Is Bond Interest Tax Rate Reduction Only for Non-Resident Taxpayers?

Question:

Allow me to introduce myself, my name is Arif. I work for a company engaged in the mining support service provider sector as a tax manager.

Pursuant to the Job Creation Law issued by the government, I observe that there is a reduction in the tax rate on bond interest income received by non-resident taxpayers from 20% to 10%. However, the same does not apply to bond interest income received by resident taxpayers because the applicable rate remains 15%.

My question is, is it true that this remains applicable? The difference in rates is, of course, unfair to resident taxpayers because they are subject to a higher rate than non-resident taxpayers.

Arif, Jakarta.

Answer:

Thank you, Mr. Arif, for the question. It is true, through the Job Creation Law, the government has amended the provisions under Article 26 of the Income Tax Law by adding paragraph (1b) which allows for a reduction in the rate on bond interest income received by non-resident taxpayers.

Consider Article 26 paragraph (1) and paragraph (1b) of the Income Tax Law after being amended by the Job Creation Law as follows:

(1)   The income below, in whatever name and form, paid, apportioned to be paid or whose payment is due by a government agency, a resident Taxpayer, an event organizer, a permanent establishment or a representative to a non-resident company to a non-resident Taxpayer other than a permanent establishment in Indonesia, shall be subject to tax withholding of 20% (twenty percent) of gross income by the party obliged to pay::

....

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

(1b) The rate of 20% (twenty percent) of the gross amount by the party obliged to pay interest, including premium, discounts and compensation in respect of loan repayment guarantees as referred to in paragraph (1) subparagraph b may be reduced by a Government Regulation.”

According to the mandate of the Job Creation Law, the government subsequently issued Government Regulation No. 9 of 2021 concerning the Tax Treatment to Support Ease of Doing Business (Gov. Reg. 9/2021). One of the provisions regulated under this law is the reduced tax rate on bond interest income received by non-resident taxpayers.

The provisions are outlined in Article 3 paragraph (1), paragraph (2), paragraph (3), paragraph (4) and paragraph (8) of Gov. Reg. 9/2021 as follows:

“(1) Interest income, including premiums, discounts and remuneration in connection with compensation for loan repayment guarantees received or accrued by non-resident Taxpayers other than permanent establishments are subject to Income Tax withholding of 20% (twenty percent) as referred to in Article 26 of the Income Tax Law.

(2)   The withholding rate of 20% (twenty percent) referred to in paragraph (1) may be reduced as referred to in Article 26 paragraph (1b) of the Income Tax Law.

(3) The withholding tax rate referred to in paragraph (2) is reduced to 10% (ten percent) or according to the rate based on the tax treaty.

(4) Interest income referred to in paragraph (1) given a rate reduction referred to in paragraph (3) is income from Bond Interest received or accrued by non-resident Taxpayers other than permanent establishments.

....

(8)   The Article 26 Income Tax rate of the Income Tax Law referred to in paragraph (3) comes into force after 6 (six) months from the enactment of this Government Regulation.”

Gov. Reg. 9/2021 has taken effect as of 2 February 2021. Thus, the reduced tax rate on bond interest income received by non-resident taxpayers already took effect on 2 August 2021.

On the other hand, the regulation of the tax rate on bond interest income received by resident taxpayers has not been amended under the Job Creation Law. The provisions continue to refer to the former regulation, namely Article 4 paragraph (2) of the Income Tax Law which reads:

“(2) The following income may be subject to final taxes:

1. income in the form of deposit interests and other savings, interests on bonds and government bonds, interests or discounts of short-term securities traded in the money market and deposit interests paid by cooperatives to individual cooperative members;

2. income in the form of lottery prizes;

3. income from share and other securities transactions, derivative transactions traded on the stock exchange and sales of shares transactions or transfers of equity participation in the partner company received by a venture capital company;

4. income from transactions of property in the form of land and/or buildings, the construction service business, real estate businesses and land and/or building leases; and

5. certain other income, 

as stipulated by or based on a Government Regulation.”

However, the government has recently issued Government Regulation No. 91 of 2021 concerning Income Tax on Income in the Form of Bond Interest Received or Accrued by Resident Taxpayers and Permanent Establishments (Gov. Reg. 91/2021) as the latest implementing regulation of taxes on bond interest for resident taxpayers.

Article 2 paragraph (1) to paragraph (4) of Gov. Reg. 91/2021 stipulates that:

“(1) Income in the form of Bond Interest received or accrued by resident taxpayers and permanent establishments is subject to final income tax.

(2) The final income tax rate referred to in paragraph (1) amounts to 10% (ten percent) of the income tax base.

(3) The income tax base referred to in paragraph (2) for:

a. interest from interest-bearing Bonds, amounts to the gross amount according to the holding period of the Bonds;

b. discount from interest-bearing Bonds, amounts to the difference between the selling price or the nominal value over the acquisition price of the Bonds, excluding accrued interest; and

c. discount from zero coupon Bonds, amounts to the difference between the selling price or the nominal value over the acquisition price of the Bonds.

(4) If there is a negative discount or loss at the time of sale of interest-bearing Bonds, the negative discount or loss may be set off against the income tax base of the accrued Bond Interest referred to in paragraph (3) subparagraph a.”

Based on the above provisions, it can be concluded that currently there is no difference in tax rates on bond interest income, either that received by resident taxpayers or non-resident taxpayers. Now, both are subject to the same rate of 10%.

This concludes our answer. We hope it satisfied your inquiries.