On 7 October 2021, the Indonesian parliament passed the “Harmonisation of Tax Regulations” (Harmonisasi Peraturan Perpajakan/HPP) Bill. The enactment of this HPP Bill into Law has been signed by the President on 29 October 2021 marked the enactment this Bill into Law No. 7/2021 (“HPP Law”).
This new law brings a number of changes to existing sections of tax laws (Ketentuan Umum Perpajakan/KUP, Income Tax, Value-Added Tax/VAT, and Excise) whilst also adding new tax law sections on the Voluntary Disclosure Programme/VDP (Program Pengungkapan Sukarela) and Carbon Tax.
Below are some highlights of some major changes proposed by the Bill:
These changes are aimed to be effective starting 2022 Fiscal Year.
Changes in the Income Tax rates:
- Individual Income Tax rates
The HPP Law shifts the cut-off for the first taxable income layer from Rp 50
million to Rp 60 million and adds a new top marginal tax rate of 35% for taxable income above Rp 5 billion. The applicable layers and rates will then be as follows:
Taxable Income Tax Rate ≤ 60 million 5% > 60 million – ≤ 250 million 15% > 250 million – ≤ 500 million 25% > 500 million – ≤ 5 billion 30% > 5 billion 35%
- Corporate Income Tax (CIT) rate for 2022 onwards
This HPP Law stipulates that the CIT rate will remain 22% instead of being reduced to 20% from 2022 Fiscal Year. Accordingly, it revokes the provisions in Article 5(1)(b) of Law No.2 Year 2020.
Changes related to transfer pricing on related party transactions:
The elucidation of Article 18 of the HPP Law elaborates that the Government is authorised to prevent tax avoidance practices by taxpayers. Examples given on these practices are:
- performing transactions that are not based on the actual conditions and not inline with the substance over forms principle.
- reporting profits that are too low compared to the financial performance of
other taxpayers in similar business.
- reporting unreasonable losses although the company has been in commercial
operation for more than five years.
For companies falling into the categories in the last two bullet points above, the DGT can benchmark against comparable companies to calculate the tax that should be due.
Non-taxable threshold for certain individual taxpayers:
The HPP Law adds a new provision which provides a threshold of non-taxable gross turnover of Rp 500 million in a fiscal year for individuals with certain gross turnover which are subject to final tax.
Interest of several financial instruments has been subject to final tax under the existing ITL. The HPP Law now adds interest or discount on short-term securities traded on the money market as one of the tax objects under the final tax regime.
New rules on Benefits-in-Kind:
Under the existing ITL, certain BIK were non-taxable to employees, whilst being
non-deductible to companies for CIT purposes. The HPP Law has eliminated this,
so that BIK is generally taxable with some limited exceptions as follows:
- Food and beverages provided for all employees;
- BIK in certain areas;
- BIK necessary to carry out work;
- BIK sourced or financed by the regional/state revenue budget; or
- Certain types of BIKs with certain threshold.
On the other hand, certain BIKs previously non-deductible (because they were non-taxable to employees) will now be deductible for CIT purposes. The types of
BIKs which are non-taxable to employees and which are deductible for CIT will be further regulated through a Government Regulation.
Changes related to several types of tax deductions:
- Bad debt provisions for financial services companies
The HPP Law modifies the requirement for deductible bad debt provision for financial services companies. Under this Law, the bad debt provisions for financial services companies should be calculated based on the applicable accounting standards with certain limits after coordinating with Financial Services Authority (Otoritas Jasa Keuangan).
- Useful lives for permanent buildings and intangible assets
If a permanent building or an intangible asset has a useful life of more than 20 years, the depreciation or amortisation can be carried out using the straightline method using a 20-year period or the actual useful life based on taxpayer’s bookkeeping.
- Expansion of methods for limitation on interest deduction
Under the existing Law, the methods to limit the interest deduction is using a Debt-to-Equity Ratio method. The HPP Law now expanded the acceptable method to other methods commonly used internationally such as using Percentage of EBITDA (Earning Before Interest, Taxes, Depreciation, and Amortisation).