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Indonesia’s Harmonized Tax Law: A new tax regime for a modern world

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Written by Greg Protektor, Azlan Mohamed Noh and Olivia Freeman.

Indonesia's parliament has introduced a new "omnibus" law – known as the Harmonized Tax Law. 

What you need to know

The Harmonized Tax Law makes a number of amendments to the income tax and value-added tax (VAT) regimes in Indonesia, and also introduces a new carbon tax on coal-fired power plants. These changes will have a significant impact on the cost of doing business in Indonesia.

Background

On 7 October 2021, Indonesia's House of Representatives passed the harmonized taxation bill (RUU HPP), which created the Harmonized Tax Law (HPP) (previously known as the Amended General Taxation Law). The HPP is the government's second "omnibus law". The first "omnibus law" was enacted in 2 November and focused on job creation.

The HPP forms a key platform for the recovery of Indonesia's economy from the damage caused by COVID-19 pandemic.  By virtue of the HPP, the Indonesian Government intends to bring Indonesia's budget deficit to 4.85% of gross domestic product as at the end of 2022 (down from a projection of 5.8% for the current year). The HPP also aims to bring Indonesia's budget deficit back under the cap of 3% of GDP by 2023 (this cap was temporarily lifted in 2020 to accommodate more than a billion dollars of spending for COVID-19 relief measures).

Introduction of carbon tax

The HPP creates a carbon tax, which will be imposed at a minimum of 30 rupiah per kilogram of CO2 equivalent (CO2e) on coal-fired power plants from April 2022.  Businesses that operate coal-fired plants should accordingly expect an increased cost when operating in Indonesia.

The carbon tax will be determined according to market prices, with a minimum rate of 30 rupiah per kilogram of CO2e. This is half the rate initially proposed by the Indonesian Government when the HPP bill was first announced (75 rupiah).

The HPP also mandates the creation of a roadmap to establish a carbon trading mechanism in Indonesia by 2025, as well as a strategy to reduce Indonesia's greenhouse gas emissions. The Indonesian Government has set a goal to achieve net zero emissions by 2060. This is in line with its commitments under the Paris Agreement, which Indonesia ratified through its Law No. 16 of 2016.

While the carbon tax will be imposed on the producers of carbon, the cost may be passed onto consumers via increased prices. This means that individuals and entities who purchase goods and services that emit carbon in production in Indonesia may economically bear the carbon tax.

Indonesia is the biggest exporter of thermal coal and the eight largest emitter of carbon in the world. As a consequence, it is expected that Indonesian energy producers may increase their focus on utilising nickel reserves to increase production for batteries and electric vehicles. This forms part of a broader push by the Indonesian Government for businesses to take advantage of Indonesia's rich nickel reserves and grow the battery and electrical vehicle manufacturing sector. Indonesia is set to spend $61.5 trillion rupiah on electricity subsidies in 2021 and 56.5 trillion rupiah in 2022.

Increase in VAT rate and removal of certain exemptions

The HPP increases the VAT rate in Indonesia.  In particular, Indonesia's current VAT rate will increase from 10% to 11% on 1 April 2022 and then to 12% by 1 January 2025.

While the increase is material, Indonesia's VAT rate is lower than other countries in the Asia-Pacific Region.  This includes China (13%), the Philippines (12%) and India (18%). Indonesia's VAT rate is also lower than the global average rate of 14.5%.

In addition to increasing the rate, the HPP removes certain VAT exemptions that previously applied to staple foods, as well as healthcare and education services.  VAT exemptions will, however, remain for most other necessities.

Introduction of new amnesty program

The HPP creates a new tax amnesty program (known as the "Taxpayers' Voluntary Disclosure Programme").  This program aims to incentivise taxpayers to voluntarily disclose their wealth to the Indonesian tax authorities.  The program is a second round of the amnesty which was first announced by the Indonesian Government in 2016.

The newly announced amnesty – which is intended to run for 6 months between 1 January 2022 to 30 June 2022 – will allow participants to disclose unreported assets acquired before 2016.  Once disclosed, the Indonesian authorities will classify the assets as additional income and charge a tax rate of between 6% to 11% of the assets' value.  The rate of tax will depend on whether – and to what extent – the assets are reinvested into resource processing or renewable energy projects in Indonesia and/or into Indonesian government bonds.   The rate will also depend on whether the assets are brought back to Indonesia from another jurisdiction (in which case a lower rate will apply).

Taxpayers who report assets that were previously hidden between 2016 to 2020 can separately disclose them back into the Indonesian tax net and pay at a rate of tax of between 12% to 18%.

Indonesia's first round of tax amnesty brought in approximately 147 trillion rupiah of revenue in 2017.  It is expected that this second round of amnesty will realise a similar amount.

Preservation of corporate tax rate

The HPP reverses the planned corporate tax cuts that were announced in 2020 as part of Law No. 2/2020 to the COVID-19 response.  As a result, Indonesia's current corporate tax rate will remain at 22%.

Indonesia's current 22% corporate income tax rate is lower than the general average for countries in the Association of Southeast Asian Nation (ASEAN), which is 22.17%. This rate is also lower than the average for G20 countries (at 24.17%).

While the preservation of the tax rate increases the cost of doing business in Indonesia, the HPP did not adopt the Government's proposal for a minimum corporate tax charge for companies that report losses in certain circumstances.  This is a business friendly approach and will increase tax certainty for many companies.

Administration

The HPP will integrate the civil registry database with the taxation administration system. Taxpayers will be able to use their citizen identification numbers (NIK) to replace identification numbers (NPWP) to facilitate the process of paying their taxes. This change will also assist authorities in expanding the tax base and improving tax compliance.

The HPP also makes certain amendments to the taxation objection and appeal processes in the tax court, as well as allowing taxpayers under investigation to settle their case by paying the amount of outstanding tax to the relevant tax regulators.

What does this mean for businesses operating in Indonesia?

The HPP is a significant overhaul of Indonesia's tax system.  The King & Wood Mallesons team can help you navigate these changes, as well as other issues of international taxation.  Please do not hesitate to contact a member of the King & Wood Mallesons team if you would like further information regarding the changes to doing business in Indonesia (or around the world more generally).

 

*KWM Indonesia CloudOffice does not provide legal advice in relation to, or practise, Indonesian law in any form. Any legal services undertaken by KWM will be provided by one or more of the separate King & Wood Mallesons member firms as described in the Terms of use & legal notices and only in relation to the laws of jurisdictions in which the relevant member firm is licensed to practise.

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