Article 26 Income Tax Withholding on Payments of Reinsurance Premiums

Question:

I am currently working for an insurance company in Jakarta. We have corporate clients that insure their factories with us by paying annual insurance premiums. To guarantee the implementation of the insurance, our company reinsures some of the insurance policies to overseas insurance companies by paying insurance premiums per year. Our question is simple, what is the withholding tax base on payments of reinsurance premiums to foreign parties? Thank you.

Rahmat, Jakarta.

Answer:

Thank you, Mr. Rahmat, for the question. Regarding your question, the tax provisions on payments of insurance premiums to overseas insurance companies have been regulated under Article 26 paragraph (2) of Law No. 7/1983 concerning Income Taxes as last amended by Law No. 36/2008 (Income Tax Law).

The article states that income from insurance premiums paid to offshore insurance companies shall be subject to tax withholding of 20% (twenty percent) on deemed profit. Deemed profit is further regulated through the Minister of Finance Decree (MoF Decree) No. 624/PMK.04/1994 concerning Article 26 Income Tax Withholding on Income in the Form of Insurance Premiums and Reinsurance Premiums Paid to Overseas Insurance Companies.

Article 1 paragraph (1) of MoF Decree 624/1994 also reaffirms that payments of insurance premiums and reinsurance premiums to overseas insurance companies shall be subject to Article 26 Income Tax withholding of 20% of deemed profit. The amount of deemed profit of overseas insurance companies is determined as follows:

1. for premiums paid by the insured to overseas insurance companies, either directly or through brokers, amounting to 50% of the total paid premiums;

2. for premiums paid by insurance companies domiciled in Indonesia to overseas insurance companies, either directly or through brokers, amounting to 10%  of the total paid premiums; or

3. for premiums paid by reinsurance companies domiciled in Indonesia to overseas insurance companies, either directly or through brokers, amounting to 5% of the total paid premiums.

Pursuant to the above provisions, there are three rates of deemed profit that apply to payments of insurance premiums and reinsurance premiums overseas. Further, the tax authorities have also issued the Director General of Taxes Circular No. SE-25/PJ.4/1995 which summarises the rates of the above deemed profit as well as the effective rates of Article 26 Income Tax, as follows:

To understand the above provisions, the following is an illustrative example in respect of Mr. Rahmat’s company conditions. For example, PT A (the company’s client) insures its factory with Mr. Rahmat’s insurance company (PT B) by paying an insurance premium of IDR10 billion per year. Then, PT B reinsures a part of the insurance policy to a foreign company (AB Insurance) by paying an insurance premium of IDR5 billion.

Based on the above information, the deemed profit of the overseas insurance company and Article 26 Income Tax payable are as follows:

Thereby, for the payment of reinsurance premium by PT B to AB Insurance of IDR5 billion, PT B is required to withhold Article 26 Income Tax of IDR100 million.

On a side note, pursuant to MoF Decree 624/1994, Article 26 Income Tax on reinsurance premium income is payable at the end of the month the premium is paid or at the end of the month the insurance premium becomes payable. Article 26 Income Tax is remitted by the withholding agent no later than 10 days after the tax becomes payable using a Tax Payment Slip (SSP).

When withholding Article 26 Income Tax, the party paying the premium must prepare the Article 26 Income Tax withholding receipts in three copies, namely the first copy is given to the overseas insurance company, the second copy is to be sent to the local Tax Office and the third copy is for the withholding agent’s file.

Moreover, the withholding agent must file the withholding and remittance of Article 26 Income Tax no later than the 20th of the following month after the month the tax becomes payable using Periodic Article 26 Income Tax Returns as well as the specified attachment documents.

This concludes our answer. We hope it addresses Mr. Rahmat’s inquiries. (Disclaimer)