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Taxation related to payments outside Indonesia | PPh26 and VAT Offshore practical points

When an Indonesian company makes a payment to a foreign company or a non-Indonesian resident, it is necessary to withhold PPh 26 and confirm the VAT on the use of foreign services, etc.

When importing tangible items, customs duties and PPh are usually paid based on an import declaration form called PIB. 22, VAT etc. will be calculated and paid at the time of import.

On the other hand, services provided from abroad, interest on foreign loans, dividends to foreign shareholders, fees for using foreign know-how or brands, etc., are not automatically taxed at customs like goods.

For such overseas payments, the Indonesian corporation must pay PPh on its own. 26, tax treaties, confirm whether or not VAT is required for overseas services, etc., and make the necessary payments and declarations.

In recent years, the application procedures for tax treaties and the submission method for Coretax have also changed. Additionally, in some cases, overseas vendors are already charging Indonesian VAT as collectors of PPN PMSE, so it is more important than ever to check transaction details and invoices.

What is PPh 26?

PPh 26 is an income tax that is generally withheld by the Indonesian payer when paying Indonesian domestic source income to a foreign corporation or non-Indonesian resident.

Typical eligible transactions include:

  • Service fee paid to overseas corporation
  • Interest on foreign borrowings
  • Dividends to foreign shareholders
  • Royalty fees for overseas know-how, trademarks, brands, technologies, etc.
  • royalty
  • Other Indonesian domestic source income

Regarding general service fees, interest, dividends, royalties, etc., under Indonesian domestic law, as a general rule, 20% of the total amount is withheld.

For example, if the total amount of compensation paid to a foreign corporation is Rp100,000,000 and the tax rate of PPh 26 is 20%, it would normally be treated as follows:

project amount
Total amount paid Rp100,000,000
PPh 26 withholding tax amount Rp20,000,000
Amount of remittance to overseas corporation Rp80,000,000

However, PPh 26 does not equal 20% of the total amount for all transactions.

Separate tax bases or tax rates are established for insurance premiums paid to foreign insurance companies, certain stock transfers by non-residents, branch profit tax, certain bond interest, etc.

Therefore, it is necessary to check what is actually being paid for, rather than making a judgment based only on the name written on the invoice.

When tax treaties can be applied

Indonesia has concluded tax treaties with many countries and regions including Japan.

If the tax treaty requirements are met, the PPh 26 rate may be reduced or not taxed in Indonesia.

If the payee is a Japanese corporation, the following will generally be considered for the main payments.

payment type Indonesian domestic law General concept when applying the Japan-Indonesia tax treaty
Service fee/business income Principle 20% Possibility not to be taxed in Indonesia if there is no permanent establishment in Indonesia and other treaty requirements are met
Interest Principle 20% In principle, the possibility of reduction to 10%
dividend Principle 20% 10% if certain direct holding requirements are met, 15% otherwise
royalty Principle 20% In principle, the possibility of reduction to 10%

Regarding the reduced tax rate for dividends, it is necessary to check not only the percentage of shares held, but also the holding period, type of shares, recipient attributes, and amendments made by tax treaties and MLI.

Also, regarding service fees, just because a foreign corporation does not have a permanent establishment in Indonesia does not automatically mean that PPh 26 will be 0%.

After confirming the activities carried out in Indonesia, the length of stay of employees, etc., the authority of the agent, the division of contracts, the relationship between multiple related operations, etc., we will determine whether a tax treaty is applicable.

Changes in tax treaty application procedures based on PMK No.112/2025

The application procedures for tax treaties have been revised by PMK No.112/2025. This regulation was promulgated and came into effect on December 31, 2025.

In the previous PER-25/PJ/2018, emphasis was placed on the formal aspects of obtaining and submitting Form DGT.

Under the new rules, it will be more clear that, in addition to submitting the required documents, whether the substantive requirements for applying a tax treaty are met.

Specifically, you should check the following:

  • The foreign recipient is a tax resident of the tax treaty partner country
  • The beneficiary is the person who will actually receive the income.
  • It is not an unnatural transaction whose main purpose is to apply a tax treaty.
  • Satisfying the main purpose test etc. under tax treaties or MLI
  • No permanent facility exists in Indonesia
  • Certification as a permanent facility is not unduly avoided through contract division or subdivision of business activities.
  • The contents of Form DGT and the actual transaction contents match.

Therefore, even if a valid Form DGT is obtained, the application of the tax treaty may be denied if the recipient does not have substantive authority to use or enjoy the income or if the main purpose of the transaction is to obtain tax treaty benefits.

What is particularly important is that the Indonesian corporation, as the withholding agent, needs to confirm the basis for applying the tax treaty and preserve the documents.

If the application of the tax treaty is denied in a tax audit, additional PPh 26 and administrative sanctions will, in principle, be imposed on the Indonesian withholding agent.

Differences between Form DGT, SKD WPLN and CoR

In practice, the expression "obtaining a DGT" is often used.

However, DGT is an abbreviation for Direktorat Jenderal Pajak, Indonesia's Directorate General of Taxation, and is not the official name of the document itself.

When a foreign corporation is subject to a tax treaty, the following documents are mainly involved.

term content Main uses
Form DGT Indonesia prescribed tax treaty application form Used by foreign recipients to obtain tax treaty coverage in Indonesia
SKD WPLN Residence certificate for overseas taxpayers Proof of residence, etc. of overseas taxpayers for application of tax treaties
CoR Certificate of Residence Tax residence certificate issued by a foreign tax authority
Form 6166 Certificate of U.S. Residency issued by the U.S. Internal Revenue Service Proof of U.S. residency as a U.S. corporation
SKD WPDN Residence certificate for Indonesian residents Used by Indonesian residents when applying for tax treaties in foreign countries

Even if a foreign business partner submits only the CoR issued by its own country's tax authority, it does not necessarily complete all the procedures for applying the tax treaty in Indonesia.

Even if CoR can supplement the residency proof part of Form DGT, other items in Form DGT must be stated separately in principle.

Regarding CoR, we also check whether the issuing authority, applicable period, written language, corporate name, tax residence, etc. meet Indonesian requirements.

Form DGT corresponding to PMK No.112/2025 is handled on Coretax, and DJP also guides you through the procedure through Coretax's SKD WPLN function.

In addition, it is necessary to confirm the application of transitional measures for Form DGT that was legally issued in the old form before the enforcement of PMK No. 112/2025.

Practical points to note when obtaining Form DGT

Form DGT cannot be used permanently once received from a foreign business partner.

Companies that continue to do business overseas must at least confirm the following:

  • The payee is a tax resident of the tax treaty partner country.
  • The corporate name listed on Form DGT and CoR must match the contract and invoice.
  • The period covered by the document covers the actual payment period.
  • The payment type is correctly listed.
  • The beneficiary is the beneficial recipient of the income
  • Does not fall under tax treaty abuse
  • Necessary registration and submission on Coretax must be completed.
  • Must be correctly reflected in monthly withholding tax returns

Especially for companies that continuously do business with multiple overseas vendors, it is important to manage the validity period of Form DGT and CoR in a list.

If you apply the reduced tax rate under the tax treaty while the documents have expired, a tax audit may point out the difference between the tax rate and the tax rate under domestic law.

What is VAT Offshore?

For payments abroad, you need to check not only PPh 26, but also VAT on the use of services and intangibles provided from abroad.

Although it is commonly referred to in practice as 'VAT Offshore' or 'Offshore VAT', this is not the official legal name.

To be precise, it is the VAT that is levied when taxable services or intangible taxable goods provided from a foreign customs territory are used within Indonesia.

Transactions that may be eligible include:

  • Consulting services received from overseas corporations
  • Technical support from abroad
  • IT support
  • Software and license fees
  • cloud service
  • Royalty fees for overseas know-how and trademarks
  • brand usage fee
  • royalty

For transactions within Indonesia, the Indonesian seller usually issues a Faktur Pajak to collect and declare VAT.

However, foreign operators usually do not issue Indonesian Faktur Pajak. Therefore, users on the Indonesian side will be responsible for calculating and paying the VAT themselves.

VAT rate

The statutory rate of VAT in Indonesia is 12%.

However, according to PMK No. 131/2024, for general non-luxury goods, services, foreign intangible assets, etc., a tax base of 12/11 of the transaction value has been adopted.

VAT on general foreign services and royalties is typically calculated as follows:

VAT = transaction value x 11/12 x 12%

As a result, the effective tax rate on the transaction value is 11%.

For example, if the transaction value of services provided from abroad is Rp100,000,000, the general calculation is as follows:

project amount
transaction value Rp100,000,000
tax base Rp91,666,667
VAT Rp11,000,000

However, special tax bases and different treatment may apply depending on the type of transaction.

Therefore, rather than automatically determining 11% for all foreign transactions, it is necessary to check each transaction individually.

Be careful about double payment with PPN PMSE

If a foreign digital service business is designated by the Indonesian tax authority as a PPN PMSE collector, that foreign business will charge and collect Indonesian VAT.

For overseas cloud services, online advertising, software, video/music distribution, digital platforms, etc., Indonesian VAT may be included on the invoices of foreign vendors.

If the overseas vendor is a PPN PMSE collector and has already collected Indonesian VAT on the same transaction, the Indonesian entity will be liable for double VAT if it self-remits it again as VAT Offshore.

If you receive an invoice for international services, please check the following:

  1. Is the overseas vendor designated as a PPN PMSE collector?
  2. Is Indonesia VAT charged on the invoice?
  3. Is there a description of the VAT registration number and collection?
  4. Is the Indonesian corporation paying the same amount on its own for the same transaction?

PPN PMSE collector designation criteria are the criteria used by tax authorities to designate foreign operators.

As an Indonesian purchaser, rather than independently investigating a foreign vendor's worldwide or Indonesian sales, it is a practical matter to verify that the vendor is actually designated as a PPN PMSE collector and is collecting VAT on the invoice.

PPh 26 and VAT Offshore are separate taxes

A common misconception in practice is that if Form DGT is filed and PPh 26 is reduced to 0% or reduced rate, then VAT Offshore is no longer required.

This is incorrect.

Form DGT and tax treaties are basically related to the treatment of PPh 26, which is income tax.

On the other hand, VAT on foreign services and domestic use of foreign intangible assets is a value-added tax issue. The presence or absence of Form DGT does not automatically result in exemption.

For example, even if you receive consulting services from a Japanese corporation and meet the requirements of a tax treaty and are not taxed PPh 26, you may be required to pay VAT if the services are used in Indonesia.

PPh 26 and VAT must be determined separately.

project PPh 26 VAT Offshore
Tax items source income tax value added tax
Main target Indonesian domestic source income received by foreign corporations/non-residents Use of foreign services and foreign intangible assets within Indonesia
General tax rate 20% in principle. Possibility of reduction through tax treaties Statutory tax rate is 12%. In general transactions, the effective rate is often 11%.
Impact of tax treaties can be As a general rule, none
Main documents Form DGT, CoR, contract, invoice Contracts, invoices, VAT payment documents, PPN PMSE invoices
Typical example Service fees, interest, dividends, royalties Foreign services, software, cloud, licenses, royalties

Who will pay PPh 26?

PPh 26 is a withholding tax on income attributable to a foreign recipient.

However, who actually bears the financial burden of taxes depends on the terms of the contract.

When tax is withheld from the contract amount

If the contract amount is Rp100,000,000 and 20% PPh 26 is to be withheld from the amount, the remittance amount to the overseas vendor will be Rp80,000,000.

When guaranteeing the take-home pay of overseas vendors

On the other hand, if the foreign vendor requests a take-home pay of Rp100,000,000 and the Indonesian entity pays PPh 26, a gross-up calculation is required.

20If you apply % PPh 26, the amount after grossing up is:

Rp100,000,000÷80％＝Rp125,000,000

project amount
Overseas vendors' take-home pay Rp100,000,000
Total amount after gross-up Rp125,000,000
PPh 26 Rp25,000,000

In order to pay Rp100,000,000 in take-home pay to a foreign vendor, the Indonesian entity will have to bear PPh 26 of Rp25,000,000.

When looking at the take-home pay, the tax burden is 25% instead of 20%.

Whether this tax amount can be treated as a loss for the purpose of calculating the corporate tax of an Indonesian corporation must be considered, including the details of the contract, the nature of the expense, and whether or not it is a related party transaction.

Foreign vendor taxes voluntarily incurred by the company are not automatically deductible.

When concluding a contract with a foreign corporation, it is important to clarify at least the following matters:

  • Is the compensation amount before tax or after tax?
  • Who will financially bear the PPh 26?
  • Indonesian corporations can withhold tax in accordance with laws and regulations.
  • Foreign vendors must submit Form DGT and CoR on time
  • If the required documents are not submitted, the tax rate under domestic law can be applied.
  • How to handle cases where additional tax burden arises due to incomplete documentation

If the tax liability becomes known after the contract is signed, there may be issues with additional charges or remittance amounts with the overseas vendor.

Payment/declaration deadline

Regarding taxes related to overseas payments, it is important not only to judge transactions, but also to manage payment and declaration deadlines.

PPh 26

Typical PPh 26 deadlines are:

  • Payment deadline: As a general rule, the 15th of the following month
  • Filing deadline: As a general rule, the 20th of the following month
  • Declaration form: SPT Masa PPh Unifikasi

VAT Offshore

For VAT on foreign services and domestic use of foreign intangibles, we generally look at the following deadlines:

  • Payment deadline: As a general rule, the 15th of the following month
  • Deadline for filing: As a general rule, the last day of the following month

Regarding tax administrative procedures, PMK No.81/2024 was enacted, and amendments have been made since then. Additional amendments have been made in January 2026 by PMK No.1/2026, so it is necessary to check the latest Coretax operation when actually filing a tax return.

Additionally, the timing of tax treatment may differ depending on the time of recognition of the transaction, date of invoice issue, date of payment, date of recording of accrued expenses, etc.

It is important to check whether PPh 26 or VAT is required not only at the time of remittance, but also at the time when accrued expenses related to overseas transactions are recorded in the monthly settlement.

Confirmation points for each transaction

1．． Overseas service charge

If you receive consulting, technical assistance, IT support, etc. from a foreign company, check both PPh 26 and VAT.

Under the tax treaty, PPh 26 may not be levied if the foreign corporation does not have a permanent establishment in Indonesia and also meets other requirements.

On the other hand, if the service is used within Indonesia, VAT may be required.

If the overseas vendor is a PPN PMSE collector, also check to see if VAT has already been collected on the invoice.

2． Interest

Interest on foreign borrowings is generally subject to PPh 26.

In principle, the tax may be reduced by up to 10% if the requirements of the Japan-Indonesia tax treaty are met.

Interest earned on ordinary money loans is generally not subject to VAT.

However, in the case of borrowing from an associated company, it is necessary to check not only PPh 26 but also thin capitalization, arm's length interest rates, the business purpose of the borrowing, and consistency with the contract and transfer pricing documentation.

3．． dividend

Dividends to foreign shareholders are subject to PPh 26.

Under the Japan-Indonesia tax treaty, the tax may be reduced by 10% if certain direct holding requirements are met, and up to 15% in other cases.

Dividends are a distribution of company profits and are generally not subject to VAT.

4．． royalty

Royalty fees for foreign know-how, trademarks, brands, technologies, software, etc. are, in principle, subject to PPh 26.

In principle, the tax may be reduced by up to 10% if the requirements of the Japan-Indonesia tax treaty are met.

Additionally, since foreign intangible assets are used within Indonesia, this transaction is likely to be subject to VAT Offshore.

In particular, royalties to affiliated companies are transactions that are easily confirmed in tax audits.

A tax audit not only confirms the existence of contracts and invoices, but also confirms the following:

  • What intellectual property do we use?
  • What kind of benefits does the Indonesian corporation actually receive?
  • How the royalty rate was determined
  • Are the rates reasonable compared to similar third-party transactions?
  • Who is the legal owner and beneficial controller of intellectual property?
  • Are royalties and other service fees duplicated?
  • Do the descriptions in the transfer pricing document match the contract details?

When paying royalties, it is important to prepare the license agreement, rate calculation materials, usage history, deliverables, invoices, remittance evidence, and transfer pricing documents in one package.

Things to check before making payments overseas

When making a payment to a foreign corporation, it is advisable to check the tax treatment from the time the contract is concluded, rather than immediately before processing the payment.

At a minimum, please check the following:

  • Is the payee a non-resident of Indonesia?
  • Whether the actual payment falls under service fees, interest, dividends, royalties, etc.
  • Does it fall under Indonesian domestic source income?
  • Is it eligible for PPh 26?
  • What is the tax rate or special tax base under domestic law?
  • Can tax treaties be applied?
  • Have you obtained Form DGT or CoR?
  • Is the document still valid?
  • Whether the beneficiary is the beneficial recipient of the income
  • Does this constitute abuse of a tax treaty?
  • Is there no permanent facility in Indonesia?
  • Is it subject to VAT Offshore?
  • Is the overseas vendor designated as a PPN PMSE collector?
  • Is Indonesia VAT already collected on the invoice?
  • Is the contract amount before tax or after tax?
  • Who will bear the financial burden of PPh 26?
  • Are contracts, invoices, work reports, deliverables, and payment vouchers stored?
  • In the case of related company transactions, are they consistent with transfer pricing documents?

FAQ

Q1． Will PPh 26 always be 0% if I submit Form DGT?

It will not always be 0%.

The applicable tax rate depends on the type of payment, the nature of the tax treaty, the recipient's residence, whether the income is effectively received, whether there is a permanent establishment, and anti-avoidance provisions.

Form DGT is an important procedural document for applying tax treaties, but simply submitting the document does not mean that the substantive requirements have been met.

Q2． Is it enough for a foreign counterparty to have its own CoR?

CoR alone does not necessarily complete all tax treaty application procedures in Indonesia.

Even if the residence proof part can be supplemented by CoR, other items on Form DGT may need to be filled out or procedures through Coretax may be required.

If you receive a CoR from a foreign supplier, you will need to check whether it meets Indonesian requirements.

Q3． Will Form DGT eliminate the need for VAT Offshore?

It won't become unnecessary.

Form DGT is a document for applying tax treaties to PPh 26, which is primarily income tax.

If services or intangible assets provided from abroad are used within Indonesia, additional VAT may be required even if PPh 26 is 0%.

Q4. My overseas vendor has included Indonesian VAT on my invoice. Do I need to pay by myself?

If a foreign vendor is properly collecting Indonesian VAT on the same transaction as a PPN PMSE collector, as a general rule, they should not self-pay the same VAT twice.

Check the registration status of the overseas vendor, what is included in the invoice, and the amount of tax collected.

Q5． Will I be taxed when I receive an invoice from overseas?

This is based not only on the fact that you received the invoice, but also on the nature of the transaction, the terms of the contract, when the expense was recognized, and when it was paid.

Even if you do not actually send money, tax treatment may be required when you recognize expenses and liabilities related to foreign transactions in your monthly financial statements.

Q6． Should I check only PPh 26 for royalties?

PPh 26 alone is not enough.

Regarding royalties, it is also necessary to check VAT Offshore, deductibility for corporate tax purposes, transfer pricing taxation, and actual usage of intellectual property.

In particular, royalties to affiliated companies are transactions that are easily confirmed in tax audits.

Q7. Can the VAT paid as VAT Offshore be deducted as input VAT?

If certain requirements are met, it may be possible to deduct input VAT from sales VAT.

However, it is important that the transaction is related to taxable business, that the tax is paid and declared properly, and that the necessary documentation is preserved.

Q8. Can I have a foreign vendor cover the PPh 26?

If the contract requires PPh 26 to be withheld from the contract amount, it will normally be deducted from the amount remitted to the overseas vendor.

On the other hand, in a contract that guarantees take-home pay to a foreign vendor, the Indonesian entity will bear the additional burden of grossing up.

Before signing a contract, it is important to clarify the pre-tax and post-tax conditions and the obligation to submit required documents.

summary

If an Indonesian company makes payments to a foreign company or non-resident, PPh 26 and VAT Offshore need to be checked separately.

In addition to filing Form DGT and CoR, tax treaty applications for PPh 26 require verifying the substance of the transaction, including the residency of the recipient, the beneficial recipient of the income, the principal purpose test, and the existence of a permanent establishment.

If the application of the tax treaty is denied in a tax audit, additional tax burden may be incurred by the Indonesian withholding agent.

Regarding VAT, the statutory tax rate is 12%, but for general overseas services and royalties, the effective tax rate is often 11%.

Additionally, if the overseas vendor is already collecting Indonesian VAT as a PPN PMSE collector, there is a possibility of double payment if the Indonesian entity self-pays the VAT on the same transaction.

When making payments overseas, it is important to check not only the tax rate, but also the transaction details, tax treaties, Form DGT, CoR, PPN PMSE, contractual tax burden, payment/declaration deadlines, documentary evidence, and consistency with transfer pricing documents.

PPh in Indonesia 26Keystone Consulting Group provides support for Japanese companies regarding tax issues related to , VAT Offshore, overseas remittances, royalties, and overseas service charges.

Related services:Indonesia accounting tax support

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