A Primer on Indonesian Added Value Tax kpmg.com/id

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1 KPMG HADIBROTO A Primer on Indonesian Added Value Tax kpmg.com/id

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3 Contents Overview 1 Scope and Rates 2 Registration Requirements 6 VAT Grouping 8 Return Requirements 8 VAT Recovery 8 Import and Export of Goods and Services 10 Tax Invoices 11 Record Keeping Requirements 15 Transfers of Business 15 Options to Tax 15 Head Office and Branch transactions 16 Anti-Avoidance 16 Penalties 17 Tax audits 18 Advance rulings and decisions from the tax authority 18

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5 A Primer on Indonesian Added Value Tax 1 Overview Value Added Tax is a tax on the consumption of goods and services in Indonesia that is imposed on production and distribution. VAT is typically due to transfers of taxable goods or services. Indonesian VAT is a single rate. The current rate is 10 percent but the law allows the government to alter the rate to a minimum of 5% and a maximum of 15%. VAT must be collected by a Taxable Entrepreneur (Pengusaha Kena Pajak). In most case, VAT liabilities are settled using an input-output mechanism. To be able to credit the input VAT, an entity must be registered as a Taxable Entrepreneur.

6 2 A Primer on Indonesian Added Value Tax Scope and Rates What goods and services are subject to VAT? VAT is imposed on: The delivery of taxable goods (tangible or intangible) by an entity in Indonesia; The importation of taxable goods; The rendering of taxable services in Indonesia; Utilization in Indonesia of intangible taxable goods from outside the Indonesia; Utilization of offshore taxable services in Indonesia; Export of taxable goods, intangible goods and taxable services by an entity in Indonesia; Self-construction activities; and The disposal of fixed assets, including transfers in the course of a merger (except where VAT on the original acquisition could not be credited). What is the standard rate for VAT? The current VAT rate is 10 percent, but the law allows the government to amend this rate to a minimum of 5% and a maximum of 15%. VAT is levied on exports at zero percent.

7 A Primer on Indonesian Added Value Tax 3 Are there any reduced rates, zero rates or exemptions? Goods not subject to VAT are: Goods produced by mining or drilling that are taken directly from their source, i.e., crude oil, natural gas, geothermal energy, sand and gravel, coal (before processing into briquettes) and hard rock ores (iron, tin, gold, copper, nickel, silver and bauxite); Basic necessities needed by the populace as a whole, i.e., rice, corn, sago, soybeans and salt; Food and beverages sold at hotels, restaurants, eating shops, stalls, and the like, whether or not for dine-in, including food and beverages delivered by catering services (however other local taxes may apply); and Money, gold ingots and negotiable instruments. Services not subject to VAT are: Medical and health services, including general practitioners, specialists and dentists, veterinarian services, health expert services (acupuncturists, dental experts, nutritionists, physiotherapists), midwifing services, paramedic and nurse services, hospital, maternity clinics, health clinics, health laboratories, sanatoria, psychologists and psychiatrists; and alternative medical treatments; Social services, including orphanages, fire departments, rehabilitative institutions, burial services and non-commercial sport services; Letter delivery services with postage stamps;

8 4 A Primer on Indonesian Added Value Tax Scope and Rates (continued) Financial services, including lending, borrowing, leasing, factoring, credit card businesses, consumer financing and underwriting. Note that all services offered by a financial institution do not automatically qualify as financial services. For example, bank selling insurance products are considered to be providing an agency service, rather than financial, which is subject to VAT; Insurance services that cover loss, life and reinsurance, provided by insurance companies to holders of insurance policies, excluding insurance support services, such as agent, loss appraisal and consultancy; Religious services; Educational services, including schools and informal education services; Arts and entertainment services; Non-commercial broadcast services; Public transportation services over roads and on water, as well as domestic air transportation services (becoming inseparable from foreign air transportation services); Manpower services, including labor and outsourcing services and training organizers; Hotel services, including rooms and facilities offered at a hotel (however other local taxes may apply); Services provided by the government in the context of running government administration in general; Parking services; Public coin telephone services; Money remittance services with money orders; and Catering services.

9 A Primer on Indonesian Added Value Tax 5 Goods and services granted exemptions from VAT are: Machinery and capital equipment in certain situations; Electricity (unless household capacity exceeds 6,600 watts); Piped water; Livestock, poultry and fish feed and/or raw materials for preparing feeds; Certain agricultural crops in their natural state delivered by farmers Agricultural seeds, plantations, forestry, animal husbandry, breeding and fishery sources; Polio vaccines; Textbooks; Charter or purchase of ships used by national shipping and fishing companies, together with related components; Charter or purchase of aircrafts used by national airline companies, together with related components; Purchase of railway trains by PT Kereta Api Indonesia and related components; Construction and sales of simple houses of various types; and Equipment and supplies of certain kinds used by Defense and Police forces. Special schemes for VAT apply to sales of used cars, cigarettes, prerecorded cassette tapes and compact discs. VAT is levied on exports of goods and services (subcontracted manufacturing, repair and maintenance and construction services) at zero percent.

10 6 A Primer on Indonesian Added Value Tax Registration Requirements Who is required to register for local VAT? A person or entity, in whatever form, which in the course of its operations, produces, imports or exports taxable goods, conducts trading activities or renders taxable services, is required to register with the Directorate General of Tax (DGT) as a Taxable Entrepreneur if total annual turnover exceeds IDR600 million (approximately USD65,000). Is a business required to issue tax invoices? Yes, once it is registered as a VAT-able taxpayer. Are there penalties for not registering, or late registration? Yes, the DGT will deem registration. Obligations related to registration are then assumed to have occurred five years prior to registration. Is voluntary VAT registration possible for an overseas company? No, only a resident or a Permanent Establishment ( PE ) can obtain a VAT registration. Registration by non-residents is not allowed. Is there any other kind of VAT registration? No. Can I recover input VAT incurred prior to registration? No. Are there any simplifications that could help avoid the need for an overseas company to register for VAT? Non-residents cannot register for VAT.

11 A Primer on Indonesian Added Value Tax 7 Does an overseas company need to appoint a fiscal representative? No. If a transaction entered into by a non-resident is subject to VAT, it must be administered by the resident counterparty. If the non-resident is paying, VAT must be charged by the resident. If the non-resident is receiving income, VAT must be self-assessed and paid (not withheld) by the resident. What documentation does an overseas company needs for VAT registration? Overseas companies cannot register Is consignment stock subject to VAT? Yes, VAT applies normally. How is the supply of installed or assembled goods treated? VAT applies normally to both the goods and the embedded services. Is a foreign company supplying goods locally required to register for VAT? No, if a foreign company has no presence in Indonesia and supplying goods is done by exporting to Indonesia. Yes, in the case that a PE is deemed, or a subsidiary exists, with the threshold to register being delivery of taxable goods and/or services over IDR600 million (approximately USD65,000) within its fiscal year.

12 8 A Primer on Indonesian Added Value Tax VAT Grouping Is VAT grouping possible? VAT centralization is allowed for Indonesian branches of an entity. Can an overseas company be included in a VAT group? No Return Requirements How frequently are VAT returns submitted? Monthly. Are there any other returns that need to be submitted? No. VAT Recovery Can I recover VAT if I am not registered? No, however a non-taxable entity is able to expense for income tax purposes input VAT paid, if it is related to business activities. This means that 25% of the amount of input VAT paid can be recovered (25% being the corporate income tax rate).

13 A Primer on Indonesian Added Value Tax 9 Does Indonesia apply reciprocity rules for reclaims submitted by nonestablished businesses? No. Are there any items from which you cannot recover VAT? Input VAT cannot be credited against output VAT for purchases of: Taxable goods or services, or utilization of taxable services and intangible goods from outside Indonesia, before an entity is deemed a Taxable Entrepreneur; Taxable goods or services having no direct relationship to business activities; Taxable goods or services related to non-vat-able business activities; Motor vehicles (sedans and station wagons) and their maintenance, except as commodities or rentals; Taxable goods, taxable services, intangible taxable goods and taxable services from outside Indonesia with invalid tax invoices; Taxable goods or taxable services if the input tax results from a tax assessment; Taxable goods or services if the input tax is not reported in the monthly VAT returns and is discovered by audit; and Taxable goods, other than capital goods or taxable services, before a Taxable Entrepreneur starts production and Input VAT that is more than three months old cannot be recovered. Can I recover input VAT on certain employee expenses? Yes, as long as the expenses are directly related to business activities that are subject to VAT and are borne by the company.

14 10 A Primer on Indonesian Added Value Tax Import and Export of Goods and Services How are exports of goods and services treated? Export goods are subject to 0% VAT. Export services subject to 0% VAT, include : 1. Subcontracting services; 2. Repair and maintenance services attached to movable goods and utilized outside of Indonesia; and 3. Construction services attached to immovable goods situated outside of Indonesia. How are goods dealt with on importation? In general, 10% VAT applies to imports. Certain exemptions may apply, based on the goods being imported. How are services brought in from abroad treated for VAT purposes? Services rendered by non-residents are subject to 10% self-assessed VAT administered and paid by the resident service recipients. What kind of written evidence is required for supplying goods abroad? These documents are generally required in processing the export of goods: Sales Invoices; Airway Bills; Export Declarations; and Tax Payment Slips (if applicable) How is VAT on purchases of goods from abroad paid and recovered? VAT on imports is payable by the importer. As long as it is related to VATable output, VAT on a purchase is creditable against the importer s output VAT.

15 A Primer on Indonesian Added Value Tax 11 Tax Invoices What is the required content of a tax invoice? The format of a tax invoice is very detailed and is mandated by DGT and includes the following: 1. Code and Serial Number of Tax Invoice A code and serial number must appear on the tax Invoice in a format which is controlled by the DGT. 2. Taxable Entrepreneur The name, address and taxpayer registration number of the Taxable Entrepreneur delivering the taxable goods and/or services, in accordance with the information in the Stipulation Letter of Taxable Entrepreneur. If the Company changes its address, it must update the tax ID and Taxable Entrepreneur stipulation letter in the Tax Office. 3. Purchaser of Taxable Goods and/or Recipient of Taxable Services The name, address and taxpayer registration number of the purchaser of the taxable goods and/or recipient of taxable services. 4. Taxable Goods/Taxable Services being delivered: a. Serial Number The serial number of taxable goods or services delivered b. Name of Taxable Goods/Taxable Services The name of the taxable goods and/or services delivered. In the event that an advance payment or installment is received, the column Name of Taxable Goods or Taxable Services must include information such as advance payment or installment for the purchase of goods and/or acquisition of services. If necessary, Taxable Entrepreneur may add the number of units and price per unit delivered.

16 12 A Primer on Indonesian Added Value Tax Tax Invoices (continued) c. Sales Price/Compensation/Advance Payment/Installment Sales price or compensation of taxable goods or services delivered before deducting advance payments or installments. In the event of receipt of advance payments or installments, the basis for calculating VAT is the amount of the advance payment or installment concerned. If the sales price/compensation/advance payment/installment is made in a foreign currency, then the lines Tax Collection Basis and VAT = 10% X Tax Collection Basis must be converted into Indonesian Rupiah ( IDR ) using the exchange rate mandated by Minister of Finance. In the event that the information for Name of Taxable Goods/ Taxable Services delivered cannot be accommodated on a single tax invoice, a Taxable Entrepreneur may: -- make more than one tax invoice, with each of them using the same code, serial number and tax invoice date, as well as being signed and showing the number of tax invoice pages on each sheet, and especially the amount, price discount, advance payment received, tax collection basis, and VAT on the last form of the tax invoice; or -- make one tax Invoice indicating the number and dates of sales invoices constituting an inseparable attachment to the tax invoice, in the event that a sales invoice is made separately from the tax invoice. 5. Total Sales Price/Compensation/Advance Payment/Installment The total amount of figures in the column of sales price/compensation/ advance payment/installment.

17 A Primer on Indonesian Added Value Tax Price Discount The total value of any price discount on taxable goods and/or services delivered. 7. Advance Payment Received The value of any advance payments received for the delivery of taxable goods and/or services. 8. Tax Collection Basis The amount of sales price/compensation/advance payment/ installment, minus any price discount and advance payment received. 9. VAT = 10% X Tax Collection Basis The amount of Value-Added Tax payable, equal to 10% of the Tax Collection Basis. 10. Sales Tax on Luxury Goods Only filled in for delivery of Luxury Taxable Goods; amounting to a sales tax tariff on luxury goods multiplied by Tax Collection Basis which becomes the basis for calculating sales tax on luxury goods. 11. Date The place and date the tax invoice is created. 12. Name and Signature The name and signature of an officer appointed by the Taxable Entrepreneur to sign tax invoices. Written notification must be given to the Tax Service Office where the Taxable Entrepreneur is assigned, or where VAT is centralized, no later than the end of the month following when the appointed officer begins signing tax invoices.

18 14 A Primer on Indonesian Added Value Tax Tax Invoices (continued) In the event that a Taxable Entrepreneur is an individual with no organizational structure, the owner of the business signs the tax invoices himself, or may authorize another party to sign tax invoices. Written notification must be given to the Tax Service Office where the Taxable Entrepreneur is assigned, or where VAT is centralized, no later than the end of the month following when the authorized party begins signing tax invoices. If signing tax invoice is authorized to another party, then additional information must be included in the Name column of the tax invoices for Proxy of Business Owner. The officer or proxy appointed to sign the invoices does not have to be the same as the one authorized to sign VAT Returns. A signature stamp is not allowed for tax invoices. 13. In the event of taxable goods and/or services delivery using foreign currency: The Taxable Entrepreneur must add the column Foreign Currency. The exchange rate information must use the rate published by the Minister of Finance at the time the tax invoice is prepared. Note: The Tax Office consider incomplete and incorrectly prepared tax invoices as invalid. Can a business issue VAT invoices denominated in a foreign currency? Yes, the VAT invoices can show the foreign currency amount, but must also have the conversion amount into IDR by using Minister of Finance exchange rate on the date of VAT invoicing

19 A Primer on Indonesian Added Value Tax 15 Record Keeping Requirements How long must records and invoices be retained? Books, records and other documents used as the basis for bookkeeping, including data processing records, must be maintained in Indonesia for 10 years. Can the invoices be stored abroad? No. Transfers of Business Is there relief from VAT for the sale of a business as a going concern? Yes in the case of a merger, consolidation or expansion, if the transacting parties are VAT-able entities. Options to Tax Are there any options to tax transactions? There are no options available in Indonesia.

20 16 A Primer on Indonesian Added Value Tax Head Office and Branch transactions How are transactions between a head office and branches treated? If the entities involved are Indonesian residents and have opted for centralized VAT reporting, there is no VAT effect from inter-company transactions. For the delivery of taxable goods between branches or a head office, normal VAT applies if centralized VAT reporting has not been obtained. Anti-Avoidance Is there a general anti-avoidance provision under VAT law? Yes, the VAT Law gives the DGT the authority to reassess transfer prices in related-party transactions.

21 A Primer on Indonesian Added Value Tax 17 Penalties What is the penalty and interest structure like? Input VAT invoices that qualify as complete can be credited against VAT payable. Failure to comply with any one of the requirements for a complete tax invoice will result in denial of the input VAT credit. This will result in a VAT underpayment. The related tax penalty is 2% per month, up to a maximum of 48%, in the case of an underpayment assessment from a tax audit. Invalid VAT overpayment carry-forward in a VAT return reporting overpayment will result in a 100% penalty on the amount invalidly carried forward if discovered in a tax audit situation A company is obliged to issue a valid tax invoice at the time of delivery of taxable goods and/or services (output VAT) to its customers. Failure to issue valid tax invoices is subject to a tax penalty at the rate of 2% of VAT base/transaction value. According to the latest VAT Law, the monthly VAT returns must be submitted to the ITO by the end of the following month. Failure to comply with this regulation may result in an IDR500,000 fine per return. The buyer of taxable goods or recipient of taxable services may be held accountable for VAT not properly remitted by the seller if evidence of VAT payment cannot be furnished. What is the reassessment period? The DGT can perform a tax audit within five years of submitting a tax return. After five years, a tax year is considered closed, except in cases where evidence of a tax crime is indicated.

22 18 A Primer on Indonesian Added Value Tax Tax audits How often do tax audits take place? The most common trigger of a tax audit is submission of a tax return claiming a refund of a tax overpayment. This can occur only once a year, since refunds can be claimed only in the December VAT returns, except for certain types of businesses. Are there audits done electronically in Indonesia (e-audit)? If so, what system is in use? No. Advance rulings and decisions from the tax authority Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority? Yes. Are rulings and decisions issued by the tax authorities publicly available in your country? No, rulings are not publicly available, since it is addressed specifically to a particular company.

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24 Contact us KPMG Hadibroto Tax Services 33rd Floor Wisma GKBI 28, Jl. Jend. Sudirman Jakarta 10210, Indonesia T: +62 (0) F: +62 (0) Erlyn Tanudihardja Partner E: Ade Irawan Director E: Yuandri Simanjuntak Director E: 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.