Jakarta – President Joko "Jokowi" Widodo's omnibus law bill will introduce sweeping tax reforms ranging from reduced income and value-added taxes and zero tax on dividends to lower non-resident taxes and a so-called Netflix tax, Finance Minister Sri Mulyani Indrawati announced on Friday.
"[The tax reforms] will improve the Indonesian economy and create more jobs," Sri Mulyani said after a cabinet meeting at the State Palace in Jakarta.
The minister said the omnibus law will revise the current tax code, income tax law, value-added tax law and regional tax and retribution law.
The new law will cut corporate income tax to 22 percent in 2021 and 2022 from 25 percent today. The tax will be lowered again to 20 percent from 2023 onward.
Companies that go public for the first time in 2021 and the years after will get a further discount of three percent for five years on their income tax.
Corporate or individual shareholders will no longer be required to pay tax on dividends they receive from local companies, Sri Mulyani said. Today, the tax office takes a 10 percent cut for the state on any dividend.
Sri Mulyani also said the government will lower income tax on interests, currently at 20 percent, to an undisclosed amount. "It will be determined later by a government regulation," she said, referring to a lower-tier regulation that can be issued without consultation with the House of Representatives.
Indonesia's new tax code will also recognize the economic presence of digital companies like Netflix or game distributor Steam – and tax them. Even if these companies do not have a subsidiary registered in Indonesia, they would still have to "collect, pay and report value-added taxes to our tax authority here," Sri Mulyani said.
The country's current tax code, last revised in 2000, has a loophole that has meant only companies domiciled in Indonesia have to pay taxes. This lets over-the-top media services to stream their movies to local customers without collecting value-added taxes like their local counterparts.
With the revised tax code, Indonesia is following in the footsteps of Singapore and Australia, countries that have implemented the so-called Netflix law.
Governments around the world are banding together to try to find a way to collect tax from over-the-top media streaming services and other companies of their ilk.
New territorial treatment
The government will also modify how expatriates in Indonesia and the Indonesian diaspora pay their tax. "Anyone who receives dividends from abroad will not have to pay tax on them, as long as they invest the dividends here," Sri Mulyani said.
Indonesians who have been living abroad for more than 183 days, or six months, will not have to pay income tax on their earnings from their new country of residence. "They will become the tax subject of the foreign country," Sri Mulyani said, adding these taxpayers still need to meet several other criteria before they can get the tax break.
Expatriates who live in Indonesia for more than six months will only need to pay income tax on earnings that they generate in the country, Sri Mulyani said.
Sri Mulyani said the government will also adjust how the tax office imposes tax deduction and tax fines to benefit businesses.
Today, companies can deduct the value-added taxes they pay when purchasing raw materials or other input services and materials. But if they purchase from suppliers that, by law, are not required to collect and report value-added taxes – such as small and medium enterprises – they miss the chance at the deduction.
Under the new tax policy, the government will let local companies that make purchases from small businesses to claim the deduction, up to 80 percent of the full-claim amount.
"The 80 percent cap will also apply to businesses which, during a tax audit, cannot provide proof of purchases," Sri Mulyani said.
The government will also adjust tax fines, from a 2 percent flat rate per month to equal to the prevailing benchmark rate. Sri Mulyani said the government hopes the new scheme is less of a burden for tax offenders and will encourage them to pay up.
Conversely, compensation for taxpayers – which applies when, for example, the tax office is late to disburse restitution – will also be based on the benchmark rate. "Hopefully this will create a better culture of compliance," Sri Mulyani said.
Clamp down on regional taxes
The government will also redefine the jurisdiction of local government when imposing local taxes or retributions. Sri Mulyani said all new regional regulations on taxation will need approval from the president.
"We are concerned by regional tax revenues, but they need to be in line with the central government's policy to create a better business climate," Sri Mulyani said.
Lastly, the reform will also include various tax breaks for investors, including tax holidays and super deduction taxes, she said.