits remitted abroad by a branch office are
subject to a 15% tax rate, based on the total profits applied or
earmarked for remittance, without any deduction for the tax
component thereof. A lower rate may apply under certain tax treaties.
Profits from qualified activities remitted by a branch registered with
the Philippine Economic Zone Authority (PEZA) are tax exempt.

Inventory valuation
• Inventories are generally stated at cost or at the lower of cost or
market. Last in first out (LIFO) is not allowed for tax purposes.
Generally, the inventory valuation method for tax purposes must
conform to that used for financial reporting purposes.

Capital gains
• Capital gains are not generally subject to CIT, but may be subject to
capital gains tax. See Capital gains tax in the Other taxes section for
more information.

Dividend income
• Dividends received by a domestic or resident foreign corporation from another
domestic corporation are not subject to tax. These dividends are excluded from
the taxable income of the recipient.
• Dividends received by a non-resident foreign corporation from a domestic
corporation are subject to a general final WHT at the rate of 30%. A lower rate of
15% applies if the country in which the corporation is domiciled either does not
impose income tax on such dividends or allows a tax deemed paid credit of 15%.
Treaty rates ranging from 10% to 25% may also apply if the recipient is a resident
of a country with which the Philippines has a tax treaty.
•Stock dividends
• A Philippine corporation can distribute stock dividends tax-free, proportionately
to all shareholders.

Interest income
• Interest on bank savings, time deposits, deposit substitutes, and
money market placements received by domestic or resident foreign
corporations from a domestic corporation are subject to a final tax of
20%, while interest income derived from FCDU deposits is subject to a
final tax of 7.5%. Such income is excluded from gross income
reportable in CIT returns.
• Interest income of OBUs and FCDUs from foreign currency loans
granted to residents other than OBUs or local commercial banks shall
be subject to 10% tax.

Royalty income
• Royalties received by domestic or resident foreign corporations from
a domestic corporation are subject to a final tax of 20%.

Other significant items
• Other items exempt from CIT include the following:
• Proceeds of life insurance policies.
• Return of policy premium.
• Gifts, bequests, and devises.
• Interest on certain government securities.
• Income exempt under a treaty.
• Gains from sale, exchange, or retirement of bonds.
• Gains from redemption of shares of stock in mutual fund companies.

•Foreign income
• A Philippine (domestic) corporation is taxed on its worldwide income. A
domestic corporation is taxed on income from foreign sources when
earned or received, depending on the accounting method used by the
taxpayer.
• Income earned through a foreign subsidiary is taxed only when paid to a
Philippine resident shareholder as a dividend. Meanwhile, income earned
through a foreign branch is taxed as it accrues. The losses incurred by the
foreign branch are deductible against other income earned by the
Philippine corporation.
• Double taxation is generally relieved through a credit for foreign taxes.
However, a taxpayer can take a deduction for foreign taxes instead, if that
leads to a more favourable outcome.

Why PH has 2nd highest income tax in ASEAN
• The Philippines currently
has the second highest
personal and highest
corporate income tax
systems among its
ASEAN-6 peers.
Come ASEAN integration by yearend, the Philippines will have the most uninviting tax system in the region

Why PH has 2nd highest income tax in ASEAN

Economists explain why.
• The Philippines has been struggling with our fiscal deficit for some
years now and one way to fix that is to impose hefty taxes on its
citizenry and corporates.
• Currently, the Philippines is the darling of the emerging market space
with an improving fiscal sector.
• Tax collections are on the rise although slow spending has also
yielded better fiscal numbers.
• But our neighbors with lower tax rates are now struggling to grow
with [their] governments running gargantuan deficit to GDP (gross
domestic product) ratios.

• For example, we've seen Malaysia implement tax reforms (with the
goods and services tax) to help shore up their fiscal picture as they
suffer from a substantial deficit to GDP ratio of more than 4%,.
• The Philippines now has the fiscal space, owing to "higher tax rates,
improved collection, and sadly, slower state spending."
Economists explain why.

Economists explain why
Government scared
• Benjamin Diokno, University of the Philippines economist, said the
government is scared that "rising deficit would cause a potential
downgrade by international ratings agencies, hence the unchanged
income tax system."
• He explained that in 2014, the Aquino administration targeted a
budget deficit of P266.2 billion ($5.70 billion) or 2% of GDP. Actual
deficit was only P73.1 billion ($1.56 billion) or 0.6% of GDP, and this is
not because of higher-than-targeted revenue intake.

• The lower deficit was due to simple incompetence or poor budget planning
or both" The same horrible story is unfolding this year.
• The high income tax rate is to address the need for increased education
and infrastructure spending.
• The need for education, infrastructure is increasing. When you look at the
percentage of GDP, the Philippines spend lower for education than its
neighbors. In the case of the Philippines, it only spends about 3% of GDP,
while others spend 5% of GDP..
• If Philippines wants to improve infrastructure, it needs to put in at least 5%
of GDP for many years. Same with education spending. So the point is, we
need revenue to make sure we attain these growth targets.

A call for uniform, equitable taxation
• "In our case, the Philippine Constitution mandates that we should
have a uniform, equitable taxation, and that Congress should evolve
a progressive taxation system," Balbieran told Rappler in an interview.
• "It will require thorough studies to answer whether we should lower
or increase income tax. We should answer first whether we are hitting
our productive capacity and how much does the government need to
spend to achieve full utilization of our productive capacity of
economy," he added.

According to the Bureau of Internal Revenue, the Tax Reform
Act of 1997 has this matrix of tax rates:

• "We're not imposing a 32% income tax across the board, but only to the
supposed highest income bracket. But the income bracket has not been
adjusted to inflation since that law has been passed," Balbieran explained.
• He added that "those who were presumed to be high middle class and rich
in the 1997, and therefore taxed heavily, are not the same income class
today. They may be very much poor and most especially the middle income
class."
• According to Balbieran, the tax bracket "should immediately be revised to
include automatic adjustments of nominal figures with inflation."
• "Moreover, I propose that the bracket be adjusted upwards to start high
and end very high. In this way, genuine progressive tax system can be put in
place," he added.

• For instance, Balbieran said a manager earning P500,000 ($10,704.85)
annual gross income, is roughly taking home little less than P30,000
($642.29) per month. He is already paying the highest tax rate,
together with those earning to about P1 million ($21,407.76) a
month.
• "Thus, there is much room to lessen the burden of the ordinary
workers and the middle class just by adjusting the bracket upwards,
and make our taxation system competitive in pushing faster economic
growth, even at the second to the highest personal income tax rate in
ASEAN-6 for the highest income earners," Balbieran said.

PH out of sync
• The Philippines, according to UP's Diokno, has not been quick to respond, unlike
some of its neighbors such as Vietnam and Thailand which have reduced their tax
rates to more attractive levels.
• "Thailand in 2010 reduced its personal income tax rate to 35% from 37% and its
corporate income tax rate to 20% from 35%; while Vietnam drastically reduced its
corporate income tax to 22% from 35%," Diokno explained.
"Singapore, which has the highest foreign direct investments among its
neighbors, has even the most attractive income tax package: 20% personal
income tax and 17% corporate income tax rates," he added.
• For the country's former budget chief, "tax reform is urgently needed in this
country."
• "The present tax system is out of date, inefficient, onerous, and out of sync with
tax systems in integrating ASEAN region. Reforming it is a question of when not
if," Diokno said

Introduction to the Indonesian Tax
System
• The major taxes in Indonesia are levied at the national level. The
exceptions are transfer tax of motor vehicles and development tax.
• AFTER THE MONETARY CRISIS IN 1997, THE COUNTRY HAS
EXPERIENCED SIGNIFICANT POLITICAL AND ECONOMIC INSTABILITY.
THE SITUATION IS IN A CONSTANT STATE OF FLUX. CONSEQUENTLY,
LOCAL BUSINESS CONTACTS, EMBASSIES AND OTHER OFFICIAL
BODIES SHOULD BE CONSULTED REGARDING THE CURRENT
SITUATION INSOFAR AS TAX LAWS AND ENFORCEMENT OF LAWS
ARE CONCERNED. MANY LAWS ARE NEW

System
• The official currency is the Indonesian Rupiah and there are no
foreign exchange controls place on this currency. Since the economic
crisis in 1997, the Rupiah has depreciated more than 70%.
• The Indonesian fiscal year ends on 31 March. The tax year in
Indonesia is the calendar year. Company financial years generally end
on 31 December. Subsidiaries of foreign companies usually follow the
financial year of the overseas parent.

System
• Married persons are taxed separately on employment income and
jointly on all other income. Employee taxes are withheld by the
employer. An employer must file a tax return based on the calendar
year for all employees no later than the following 31 March. The
employer must also file a monthly return by the 20th day of the
following month.

System
• Employees with only one source of income have not been required to
file annual tax returns. However, resident individuals with more than
one source of income must file individual tax returns disclosing all
sources of worldwide income, and, effective from 1 January 2001, it
appears that most individuals will be required to file individual
income tax returns. The return is due on 31 March following the end
of the tax year.
• .
•

System
• Withholding tax is levied on a variety of payments to residents. A self-
employed professional, including an accountant, attorney, architect or
consultant, has tax withheld at source on the settlement of invoices.
The rates of withholding tax vary from 6% to 9% of the gross amount.
Withholding tax is an advance payment of income tax.

System
• Self-employed individuals must make monthly advance tax payments.
The monthly payment amount is based on the previous year�s tax
liability, reduced by tax withheld at source during the preceding year.
The payment is due on the 15th day of the month following the
income month

PART 2
SNAPSHOT OF INDONESIA'S TAX
SYSTEM
Tax Description
Corporate Income Tax
• 25 percent on all income (normal rate)
• a 5 percent lower than normal rate is applied to a Limited Company of
which at least 40 percent of its shares are traded on the stock exchange
market (IDX)
• a 50 percent deduction from the normal rate is applied to companies
with a gross turnover up to IDR 50 billion

VAT (Value Added Tax) • Input and Output mechanism
• The current rate is 10 percent
Withholding tax
for payments to residents
• 15
percent for interest, dividends and royalties
• 2 percent for services
• These withholding taxes are considered
corporate tax prepayments
• 10 percent for land and building rental
(final tax)
• Withholding tax calculated on
sales/revenue is considered a final taxWithholding tax
for payments to non-
residents
• 20 percent according to the domestic law, but can be
reduced by using tax treaty provisions, or exempt for
services that qualify as business profits
PART 2 SNAPSHOT OF INDONESIA'S TAX SYSTEM

Individual Tax
the following progressive rates are charged to taxable annual
income
• Up to IDR 50 million, tax rate applied is 5 percent
• Over IDR 50 million to IDR 250 million, tax rate applied is 15
percent
• Over IDR 250 million to IDR 500 million, tax rate applied is 25
percent
• Over IDR 500 million, tax rate applied is 30 percent
Tax Losses
• Can be carried forward for 5 years
PART 2 SNAPSHOT OF INDONESIA'S
TAX SYSTEM

PART 2 SNAPSHOT OF INDONESIA'S
TAX SYSTEM

Primary types of taxation
•Corporation Income Tax
• Resident companies are subject to taxation on their worldwide income. Foreign direct investment companies
must pay corporate income tax based upon Indonesian source revenues.
• Corporation income tax is calculated on the basis of income less certain deductions. Any foreign tax paid by
the company may be used to credit the amount of income tax to be paid to Indonesia. Non-resident
companies are only liable for taxes withheld.
• Tax losses may be carried forward for 5 years as an offset against profits in those years. Some types of
industries are allowed to carry forward such losses as an offset to profits for up to 8 years.
• A company is domiciled in Indonesia if it is managed, controlled or has its head office in Indonesia. Branches
of foreign companies are taxed only on those profits derived from activities carried out in Indonesia.
However, income accruing from an Indonesian branch to a foreign parent is taxed as income of the branch if
the business is of a similar nature to the business of the branch.
• The tax rate for corporate income exceeding 100,000,000 Rupiah is 30%. This is the maximum corporation
tax rate.

Corporation Income Tax
• Special tax rates apply to specific types of corporations:
• Petroleum companies are subject to tax at a flat rate of 30% - 45%.
• General mining companies are taxed at rates ranging from 30% to 45%, depending on the
generation of their contracts with the Indonesian government. Most recent mining
contracts, though, provide for taxation on the basis of current tax rates with no tax rate
escalation provisions.
• Geothermal companies are subject to income tax at a rate of 34%.
• Construction companies are subject to a final tax at a rate of 2% of gross turnover.
• Construction design or supervision or consultancy companies in this category, other than
legal and tax consultancy are subject to tax at a rate of 4% of gross turnover.
• Foreign drilling companies are subject to a rate of 5.6% of their gross turnover.
• Non-resident international shipping companies and airlines are subject to tax at a rate of
2.64% of gross turnover.

TYPES OF BUSINESS ORGANIZATIONS IN
INDONESIA
• PERSEROAN TERBATAS (PT)
• Limited Liability Companies (PT) can include, and are classified as
private and public companies. They are governed by the 1996
Corporation Law. PTs are managed by a Board of Directors. Non-
Indonesian citizens may not be directors or foreign investment
commissioners in a PT.
• REPRESENTATIVE OFFICES
• Foreign representative offices are typically formed to facilitate
transactions between local and foreign buyers and suppliers. A
Representative Office facilitates making such transactions easier but a
Representative Office cannot perform operating activities
characterized by a PT.

TYPES OF BUSINESS ORGANIZATIONS IN
INDONESIA
• JOINT VENTURES
• Foreign direct investment companies may be in the form of Joint
Ventures between foreign and domestic capital owned by Indonesian
citizens or organizations, or through straight investment.
• BADAN USAHA MILIK NEGARA (BUMN) These are companies owned
by the government
• PERUSAHAAN DAGANG (PD) These entities are known as private
trading companies, most of which are sole proprietorships.
• LIMITED LIABILITY PARTNERSHIPS (CV) This legal designation only
applies to the silent partners in a given partnership.
• FIRMA These are unlimited liability partnerships, more commonly
known as disclosed partnerships.

Individual Income Tax
• Indonesian resident taxpayers are subject to tax on worldwide income.
Nonresidents are subject to tax on Indonesian-source income, only. Individuals
are considered resident if they reside in Indonesia; if they are present in
Indonesia for more than 183 days within a 12 month period; if, within the
calendar tax year, they reside in Indonesia with the intent to stay or meet the
time requirements of applicable tax treaty.
• Fringe benefits such as employer-provided housing and automobiles are not
included within the employees taxable income. Yet they are allowable deductions
for the employer if the employee works in remote areas. Benefits received in the
form of cash allowances are taxable.
• Self-employment income, directors fees and business income is combined with
other income and taxed at published Rates
• Dividends paid to individuals, interest, rents and royalties are subject to 15%
withholding tax.

• Employer-provided stock options are not taxed at the time of grant or
exercise. Income tax at a rate of 30% is imposed at the time of sale on
the difference between the sale price of the shares and the strike
price.
• Capital gains (note: the same tax rate exists for corporations and
individuals for capital gains): A 0.1% final withholding tax is imposed
on proceeds of sales of publicly listed shares through the Indonesian
Stock Exchange.

• An additional tax at the rate of 0.5% of the share value is levied on
sales of founder shares associated with public offerings. Founder
shareholders must pay the 0.5% tax within one month after the
shares are listed. Founder shareholders that do not pay the tax by the
due date are subject to income tax on the gains at the ordinary
income tax rates.
• Other capital gains derived by residents are included in taxable
income and are subject to tax at the normal progressive income tax
rates. Other capital gains derived by nonresidents are subject to tax at
a rate of 20% The law provides that the 20% tax is implosed on an
amount of deemed income

Deductible expenses:
• Deductible expenses: To determine the taxable income of regular
employees, gross income is reduced by the following amounts:
• STANDARD DEDUCTION at a rate of 5% of gross income, up to a
maximum of 1,296,000 Rupiah for the year.
• PENSION FUND CONTRIBUTIONS for approved pensions up to
432,000 Rupiah for the year.
• PERSONAL ALLOWANCES of 2,880,000, with additional allowance for
married persons, family members these are varying amounts.
• BUSINESS DEDUCTIONS for self-employed individuals. A spouses
business losses may be offset against the business profits of the other
spouse.
• OTHER DEDUCTIONS such as premiums for certain life and health
insurance, gifts and donations.

RATES:
• A graduated scale of tax rates exists. Income above 100,000,000
Rupiah and below 200,000,000 Rupiah is taxed at a 25% tax rate.
• Income over 200,000,000 Rupiah is taxed at the maximum rate of
35%.
• Nonresident taxpayers are subject to tax at a flat rate of 20% on all
Indonesian-source income.

Other taxes
• Value-Added Tax (VAT), on delivery of taxable goods, on imports of
goods and on services (including services furnished by foreign
taxpayers outside Indonesia if the services have a benefit in
Indonesia). Unless specifically exempt, the VAT is 10%.
• Sales tax on luxury goods, imposed in addition to the VAT on the
delivery of luxury goods manufactured in or imported into Indonesia.
Rates depend on the nature of the goods and the range is from 10%
to 75%.
• Tax on land and buildings, based upon sales value. This rate is 0.5%.
• Road Tax. This tax applies to all motor vehicles and is charged based
upon the value of the vehicle. It is charged annually.

Other taxes
• Provident Fund (JAMSOSTEK) is compulsory only for companies with
more than 10 employees or a payroll exceeding 1,000,000 Rupiah per
month. Contributions are not mandatory for expatriates.
• Transfer Tax. This applies to the purchase and transfer of ownership
on all vehicles.
• Excise Duties. This applies to all cigarettes and alcohol imported or
manufactured in Indonesia.
• Stamp Duties. This is applicable to certain types of documents,
contracts and deeds at a nominal rate of 1,000 - 2,000 Rupiah.

Tax incentives
• Tax incentives will be granted to newly established resident
companies investing in certain types of businesses or regions. A
government regulation will specify the types of industries and regions
qualifying for the incentives. These tax incentives are:
• Accelerated depreciation and amortization
• Tax-loss carry forwarad period of 10 years
• A reduced dividend withholding tax rate of 10% unless the rate
provided in a relevant tax treaty is lower, and
• An investment allowance of 5% per year for a period of six years.

Tax incentives
• Companies restructuring debts through entities appointed by the
government, such as Jakarta Initiative, qualify for the following tax
incentives from 2000 through 2002:
• A partial tax exemption for income resulting from the debt
forgivements and the option to pay the tax on such income in
installments
• Income tax exemption for the transfer of assets to creditors for debt
settlement, if all assets are transferred at book value, and
• Income tax exemption for debt to equity swaps, if the value of the
equity transferred is equal to the amount of the debt

Tax treaties
• Indonesia and the United States have a double tax elimination treaty.
Indonesia has concluded double tax treaties with 48 countries.
• Indonesia Income Tax Rate 5% - 30%
• Corporate Tax Rate 25%
• Sales Tax / Service Rate 10%
Personal Income Tax Individual income tax rates are progressive rate
between 5% - 30% as shown below:
• Taxable income (Rp) Tax rate Rp 1 – 50,000,000 5%
Rp 50,000,001 – 250,000,000 15%
Rp 250,000,001 – 500,000,000 25% Rp 500,000,001
and above 30%

Tax treaties
• Corporate Tax Indonesian firms are subject to corporate tax on all
sources income regardless of where the income is derived.
• Foreign companies shall be considered taxable in Indonesia if they
have a presence and conduct business in that country.
• In case of branches of foreign companies, the companies are taxed
only on income derived in Indonesia.
• Taxable income for the companies shall be assessable income less tax
deductible expenses. It is important to note that the tax payment
paid to other countries is granted tax deduction in Indonesia.

Tax treaties
• Corporate tax rates in Indonesia are levied as follows: Level
of income Tax rate Rp 50,000,000 and below 10%
• Rp 50,000,001 – 100,000,000 15% Rp 100,000,001 and
above 30%
• The following is types of business subjected to special tax
rates

Types of business Tax rate
• Petroleum 30% - 45% Mining site 30% – 45%
• Construction 2%
• Building Design 4% Tax and
• legal consultant Multinational shipping company and foreign airlines
2.64%
• Value Added Tax/ Sales Tax Generally, value added tax for imported
and exported good produced in Indonesia is 10%.
• However, some imported raw materials are granted value added tax
exemption. These include raw material used in the production of
banknotes and coins, fodder, marine and air vehicle weapons, science
book, software medical tools and raw materials used in the
production of ship and airplane.

Tax treaties
• Withholding Tax Withholding tax shall be payable at the following
rates: Types of taxable income Tax rate For resident For non-resident
Dividend 10% 20% Interest 15% 20% Royalty 15% 20% Technical
assistance and Service Fee 2% 20% Indonesia does not levy any
withholding tax on dividend and there is no Capital Gains Tax. Tax
Incentives for SMEs SME companies with income not exceeding Rp
600 million per year are not subject to value added tax.
• However, Young Entrepreneurs Association (Hipmi) in Indonesia is
currently enhancing yearly ceiling income from Rp 6,000,000.
• .

Indonesia Corporate Tax Rate
• The Corporate Tax Rate in Indonesia stands at 25 percent.
• Corporate Tax Rate in Indonesia averaged 28.79 percent from 1997
until 2015, reaching an all time high of 39 percent in 2002 and a
record low of 25 percent in 2010.
• Corporate Tax Rate in Indonesia is reported by the Direktorat Jenderal
Pajak

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