An Overview of Indonesia s Insurance Sector Tax Environment

Transcription

1 KPMG HADIBROTO An Overview of Indonesia s Insurance Sector Tax Environment kpmg.com/id

2 1 An Overview of Indonesia s Insurance Sector Tax Environment The Indonesian insurance industry has seen continued growth for the past several years. Partly because of the longterm characteristics of life insurance products, this segment of the industry has grown faster than general insurance or re-insurance. As of 31 December 2011, the assets of the top 10 life insurance companies grew by 24.6% from the previous year, while assets of general insurance companies increased by only 15.9%. 1 However, industry penetration is low, with gross premiums underwritten representing only 1.84% of GDP at the end of This suggests that there are significant growth opportunities for the industry. It is important for those considering entry into the Indonesian insurance industry to have an initial overview of the tax treatment.

3 An Overview of Indonesia s Insurance Sector Tax Environment 2 General Tax Overview A. Corporate Income Tax Corporate income tax in Indonesia is levied at a flat rate of 25% on the worldwide income of both resident companies and permanent establishments. The tax rate for listed entities could be reduced by 5% 2. Also, local entities are eligible for a partial 50% corporate tax rate reduction if annual gross turnover is less than IDR50 billion. This reduced rate is applied to a portion of taxable income proportional to IDR4.8 billion of annual turnover. For example, if turnover were IDR30 billion and taxable income IDR3 billion, the reduced rate would be applied to IDR480 million ((4.8 billion/30 billion) x 3 billion). Reserves Insurance companies are allowed to establish certain reserves related to unearned premiums and potential claims for tax purposes 3. General insurance Allowable reserves for self-covered premiums by loss insurance companies are 40% of the total premiums received or earned in a given fiscal year. These reserves will become taxable income in the following year. The allowable reserves for self-covered claims are 100% of: claims agreed to, but not yet paid; and claims already reported and currently in process, but not including IBNR. 1 Investor Magazine in July Law No.36 Year 2008 Article 17(2a) and (2b) 3 Minister of Finance Regulation No.81/PMK.03/2009

4 3 An Overview of Indonesia s Insurance Sector Tax Environment Life insurance The amount of allowed life insurance reserves is determined by actuary calculations and must be approved by the Capital Markets and Financial Institutions Supervisory Board (Bapepam-LK). An increase in the premium reserve balance is recognized as an expense for the fiscal year. The costs of claims paid to the insured are charged to the premium reserve estimate. In 2011, a circular issued by DGT emphasizes that reserves created in relation to income subject to final tax and/or non tax object are not deductible. Premiums covering for more than one year The income tax treatment for insurance premiums covering more than one year is determined by how the income is accounted for: Under accrual basis accounting, the income must be allocated proportionally to the covered years. Under cash or a mixed basis accounting, income must be recognized at the time the premium is received, whether periodically or in advance. 4 Non taxable income and income subject to Final Tax Income subject to final tax, or considered non-taxable by virtue of legislation, cannot be aggregated with income subject to the general tariff. 5 In addition, expenses related to these types of income are not deductible for tax purposes. 6 4 Director General of Taxation Circular Letter SE-03/PJ.42/ Elucidation of Law No. 36 Year 2008 Article 4(1) 6 Government Regulation PP.94/2010

5 An Overview of Indonesia s Insurance Sector Tax Environment 4 B. Withholding Taxes Article 26 Withholding Tax on insurance or reinsurance premiums paid to non-resident insurers or reinsurers The tax treatment for insurance and reinsurance premiums paid to companies overseas are treated according to the following categories: 7 Premium paid by/tax withheld by Description Withholding tax - Premiums paid to overseas insurance companies directly or through brokers Definition of deemed net income The Insured 50% of the gross premium paid Resident Insurance Company WHT Art.26 20% of deemed net income 10% of the gross premium paid Effective tax rate 10% 2% 1% Tax liability recognition Tax payment due date Tax reporting due date Resident Reinsurance Company 5% of the gross premium paid End of the month in which the premium is payable or paid, whichever comes first. 10th of the month after the tax is recognized 20th of the month after the tax is recognized The tax rate may be reduced subject to the availability of tax treaty and valid DGT Form 1 as the certificate of tax resident. 7 Minister of Finance Decision No. 624/ KMK.04/1994

6 5 An Overview of Indonesia s Insurance Sector Tax Environment Article 4(2) Withholding Tax on saving element payment 8 Insurance products may contain saving element. If the policy holders redeem the saving elements within a period of 3 years or less, the excess of the amount redeemed and the initial premium paid for the saving element will be subject to 20% final withholding tax Article 21 Withholding Tax on pension funds transferred to life insurance companies to purchase lifetime annuities The transfer of obligations to pay pension compensation from a Ministry of Finance approved pension fund to a life insurance company is regarded as being pension payments to the participants. This triggers the obligation to withhold Article 21 Final Income Tax for each participant which is the obligation of the pension fund. 9 Article 21 Withholding Tax on severance funds transferred to a severance fund managed Company (in practice, it can be a life insurance company) The transfer of severance fund from a Company to a severance fund managed company at once in advance will trigger the Company to withhold Article 21 Final Income Tax, and at the time the severance payment is distributed, the severance fund managed company need not withhold Article 21 Final Income Tax. 8 Director General of Taxation Circular Letter SE 09/PJ.42/ Director General of Taxation Decision No. KEP-333/PJ/2001, Government Regulation No. 149 Year 2000 jo. Minister of Finance Decision No. 112/KMK.03/2001, replaced by Minister of Finance Regulation No. 16/ PMK.03/2010

7 An Overview of Indonesia s Insurance Sector Tax Environment 6 While the transfer of severance fund from a Company to a severance fund managed company periodically will not trigger the Article 21 Final Income Tax, and at the time the severance payment is distributed, the severance fund managed company need withhold Article 21 Final Income Tax to the relevant recipient. Insurance Agents Income paid to insurance agents is subject to Article 21 WHT on 50% of the gross amount paid, after taking into account non-taxable income based on marital status and number of dependants. The applicable tax rates range from 5% to 30%, as stated in Income Tax Law Article 17(1). 10 Bancassurance Bancassurance commissions paid or owed to banks are not subject to Article 23 WHT. 11 C. Value-Added Tax Insurance services covering loss, life and reinsurance, offered by insurance companies to policyholders, are not subject to Value-Added Tax. On the other hand, any insurance support services, such as agents, appraisers and consultants, are subject to VAT. 12 Bancassurance Bancassurance commissions paid to banks for insurance products sold by banks on behalf of insurers are subject to VAT Director General of Taxation Regulation No. 57/PJ/ Law No. 36 Year 2008 article 23 (4) 12 Law No. 42 Year Director General of Taxation Circular Letter SE-121/PJ/2010

8 Contact us Erlyn Tanudihardja Partner, Tax T: + 62 (0) E: Erlyn.Tanudihardja@kpmg.co.id kpmg.com/id The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG Hadibroto, an Indonesian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Indonesia. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.