Lower Royalty Income Tax for Individual Taxpayers Using Deemed Profit

Question:

Allow me to introduce myself, I am Sukma. I currently work as a novelist. To date, my novel publishing company withholds Income Tax on royalty income of 15%. Please note that I use deemed profit (NPPN) in calculating Income Tax payable.

I have recently heard of the reduction in the income tax rate on royalties for taxpayers using Deemed Profit. Is that correct? What are the mechanisms? Please explain.

Thank you.

Sukma, Bogor.

Answer:

Before answering your question, it is necessary to understand that royalty income is an object of Article 23 Income Tax withholding. In this case, the issuing company must withhold Article 23 Income Tax of 15% for each royalty payment to you.

This is stipulated in Article 23 paragraph (1) subparagraph a number 3 of Law No. 7 of 1983 concerning Income Taxes as amended by Law No. 7 of 2021 concerning the Harmonisation of Tax Regulations (Income Tax Law as amended by the HPP Law), which reads:

“(1) The following income, in whatever name and form, paid, apportioned to be paid or whose payment is due by a government institution, a resident corporate taxpayer, an event organiser, a permanent establishment or a representative of any other non-resident enterprises to a resident Taxpayer or permanent establishment, shall be subject to tax withholding by the party obliged to pay:

1. by 15% (fifteen percent) of the gross amount of:

1. dividends as referred to in Article 4 paragraph (1) subparagraph g;

2. interests as referred to in Article 4 paragraph (1) subparagraph f;

3. royalties; and

...”

Further, individual taxpayers (OP) conducting business or independent personal services with a gross income of less than IDR4.8 billion may use Deemed Profit to calculate their net income.

This method is basically used to facilitate individual taxpayers to determine their net income when the amount of deductible expenses is difficult to identify.

Provisions on the use of Deemed Profit are stipulated under Article 1 paragraphs (2) and (3) of the Director General of Taxes Regulation No. PER-17/PJ/2015 concerning Deemed Profit (PER-17/2015), which states:

“(2) Individual taxpayers conducting business or independent personal services whose gross turnover in 1 (one) year is less than IDR4,800,000,000.00 (four billion and eight hundred million rupiah) must maintain recording, unless the Taxpayers concerned choose to maintain bookkeeping.

(3) Individual Taxpayers that must maintain recording referred to in paragraph (2) and receive or accrue income not subject to final Income Tax, shall calculate net income using Deemed Profit.”

In respect of your question, we can refer to Appendix I of PER-17/2015. In the appendix, novelists are included in business classification 90002 Art Workers with a Deemed Profit percentage of 50%.

Next, a Director General of Taxes Regulation concerning the reduction of Article 23 Income Tax rate on royalties specifically for resident individual taxpayers who calculate their net income using Deemed Profit has recently been issued. See ‘6% Art. 23 Royalty Income Tax for Deemed Profit Individual Taxpayers.’

This is stipulated under the Director General of Taxes Regulation No. PER-1/PJ/2023 concerning Technical Guidelines for the Withholding, Remittance and Filing of Article 23 Income Tax on Royalty Income Received or Accrued by Individual Taxpayers Applying Income Tax Calculation Using Deemed Profit (PER-1/2023).

Article 2 paragraphs (2) and (3) of PER-1/2023 state:

“(2) The withholding rate of Article 23 Income Tax on royalty income referred to in paragraph (1) is 15% (fifteen percent) of the gross amount, excluding value added tax.

(3) The gross amount referred to in paragraph (2) for resident individual Taxpayers applying Income Tax calculation using Deemed Profit amounts to 40% (forty percent) of the total royalty income referred to in paragraph (1).”

Referring to the above provisions, the Article 23 Income Tax rate for resident individual taxpayers using Deemed Profit is 15% of 40% of the royalty value. Thus, the effective Article 23 Income Tax rate on royalties is 6%.

For example, the gross amount of royalties that must be paid is IDR100 million. Before the enactment of PER-1/2023, the amount of Article 23 Income Tax that must be withheld is 15% X IDR100 million = IDR15 million. With the enactment of PER-1/2023, the amount of Article 23 Income Tax that must be withheld is: 15% x (40% X IDR100 million) = IDR6 million.

On a side note, to enjoy the Article 23 Income Tax rate pursuant to the provisions under PER-1/2023 provisions, you must submit the proof of receipt (BPS) of the notification of the use of Deemed Profit to the issuing company as the Article 23 Income Tax withholding agent before the withholding of Article 23 Income Tax. This is stipulated in Article 3 paragraphs (2) and (3) of PER-1/2023.

Further, the royalty income that you receive must be filed in the Annual Tax Return in the domestically-sourced net income from independent personal services section. Further, Article 23 Income Tax which has been withheld constitutes a tax credit in your annual tax return.

We hope our answer satisfies your inquiries.