Understanding types of corporate taxes in Indonesia

Understanding corporate tax: What it is and why it's important

Corporate tax is a levy imposed on a company's income in a given period. As such, it falls under the category of income tax (PPh).

All companies, whether domestic or international, that operate and earn income in Indonesia are required to pay tax. Even businesses that are not based in Indonesia but operate in the country through a permanent establishment (BUT) or generate income must also comply with the Indonesia tax regulations.

Corporate tax is based on a solid legal framework, particularly Law (UU) No. 7 of 1983 on Income Tax, which was later revised as Law No. 7 of 2021 on Harmonization of Tax Regulations.

According to these regulations, the government identifies the following types of income as taxable under the income tax:

• Corporate profits
• Dividends
• Interest
• Royalties
• Proceeds from the sales of assets

But there are reasons for this taxation. Corporate income tax contributes to the Indonesian economy in several ways:

• It serves as a source of revenue for the government.
• Finances various development programs.
• It regulates economic and social activities.
• Stimulates the growth of high-potential industries.
• Maintains national economic stability.
• Ensures a fair distribution of income in Indonesia.

The main types of corporate taxes in Indonesia

As mentioned earlier, companies are required to pay income tax (PPh). In Indonesia, companies are generally required to pay the following types of taxes:

Income tax from main business activities (Income tax Article 17)

This tax is levied on the taxable income of both individuals and companies, as stipulated in the latest Tax Harmonization Law (UU HPP). For businesses, the tax rate is set at 22% of total income, which has been in force since 2022.

Taxable income for companies includes:

• Profits from the sale of goods and services
• Proceeds from the sales of assets
• Dividends
• Royalties
• Interest

Income tax from other activities (income tax Article 23)

This article regulates the tax rates for certain types of income that occur from transactions between an income recipient (seller) and an income provider (buyer) and are not subject to Article 21.

The provider of the income is responsible for deducting and paying Article 23 directly from the income paid. According to the article, the government can impose this tax to:

• Capital
• Prizes
• Rewards
• Fees for services
• Rental of property (excluding land and buildings)

The tax rates under Article 23 vary depending on the type of income and are calculated based on the tax base value (DPP) or gross income. Two rates apply: 2% and 15%.

A rate of 2% applies to service charges related to technical, construction, management and consulting services and other services listed in the Regulation of the Minister of Finance No. 141/PMK.03/2015. This rate also applies to property rental or other property-related income with the exception of land and buildings.

Meanwhile, a rate of 15% applies to income from dividends, prizes and rewards, with the exception of personal dividend distributions and income that has already been deducted in accordance with Article 21.

Income tax for foreign taxpayers (income tax Article 26)

Article 26 applies to income of foreign taxpayers from sources in Indonesia. The standard tax rate is 20% but may vary if a double tax treaty (P3B) exists.

Types of income subject to tax under Article 26 include:

• Business income earned in Indonesia
• Proceeds from the sale of assets in Indonesia
• Dividends, interest, royalties and income from services originating in Indonesia

Additional levies for companies in addition to income tax

In addition to income tax, companies have to pay several other levies:

Value Added Tax (VAT)

VAT is levied on the sale of goods and services by businesses. As a consumer, you have probably been confronted with this tax many times.

Businesses collect VAT on every product or service they sell to customers and then remit and report the tax to the government. The VAT rate is usually 10% of the price of the product or service, but can vary depending on the type of goods or legislative changes.

Luxury goods sales tax (PPnBM)

PPnBM applies to goods that are classified as luxury goods, which are non-essential and are generally consumed by high-income groups.

This tax is generally aimed at companies that manufacture or import luxury goods and is levied once, either during the delivery or import of these items.

The tax rates for PPnBM range from 10% to 200%, depending on the category of luxury goods, the purchasing power of people consuming the goods and the benefits of the goods for society.

Customs duties

Customs duties are levied on goods entering or leaving the Indonesian customs territory, generally for export and import activities. 

There are two types: import duty and export duty. Import duty applies to goods entering the Indonesian customs territory while export duty applies to goods leaving the country.

Excise duty

Excise duty, as stipulated in the Excise Duty Law, is levied on certain goods whose consumption must be controlled due to potential negative effects and the need for regulated distribution. Examples include alcohol and tobacco products.

Land and building tax (PBB)

PBB applies to land or buildings owned by taxpayers. For businesses, this includes business-related land and buildings such as offices, factories, warehouses and employee housing.

PBB rates vary depending on the value and location of the company property. Payments are made annually to the regional tax office as it is a part of regional taxes.

Understanding tax exchange rates

In addition to their main business activities, companies are often involved in export-import activities that are subject to international transaction taxes. For these activities, tax exchange rates are essential. But what exactly is a tax exchange rate?

In Indonesia, a tax exchange rate is the conversion value from a foreign currency to rupiah, the mandatory currency for tax payments in the country. This rate is set weekly by the Minister of Finance through a ministerial decree (KMK) and remains valid for seven days.

These rates form the basis for calculating taxes on international transactions. When a company carries out such transactions, it must pay taxes based on the current tax exchange rate set by the Minister of Finance.

Types of tax and duties calculated using tax exchange rates

Settlement of import and export duties

The tax rates are used for the settlement of import and export duties. 

Import duty is a levy on goods imported into Indonesia and is usually set at 7.5% of the import duty assessment base (NDPBM). Meanwhile, the export duty applies to goods leaving Indonesia and it is calculated by multiplying the unit price of the goods by the tax exchange rate.

Income tax (PPh)

The tax exchange rate applies to income from abroad, such as income in foreign currencies such as the US dollar.

Value added tax and luxury goods sales tax

Tax exchange rates are also used to calculate VAT on international transactions and PPnBM for luxury goods to ensure accurate tax calculation.

Tax reporting and compliance obligations for companies

Every company operating in Indonesia must report and comply with applicable tax regulations. As taxpayers, companies are required to pay their taxes on time and can do so through online tax filing systems.

Tax reporting obligations for companies

• Annual submission of the annual income tax filing (SPT).
• Filing regular tax filings (monthly or quarterly, depending on the type of tax).
• Submission of regular VAT returns on a monthly basis.
• Submission of customs and excise tax returns monthly or quarterly.
• Submission of tax-related documents such as tax invoices, withholding tax receipts and annual financial statements.

Failure to comply with tax regulations can result in penalties, including fines, seizure of assets, suspension of business license or even criminal charges.

The most important obligations of companies when complying with tax regulations

• Understanding the applicable tax laws.
• Pay taxes on time.
• Cooperate with tax audits.
• Keeping tax-related documents.
• Preparing accurate financial reports.

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