Tax Cut and What You Need To Know About PPh 26 for Your Business

Tax is one of the obligations of citizens and the government as their part of financing national development. One of the efforts towards this goal is to collect Income Tax in order to increase economic growth and social welfare of the Indonesian citizens.

Income tax is a tax imposed on a tax object against a tax subject (individuals or entities) with respect to income received or accrued during a tax year.

‍

What is an Income Tax Object?

Items that are subjects of income tax are any additional economic capabilities received or obtained by taxpayers, both originating from Indonesia and outside Indonesia, which can be used for consumption or to increase the wealth of the concerned taxpayer, in any name and form, including:

1. Salary, wages, commissions, bonuses or gratuities, pensions or other rewards for one’s work;
2. Honorarium, lottery prizes and awards;
3. Gross profit of a business;
4. Profits due to sales or transfer of assets, including profits earned by companies, partnerships and other entities due to transfer of assets to shareholders, partners, members and due to liquidation;
5. Return of tax payments that have been calculated as expenses;
6. Interest;
7. Dividends, in any name and form, that are paid by the company, payment of dividends from insurance companies to policyholders, distribution of the remaining profits of a company to management, and return of the remaining profits of a cooperative to members;
8. Royalties;
9. Rent of property;
10. Collection of periodic payments; and
11. Profits due to debt relief.

‍

Who is Subject to Income Tax?

The subject of income tax according to Undang Undang no 36 of 2008 regarding the Fourth Amendment to UU no. 7 of 1983 concerning Income Tax, is divided into several categories namely:

1. Individuals in which there are subs in the form of inheritance that has not been divided as a unit to replace those who own the rights;
2. Entities in the form of limited liability companies, limited partnerships, state and regional owned enterprises in whatever name and form, partnerships, corporations or other associations, firms, partnerships, cooperative associations, foundations or institutions; and
3. Permanent establishment, which is a form of business used by foreign tax subjects (non-resident taxpayers) both individuals ( person) and entities (legal person) to run a business or carry out activities in Indonesia.

Tax subjects based on location are divided into domestic tax subjects and foreign tax subjects. Where domestic tax subjects follow the provisions of PPh 21, and foreign tax subjects are bound by PPh 26 policies.

This article will focus on regulations regarding PPh 26 which focus on foreign tax subjects, here we go. 

‍

‍What is PPh 26? 

According to the Regulation of the Minister of Finance Number 252/Pmk.03/2008 concerning Guidelines for Implementation of Tax on Income in Relation to Employment, Services and Activities of Individuals, PPh Article 26 is a tax on income in the form of salaries, wages, honoraria, allowances and other payments in any form in connection with work or position, services, and activities carried out by individuals who are foreign tax subjects, as referred to in Article 26 of the Income Tax Law.

Then, who are the foreign tax subjects?

1. Foreign citizens (individuals) who do not live in Indonesia;
2. Foreign nationals (individuals) who stay in Indonesia for no more than 183 days within a 12 month period; and
3. Representative companies or business entities that are not established and are not located in Indonesia:

• Who run a business or carry out activities through a permanent establishment in Indonesia
• Who earn income from Indonesia not from running a business or carrying out activities through a permanent establishment in Indonesia.

Subjects of Article 26 Income Tax are individuals with status as foreign tax subjects who receive or earn income in any form, as compensation for work, services or activities carried out either related to employees or non-employees, including pension recipients.

‍

How Much is the PPh 26 Rate?

According to the Regulation of the Minister of Finance Number 252/Pmk.03/2008, PPh 26 rate is 20%, final, and is applied to gross income received or earned as compensation for work, services, and activities carried out by individuals with the status of foreign tax subjects. This takes into account the provisions of the Double Tax Treaty Agreement that applies between Indonesia and the country of domicile of the foreign tax subject. PPh 26 is not final if the individual as a foreign taxpayer changes their status to become a domestic taxpayer.

The subjects of the PPh 26 withholding tax, which is 20% of the gross income of foreign taxpayers are:

1. Dividends from domestic companies;
2. Interest, including premiums, discounts and rewards for guaranteeing debt repayments;
3. Rent, royalties and other income due to the use of assets;
4. Fees paid for technical services, management services and other services performed in Indonesia;
5. Profits after tax of a permanent establishment in Indonesia;
6. Prizes and awards;
7. Pension and other periodic payments; and
8. Swap premiums and other hedging transactions.

‍

Just like PPh 21, PPh 26 Income Tax is payable for each tax period, which means that it is to be paid at the end of each month when the payment is made, or at the end of the month when the payable is made. 

An example for 20% rate of Gross Income calculation:

The gross income of a foreigner who works for a garment company in Cikarang reaches IDR 10,000,000, so the calculation of PPh26 is:

PPh 26 x Gross Income = 20% x IDR 10,000,000= IDR 2.000.000,-

So PPh 26 Income Tax for the foreigner is IDR 2,000,000

PPh 26 procedures can be carried out through e-billing unification which is available in electronic and paper documents. E-billing unification provides an electronic signature feature. It is also easier to use and access, so it can save your time while making tax reports.

There are 3 attachments that you will get from PPh 26 tax payment. The first attachment belongs to the foreign taxpayers, the second attachment belongs to the Tax Service Office, and the third attachment is for the withholding party’s documentation.

‍

Sometimes managing taxes takes a lot of resources and can be quite complicated. That’s why Aspire provides an automatic tax deduction feature in Aspire's payables management. You won’t have to spend hours calculating taxes or preparing tax withholding invoices for your vendors or business suppliers. Simply input your payments through Aspire, and let Aspire take care of the rest, from calculating your tax cut, send invoices and proof of tax cuts to related suppliers or vendors. 

To know more about our features, check out our payable management solutions page, or contact our team to schedule a demo and find out more about Aspire's features that will help managing your business operation finance a breeze.

‍