Latest Regulation of Individual Income Tax on Expatriates

Question:
My name is Roy. I am currently working as an accounting manager at a technology company in Jakarta. After the enactment of the Job Creation Law, are there any changes in tax regulations for expatriates, specifically, those constituting resident individuals?

Roy, Jakarta.

Answer:
Thank you for your question, Mr. Roy. As we all know, the government has issued Law No. 11 of 2020 concerning Job Creation. The Job Creation Law is an omnibus law that amends several laws at once, including the Income Tax Law which is regulated under Article 111 of the Job Creation Law.

In principle, Article 111 of the Job Creation Law does not amend Article 2 paragraph (2) of the Income Tax Law on the division of tax subjects consisting of resident tax subjects and non-resident tax subjects. However, the criteria for determining resident tax subjects for individuals under Article 2 paragraph (3) subparagraph a of the Income Tax Law have been amended as follows:

“Resident taxpayers are:

a. an individual, either an Indonesian citizen or a foreign citizen, who:

1. resides in Indonesia;
2. has been present in Indonesia for more than 183 (one hundred and eighty-three) days within any 12 (twelve) months period; or
3. within a particular tax year has been residing in Indonesia and intends to reside in Indonesia"

Further, the tax obligations of resident tax subjects (including expatriates) can be seen in the Elucidation of Article 2 paragraph (2) of the Income Tax Law which reads:

“Tax subjects are categorised into resident taxpayers and non-resident taxpayers. A resident individual constitutes a Taxpayer if he/she receives or accrues income exceeding Personal Tax Relief.

The important difference between resident Taxpayers and non-resident Taxpayers lies in the fulfilment of their tax obligations, including:

a. Resident Taxpayers are taxed on income, either received or accrued from Indonesia or outside Indonesia, whereas non-resident Taxpayers are taxed only on income sourced from Indonesia … ”

The definition of income refers to Article 4 paragraph (1) of the Income Tax Law which reads:

“A taxable object is income, which refers to any increase in economic capacity received by or accrued by a Taxpayer, either from Indonesia or from outside Indonesia, which may be utilised for consumption or increasing the Taxpayer’s wealth, in whatever name and form … ”

Thus, expatriates constituting resident tax subjects, will be taxed on their income both from Indonesia and from outside Indonesia. However, in the Job Creation Law, there is a new clause regulated in Article 4 paragraph (1a), paragraph (1b), paragraph (1c) and paragraph (1d) of the Income Tax Law which reads:

“(1a)    Excluded from the provisions referred to in paragraph (1), a foreign citizen who constitutes a resident taxpayer is subject to Income Tax only on income received or accrued from Indonesia under the following conditions:
a. having certain skills pursuant to statutory provisions; and
b. this provision is valid for 4 (four) tax years since he/she becomes a resident taxpayer.

(1b)      Included in the definition of income received or accrued from Indonesia as referred to in paragraph (1a) is income received or accrued by a foreign citizen in connection with work, services or activities in Indonesia in whatever name and form paid outside Indonesia.

(1c)      Provisions referred to in paragraph (1a) do not apply to a foreign citizen taking advantage of the Tax Treaty between the Government of Indonesia and the government of a Tax Treaty partner country or jurisdiction where the foreign citizen accrues income from outside Indonesia.

(1d)      Further provisions on the criteria of certain skills and procedures for the imposition of Income Tax on foreigners referred to in paragraph (1a) shall be stipulated in a Minister of Finance Regulation.”

Thereby, pursuant to Article 4 paragraph (1a), paragraph (1b), paragraph (1c) and paragraph (1d) of the Income Tax Law, it can be concluded that expatriates who already constitute resident tax subjects may be subject to income tax only on their income sourced from Indonesia for the first four years, insofar as they have certain skills and do not take advantage of the Tax Treaty, the technical provisions of which will be further regulated in a Minister of Finance Regulation.

We hope our answer satisfied your inquiries.