Taxable Income in Indonesia

Income Tax Law in Indonesia adheres to the principle of taxation on income in a broad meaning. So, it is basically all income from whatever source.This also means that the tax shall be imposed on any increase in economic capability received by or accrued by a Taxpayer from whatever source which can be used for consumption or for increasing the wealth of the Taxpayer. So, it is basically all income from whatever source

The meaning of income in the Law shall concern whether it comes from a particular source, but on its additional economic capability. The said increase received by or accrued by a Taxpayer constitutes the best measure of the capability of the Taxpayer to participate in sharing the burden of expenditure needed by the government.

Seen from the flow of the increasing economic capability of the Taxpayer, income could be classified into:

         i.     income form any form of employment or professional work, such as salary, honorarium, income derived by a physician, notary, actuary, accountant, lawyer, et cetera;

         ii.     income from conducting business and activities.

         iii.    income from capital (movable or immovable property) such as interest, dividend, royalty, rent, gain on sales of property, or rights which are not used for the business; and

         iv.    other income, such as discharge of indebtedness, and gift.

From the usage of income poit of view, income could be classsified as amean to be used for consumption or to be put into savings to increase the wealth of a Taxpayer.

Because this Law adheres to the concept of income in a broad meaning, all types of income received or earned in a taxable year shall be combined to establish a basis for tax imposition. Therefore, if in a taxable year a business or an entity suffers a loss, the said loss may be compensated with other income (horizontal compensation), except if the loss is incurred abroad. However, if a type of income is taxed with a rate which is final in nature or is exempted as a Taxable Income, then the said income shall not be combined with other income, which is imposed with the general tax rate.

The examples of income referred to in these provisions are intended to clarify the concept of income in a broad meaning, which is not limited to the examples.

a.     compensation or remuneration received or accrued in respect of employment or service rendered, including salary, wage, allowance, honorarium, commission, bonus, gratuity, pension, or other forms of remuneration, unless otherwise stipulated by this Law;

All payments or remuneration in connection with employment, such as wages, salaries, life insurance and health insurance premium paid by an employer, or compensation in any other form, shall be Taxable Income. The term "compensation in another form" shall include benefit in kind, which essentially constitutes an income.

b.    lottery prizes, or gifts in respect of employment or activities, and reward;

The term "gift" shall include prizes from lotteries, work, and activities, such as the prize in a saving lottery, the prize of sport competition, et cetera. The term "award" shall mean compensation granted in connection with certain activities, such as compensation received in connection with archaeological foundings.

c.     business profits;

d.    gains from the sale or transfer of property, including:

                 1.    gains from a transfer of property to a company, a partneship, and other entity in exchange for shares or capital contribution;

                 2.    gains accrued by a company, a partnership or other entities from the transfer of property to its shareholders, partners or members;

                 3.    gains from a liquidation, merger, consolidation, expansion, split-up, acquisition, or reorganization in whatever name and form

                 4.    gains from transfer of property in the form of grant, aid or donation, unless they are given to relatives within one degree of direct lineage, and to religious body, educational or other social entity including foundation,cooperative, or to any individual who conducting micro and small business which stipulated by Minister of Finance, provided that aforementioned parties have no business, employement, ownership nor control relationship; and

                 5.    gains from the sale or the transfer of part or all of mining rights, participation in financing, or capitalization in a mining company;

If a Taxpayer sells property at a price higher than the book value, or at a price higher than the acquisition cost or value, the difference in price is regarded as profit. If the sale of such property occurs between a company and its shareholders, the sale price shall be used as the basis for calculation of profit is the market price.

                   Example: Company 'S' owns a car used for business activities with a book value of Rp40,000,000.00 (forty million rupiahs). The car is sold based on the market price of Rp60,000,000.00 (sixty million rupiahs). The profit earned by Company 'S" on the sale of the car is Rp20,000,000.00 (twenty million rupiahs). If the car is sold to one of the shareholders for Rp55,000,000.00 (fifty five million rupiahs), the sale value of the car shall still be calculated on the basis of market price of Rp60,000,000.00 (sixty million rupiahs). The Rp20,000,000.00 (twenty million rupiahs) difference is profit to Company 'S', while for the shareholder purchasing the car, the difference of Rp5,000,000.00 (five million rupiahs) counts as income.

                   If an entity is liquidated, profit from the sale of property, namely the difference between the sale price based on market price and the book value, will be regarded as taxable income.

                   The similar standard as above is also for the positive difference between the market price and the book value in the case of a liquidation, merger, consolidation, expansion, split up or acquisition constitutes income. If there is a transfer of property in exchange for shares or capital participation, any profit in the form of difference between the market price of the property transferred and the book value constitutes income.

                   Profit, in the form of the difference between the market price and the purchase price or book value on a transfer of property in the form of gifts, aid or donation is considered income to the party undertaking the transfer, unless the property is transferred to a relative in direct lineage of one degree Similarly, the profit in the form of the difference between market price and the acquisition value or book value of the transfer of property as aids or donation and grants to religious organizations or educational and social institutions, including foundations or small businesses including cooperatives or any individual which are regulated by the Minister of Finance Regulation, provided that there is no business, work, ownership or control relationship between the parties concerned.

                   In the case of a Taxpayer who owns mining rights transfers a part or the whole rights to other Taxpayer, the profit gained is subject to tax.

e.     refund of tax payments which already deducted as an expense and any additional payment of tax refund;

A tax refund regarded as an expense at the time of calculating Taxable Income, is considered as taxable income. For example, if Tax on Land and Buildings which has been paid and accounted for as an expense is subsequently refunded for whatever reason, the total amount of the refund is regarded as income.

f.     interest including premium, discounts, and compensation for loan repayment guarantees;

The term 'interest' includes premiums, discounts and compensation in connection with guarantees loan. A premium occurs if, for example, a bond is sold above its par value while a discount occurs if a bond is purchased below the par value. The premium is income for the issuer of the bond while discount is income for the purchaser.

g.    dividends, in whatever name and form, including dividends from an insurance company to its policyholders, and distribution of net income by a cooperative;

Dividend is the share of profit received by shareholders or insurance policyholders, or the distribution of net income of a cooperation received by its members.

The term dividend shall include:

                   1)     distribution of profit, directly or indirectly and under whatever name or form;

                   2)     refund in a liquidation in excess of the paid-up capital;

                   3)     bonus shares received without payment, including bonus shares derived from the capitalization of premiums on new shares;

                   4)     distribution of profit in the form of shares;

                   5)     records of additional capital with out payment;

                   6)     the sum exceeding the amount of paid-in capital received or accrued by shareholders on a buyback shares by the company concerned;

                   7)     whole or partial refund of paid-in capital, if in previous years profits have been made, except where the refund is caused by a legal reduction in the statutory capital;

                   8)     payment related to rights of profit, including that received as redemption of the rights;

                   9)     a share of profit in connection with bond ownership;

                   10)    a share of profit received by policy holders;

                   11)    distribution of net income to members of a cooperative;

                   12)    company expenditures for the personal benefit of shareholders, which are charged as company expenses.

ln practice, it often happens that distribution or payment of dividend is not transparent, for instance, where shareholders, who have fully paid-in capital, grant a loan to the company which is repaid with a rate of interest higher th an appropriate. In such a case, the positive difference between the interest paid and the market rate will be treated as dividend. The portion of interest treated as dividend cannot be charged as an expense by the company concerned.

h.     royalty or compensation from the use of right;

ln principle, compensation in the form of royalties comprises three types, namely payment for the use of:

1.     rights over intangible property, such as copyrights in the field of literature, art, or scientific masterpiece, patents, design or model, plans, formulas or secret process, company trade secrets, or intellectual/industrial rights or other similar rights;

2.     rights over tangible property, such as rights over industrial, commercial, and scientific equipment;

3.     Transfer of knowledge or information in the field of scientific, technical, industrial, or commercial;

4.     Additional aids or complement relating to the use or rights to use rights, the use of right to use tools/equipments, or transfer of knowledge or information in the form of:

a)     the acceptance of or the right to receive the recorded image or voice recording, or both, which is distributed to the public via satellite, cable, fiber optics, or similar technology;

b)     the use or right to use the recorded image or voice recording, or both, for television or radio broadcast / emanated through satellite, cable, fiber optics, or similar technology;

c)     the use or right to use some or all of the radio spectrum communication;

5.     the use or right to use picture film (motion picture films), film or video tape for television broadcast, or the soundtrack to the radio broadcast; and

6.     The release all or part of the rights associated with the use or provision of intellectual property / industrial or other rights, as mentioned above.

i.     rents and other income from the use of property;

Rent includes compensation received or obtained in whatever name or form in connection with the use of movable or immovable property, such as rent of a car, rent of an office, rent of a house or rent of a building.

j.     annuities;

Receipts in the form of periodic payments such as alimony or a lifetime allowance paid regularly at certain times.

k.     gains from the discharge of indebtedness up to a certain amount stipulated by Government Regulation;

Discharge of indebtedness by a creditor is considered income to the debtor, while it can be charged as an expense by the creditor. However, as determined by the Government Regulations, discharge of indebtedness for small debtors, such as for Business loan for low income family (Kredit Usaha Keluarga Prasejahtera, Kukesra), Farmer Business Loan (Kredit Usaha Tani, KUT), Loans for small housing, and other small loans up to certain amount, are exempted from Taxable income.

l.     gains from foreign exchange;

Gains from the fluctuation in foreign currency are taxed based on the accounting system adopted by and for which the Taxpayer has complied with consistently congruent with the Financial Accounting Standard which prevails in lndonesia.

m.   gains from revaluation of assets;

Gains from the fluctuation in foreign currency are taxed based on the accounting system adopted by and for which the Taxpayer has complied with consistently congruent with the Financial Accounting Standard which prevails in lndonesia.

n.     insurance premium;

o.    contribution received by or accrued by an association from its members who are taxpayers engaged in business or independent services;

p.    an increase in net wealth from income which has not been taxed;

An increasing in the net wealth is basically the accumulation of income, whether it has already been taxed, or it is not a taxable object, or it has not yet been taxed. If it is found that there is an increase in the net wealth that exceeds the accumulation of income whether it has been taxed or it is not a taxable object, the increase is regarded as income.

q.    income from sharia business;

 Business activities with a Sharia-based platform has a-different philosophy from conventional business. However, the revenue received or earned from a Sharia-based business activityis still considered taxable income according to this Law.

r.     compensation as stipulated by Laws concerning General Provisions and Tax Procedures; and

s.     surplus of Bank of lndonesia. 

sources: idtaxes.wordpress.com