What kind of tax treatment is required when a payment is made from an Indonesian corporation to a corporation located outside Indonesia or to an individual who is not resident in Indonesia? In import transactions involving the purchase of tangible goods, the amount of tax such as customs duty, PPH22 (Article 22 of Income Tax: Advance Corporate Tax), and VAT (Value Added Tax) is calculated and recorded according to the price of the imported product on the import declaration form called PIB, and the amount of tax is calculated and recorded according to the price of the imported product, so the tax is paid and the customs clearance is completed. So, what about transactions where there is no physical object? For example, (1) remuneration for services provided from overseas, (2) interest on loans from overseas, dividends on investments from overseas, and (3) royalties paid when using foreign know-how or brands, etc. do not come through customs, so they must be declared voluntarily.

1. pph26 Income Tax Article 26

In cases where transactions fall under ① to ③ above, the transaction will be subject to PPH26 tax under Indonesian tax law, and 20% tax will be withheld, and the equivalent of 80% will be remitted to the overseas payee. However, Indonesia has concluded tax treaties with many countries, including Japan, so by following certain procedures, the tax rate under the tax treaty can be applied. The reduced tax rate differs depending on the treaty of each country, but if the destination country is Japan, the tax rate under the tax treaty will be reduced to 0% for (1), 10% for interest and 15% for dividends for (2), and 10% for (3). In order to apply this rule, a document called "(Resident Proof) DGT" is required, which indicates that the payee is a resident of the country concerned, that is, a non-resident of Indonesia. Specifically, a certificate is issued by the tax office in the country where the payment is made, and a notification is submitted to the tax office in Indonesia where the payment is made. The paying Indonesian corporation must then attach this DGT to its monthly withholding tax return. Once obtained, DGT is valid for 12 months regardless of the fiscal year, so there is no need to obtain it every time you make a transaction, but you need to be careful about how long the 12-month period is valid.

２．VAT Offshore

Income tax is not the only tax levied on overseas payments. Value-added transactions are subject to VAT. For example, transactions ① and ③ above will be subject to a VAT rate of 10%. However, unlike in domestic transactions, it is not possible for overseas payee corporations or non-residents to receive a Faktur Pajak (tax invoice) from the payee and complete the Indonesian tax payment procedures, so the system is such that the Indonesian corporation that is the payment source pays the VAT on their behalf, and this is called VAT Offshore. Therefore, you must voluntarily file a tax return. DGT, as described in 1 above, allows the application of a reduced tax rate on income tax and does not affect the tax rate of VAT Offshore, so it is important to note that even for transactions where PPH26 becomes zero due to the acquisition of DGT, a tax return for VAT Offshore must be filed.

Related laws and regulations: Minister of Finance Ordinance No.. PER-25/PJ/2018
Articles 10, 11, and 12 of the Japan-Indonesia Tax Treaty