INDONESIA Law and Practice Contributed by: Agus Ahadi Deradjat (Agung), Gustaaf Reerink, Adri Dharma, Karina Widyaputri and Ilma Sulistyani, ABNR Counsellors at Law
Tax Incentives Additionally, while not formal credits, Indonesia offers several tax incentives that reduce taxable income or provide additional deductions. These include tax holi - days for pioneer industries (5–20 years CIT exemp - tion), tax allowances for labour-intensive or export sectors (eg, 30% investment deduction), Special Economic Zone incentives (CIT/VAT/customs relief), super deductions of up to 300% for R&D, dividend reinvestment exemptions, Free Trade Zone benefits (eg, Batam and Bintan), and green energy incentives including potential carbon credits. Note that the tax holiday application must be submit - ted no later than 31 December 2025, meaning that taxpayers will no longer be able to apply for the facility starting from 2026. As of May 2026, there has been no further regulatory update on this matter. Nevertheless, it should be noted that the tax holiday facility remains available for taxpayers operating within a Special Eco - nomic Zone. The implementation of the OECD’s Pillar Two signifi - cantly reduces the effectiveness of Indonesia’s tax holiday regime for large multinationals, as any cor - porate income tax exemption or reduction that brings the effective tax rate below 15% may trigger a top- up tax. This undermines the intended benefit of tax holidays and could make Indonesia less attractive to large-scale foreign investors. 5.4 Tax Consolidation In Indonesia, tax consolidation is not generally avail - able. Each legal entity is treated as a separate tax - payer, even within the same group. 5.5 Thin Capitalisation Rules and Other Limitations Indonesia applies thin capitalisation rules by limiting the debt-to-equity ratio (DER) to a maximum of 4:1 for the purpose of interest deductibility. Any interest expense on debt exceeding this ratio is non-deducti - ble for income tax purposes, aiming to prevent exces - sive debt used for tax avoidance through related-party financing. This rule applies to most corporate taxpayers, with exceptions granted to banks, insurance companies,
2% for service fees, consulting, and rentals, except for land and building rentals, which are subject to 10% WHT. For non-resident recipients, WHT is typi - cally 20% on dividends, interest, royalties, and ser - vice fees, unless reduced under a tax treaty. Other applicable taxes include final income tax for certain sectors (eg, micro, small, and medium enterprises, and construction), land and building tax, stamp duty, and excise tax on specific goods. Effective 1 January 2025, Indonesia has committed to implement OECD Pillar Two, which targets large mul - tinational groups with global revenues above EUR750 million to ensure a minimum 15% effective tax rate. To retain taxing rights and maintain investment com - petitiveness, Indonesia has introduced a Domestic Minimum Top-Up Tax (DMTT) aligned with OECD safe harbour rules. Further regulations have been issued to provide the substantive and procedural framework for the imple - mentation of the OECD Pillar Two in Indonesia. In particular, Minister of Finance Regulation No 136 of 2024 and Directorate General of Tax Regulation No 6 of 2026 set out the detailed rules, including the deter - mination of in-scope taxpayers, the calculation of the effective tax rate and top-up tax, as well as the related compliance, filing, and administrative requirements. 5.3 Available Tax Credits/Incentives Tax Credits In Indonesia, tax credits are relatively limited and mainly apply to taxes already paid, either domesti - cally or abroad. The two primary credits are the For - eign Tax Credit (FTC), which allows resident taxpayers to credit foreign income tax paid on foreign-sourced income, and prepaid taxes, such as income tax with - held at source (eg, Article 21 on salaries, Article 22 on imports, Article 23 on rental and services, and Article 25 on monthly instalments, all of the Income Tax Law). Additionally, input VAT incurred on purchases (goods or services) can be credited against output VAT col - lected on sales, provided it relates to taxable business activities, is supported by a valid tax invoice, and is claimed within three months of the invoice date.
476 CHAMBERS.COM
Powered by FlippingBook