Indonesia payroll and tax overview.

Indonesia lies between the Indian and Pacific oceans and comprises an archipelago of thousands of individual islands, including the larger Borneo, Java, Sumatra and Sulawesi. Home to over 260 million people, Indonesia holds the fourth-largest population in the world, and stands as a historic international trade destination. Indonesia’s economy is the 16th-largest by GDP and the country has a targeted growth rate of 6% for the coming years - a trend supported by a range of investment-stimulating government initiatives. Considered an emerging market, Indonesia’s natural resources, including gold, tin, copper, gas, and oil have long been important to the economy, while major exports include timber, rubber, textiles, electrical products and palm oil. The automotive industry is also important: Indonesia produced 1.18 million cars in 2016, making it the 17th-largest producer in the world. Indonesia is a founding member of the Organisation of Islamic Cooperation, and is part of the G20, the United Nations, and the World Trade Organisation.

Why Invest in Indonesia?

Financiers will find a number of reasons to make Indonesia an investment target:

• Government Support: Indonesia’s government is introducing a number of measures to make the country more attractive to investment. These measures include streamlining financial regulations, and amending business laws in order open the country up to investment and allow for equal treatment of financiers.
• Economic Strength: Indonesia has experienced continuous GDP growth since the early 2000s, and has become a regional economic powerhouse. Since 2013, Indonesia has risen from 128th to 91st on the World Bank’s Ease of Doing Business Survey.
• Market Potential: Thanks to a population increase rate of around 3 million people each year, Indonesia represents a lucrative domestic market. Indonesia’s population is projected to reach 272 million people by 2020 - with a huge demographic of young, wealthy consumers and a healthy middle class.
• Regional Portal: Indonesia has trading partners across Southeast Asia, including China, Malaysia, Japan and the Philippines. With an increasingly efficient transport infrastructure, Indonesia also represents a regional portal, offering excellent air and sea links to destinations across Asia and the world.
• Tax Incentives: From 2008 to 2010, Indonesia implemented tax reforms which streamlined administrative procedures and reduced the corporate income tax rate to 25%. Further tax incentives are available to businesses which meet a range of financial criteria.

Foreign Direct Investment in Indonesia

Indonesia has been a solid performer throughout the 2008 economic recession and continues to be an attractive investment destination. BKPM is the Investment Coordinating Board of the Republic of Indonesia. As the primary interface between business and government, BKPM is mandated to boost domestic and foreign direct investment through creating a stable investment climate, reporting directly to the President of the Republic of Indonesia, to improve social inequality and reduce unemployment.

Every three years, the government issues a regulation (commonly known as the negative list) specifying the business sectors that are closed to foreign investment or open subject to conditions. If a business sector is not on the negative list, then it is open to 100% foreign investment. Sectors that are closed to foreign investment include defense, national security and other areas of national interest.

Sectors that are open subject to conditions usually involve restrictions on the maximum foreign ownership permitted and sometimes the imposition of specific requirements, such as approvals from specific ministries.

Registering A Company and Establishing an Entity in Indonesia

Investment must be made by way of establishing new or purchasing shares in an existing limited liability company. A PMA company must satisfy the requirements of the negative list and have an approved deed of establishment or articles of association, which must be signed before an Indonesian notary.

Foreign Investors who wish to invest in a PMA Company must first obtain an “In-Principle Approval” from BKPM. BKPM will issue approval approximately 5 to 10 working days after receiving a completed application and required supporting documentation, although satisfying BKPM’s requirements often mean approvals take longer than this.

For certain lines of business (for example, mining, oil and gas, education), the recommendation of the relevant government regulating institution must be obtained before BKPM will issue its approval.

Once BKPM approval has been obtained, the foreign company may establish or invest in a PMA Company. Establishing a new PMA Company usually takes approximately 4 to 8 weeks.

You are required by law to be licenced to make certain tax and /or social security filings on behalf of the client, however most of tax advisors are a member of a professional organisation.

Business Banking in Indonesia

It is not mandatory to make payments to employees and the authorities from an in-country bank account; however, it is recommended that an in-country bank account is used to make the payments.

Working Days and Working Hours in Indonesia

The working week in Indonesia is Monday to Friday. The working day for commercial offices is usually eight hours, with a 50 hour working week allowed for 2 months of the year in case of a seasonal increase in production. The maximum number of days anyone can work in Indonesia is 6 days per week.

Basic Facts about Indonesia

General Information

The Republic of Indonesia is one of Southeast Asia’s largest and most populous countries. An island archipelago of thousands of individual landmasses, Indonesia’s neighbours include Australia to the southeast, Papua New Guinea and the Philippines to the east and north, and Malaysia to the west. Indonesia has always been an important location for Southeast Asian civilisation: Hindu and Buddhist kingdoms flourished there in prehistory, while European traders and colonial powers arrived in the late 15th century. Today, Indonesia is home to a spectrum of ethnic groups and societies, from highly urbanized populations, to remote farming and tribal communities. Lying on the equator, Indonesia experiences a tropical climate, and hosts a wide range of natural environments, from mountainous volcanic regions, to lush rainforests. The country also hosts a vast range of biodiversity and is home to over 2000 endemic species.

Full Name: Republic of Indonesia

Population: 242.3 million (IMF, 2012)

Capital: Jakarta; People's Consultative Assembly Major

Language: Indonesian

Major religion: Muslim

Monetary Unit: 1 Rupiah (USD 1 = IDR 11,000)

Main Exports: oil and gas, electrical appliances, plywood, rubber, and textile

GNP per Capita: $5,200 (2013 est)

Internet Domain: .co.id

International Dialling Code: +62

The tax year runs from 1st January to 31st December.

Income Tax in Indonesia

All individual tax residents (including expatriates) have to register with the Tax Office and obtain a Tax ID number.

The employees with non-taxable income should also register to obtain a Tax ID for reporting their annual income to tax office (in order for the tax office can easily track and record their income).

Taxation in Indonesia is determined on the basis of residency. Individual resident taxpayers are individuals who:

• are domiciled in Indonesia or
• stay in Indonesia for more than 183 days in any 12-month period or
• are present in Indonesia during a tax year and intending to reside in Indonesia.

Residency of a corporation is based on place of incorporation / domicile / effective place of management.

Indonesia imposes a range of taxes on individuals and corporate taxpayers. These are summarized below:

Income Tax, which includes:

• Corporate Income Tax;
• Individual Income Tax;
• Withholding Tax On Employee’s Remuneration;
• Withholding Tax On Various Payments To Third Parties

Value Added Tax (VAT) and Luxury Goods Sales Tax (LGST), are subject to various criteria.

Tax returns are filed by taxpayers based on a Self-Assessment System. Members of a group of companies are taxed individually as there are no group relief provisions available.

Indonesian tax residents are taxed on their worldwide income. Non-residents are taxed on income derived from an Indonesian source, subject to any relief available under applicable tax treaties.

Reporting Tax in Indonesia

Monthly

The following reports must be filed on a monthly basis:

• Social benefit report (ND-7) ,
• Social benefit payment computation sheet (ND-8)

Employers shall deduct insurance from an employee’s monthly earnings and remit it to the social insurance authorities on an employee’s behalf. The employer shall prepare a monthly report (ND-7, 8) and submit it to the social insurance authorities by the 5th of following month.

Quarterly/Yearly

• Report of withholding Tax Return for Wage, Salary other Comparable Income - (TT-11);
• Information of Withholding Tax Return for Wage, Salary Other Comparable Income-((TT-11(1))

Employers shall prepare and file withholding Tax Return ((TT-11, 11(1)) to the Tax Authority on a quarterly and annual basis. The 20th of April, July and October are the submission dates of the quarterly Report; 10th of February of next year for Annual Report.

All reports and returns can be submitted by both parties either the client or payroll provider. It should be signed by employer or can be signed by a representative of the payroll provider based on previous authorization provided by client.

Social Security in Indonesia

The Indonesian equivalent of social security is called Jamsostek. The employer’s contribution to basic salary is 3.7% and the employee’s contribution is 2.0%. Late payments to the Jamsostek office will result in a suspension of claims and benefits, new membership issuance and a penalty of 2 % from total contribution. Jamsostek reports and payments are due by the 15th of the following month but settling at the month-end ensures a quicker service level on benefits and claims processing for employees. Pension Scheme Same as social security, employers contribution is 3.7% of basic salary and fixed allowances and employees’ contribution is 2.0 % of basic salary and fixed allowances.

New Employees in Indonesia

Companies are required to register for a tax ID number, during the incorporation process and with BPJS (Jamsostek) after this has been completed. As per law, companies with a minimum of 10 employees must register with Jamsostek however it is recommended that multinational companies with less than 10 staff also register all their employees as the benefits outweigh the costs.

Currently, the individual taxpayer is legally responsible for ensuring that they've registered with the tax office and comply with the regulations and payment of the taxes due.

Many companies, as per contract, for expatriates may have agreed to pay taxes on their behalf; however they are still personally liable for their payment.

Thus they must obtain a receipt showing that the taxes have been paid on a monthly basis. Documents required for registration:

• A Completed Registration Form
• Photocopies of all the pages of the passport
• Photocopy of Work Permit
• Certificate of Domicile for employee and employer
• Photocopy of Employer's NPWP
• Letter of Authorization, authorizing the company representative to register and handle the company's tax matters
• While the registration form only asks for a copy of the ID page of the passport and does not request the other items mentioned above, the bureaucrats at the Tax Office ask for them as a matter of course.

For New starts, according to the regulations, failure to secure an NPWP could mean imprisonment for a maximum of six years and a maximum fine of four times the total amount of tax due.

Leavers in Indonesia

Employees who leave employment in Indonesia must observe certain statutory procedures - in addition to those set out by their employer’s organisation. Normally, employees must give one month’s notice when they decide to leave employment: this notice period allows employers to de-register employees from payroll, and cease a number of statutory payments, including premiums being paid to the BPJS Health Office.

Payroll in Indonesia

Employers in Indonesia must follow specific procedures when processing payroll. Payroll compliance involves tax payments and social security contributions which must be withheld by employers each pay cycle.

In detail, income tax rates range from 5% to 30% dependent on gross income, while social security contributions involve a 2% contribution from employees and a 3.7% contributions from employers. Companies with less than 10 employees are not required to register for social security payments.

The payroll reporting deadline is the 10th of the following month, and reports must be kept for at least 5 years. Payments must be made to employees and tax authorities from an in-country bank account.