Understanding Double Taxation in Bali: Laws, Treaties, and Exemptions Explained

Double taxation occurs when an individual or business is taxed on the same income in more than one jurisdiction. This situation can be particularly complex for foreigners and businesses operating in Bali, where the tax landscape is influenced by both local laws and international treaties. 

This article aims to provide a comprehensive overview of double taxation in Bali. We’ll be covering income tax laws, residency regulations, tax treaties, and strategies for avoiding double taxation.

Understanding Income Tax Laws in Bali

Individual Income Tax

In Bali, individual income tax is governed by the Indonesian tax system. Under the Income Tax Law No. 36 of 2008, individuals who reside in Indonesia for more than 183 days within a 12-month period are classified as residents. They are subject to progressive tax rates ranging from 5% to 30%, depending on their income level. Non-residents, on the other hand, are taxed at a 20% flat rate on income earned in Indonesia. 

Residents must file their annual tax returns to the Directorate General of Taxes (Direktorat Jenderal Pajak) under the Ministry of Finance by March 31 of the following year. In some cases, however, non-residents are not required to file unless they have specific obligations or sources of income that necessitate reporting. 

Corporate Income Tax

Corporate income tax in Bali is also structured based on residency. Domestic corporations are subject to a 22% corporate tax rate (as of 2021). Meanwhile, foreign entities conducting business in Indonesia may face different rates depending on the sector and the nature of their income. 

Companies making payments subject to withholding tax must ensure compliance by deducting the appropriate amount before disbursing funds to recipients. The withholding tax rates in Bali vary depending on the type of income being paid. Here are the key categories:

Withholding Tax Categories	Tax Residents	Non-tax Residents
Dividends	~15%	20%
Interests	20%	20%
Royalties	20%	20%

Payments for services, management fees, and other types of income may also be subject to withholding tax, usually at a rate of 20%. For more information, take a look at our related guide to corporate Taxes in Bali. 

Emerhub can help your business prepare and file your annual tax returns, ensuring you have all the documentation submitted before the deadline. Additionally, our experts provide strategic advice on leveraging Double Tax Avoidance Agreements (DTAAs) to minimize double taxation risks, helping companies optimize their tax liabilities. 

What is double taxation and how should you avoid it?

How does double taxation work?

Double taxation refers to the situation where the same income is taxed by two different jurisdictions. For example, an expatriate working in Bali might be liable for taxes both in their home country and in Indonesia. Foreign investments can often trigger double taxation issues as well. For instance, if a foreign investor earns dividends from an Indonesian company, they may face taxation in both Indonesia and their home country unless mitigated by tax treaties.

Tax Treaties for Eligible Foreigners

Indonesia has signed Double Tax Avoidance Agreements (DTAAs) to allow taxpayers to claim exemptions or reductions on certain incomes. It establishes which country has taxing rights over specific types of income and provides clarity and reduces the overall tax burden for investors. Indonesia has double taxation avoidance agreements with several countries: 

• Australia
• Canada
• China
• Hong Kong
• India
• Malaysia
• New Zealand
• Philippines
• South Korea
• Singapore
• Spain
• Taiwan
• Thailand
• United Kingdom
• United States of America
• Vietnam

Strategies for Avoiding Double Taxation

There are several strategies to avoid double taxation. Each of these methods can help mitigate the financial burden of being taxed in multiple jurisdictions on the same income. We recommend getting in touch with our qualified accounting professionals to provide tailored advice. 

Here are some strategies you can employ to avoid double taxation: 

1. Utilize DTAAs – to benefit from these agreements, taxpayers must provide a Certificate of Domicile (CoD) to prove their residency status and eligibility for reduced tax rates. 
2. Consider a tax residency – Tax residents in Indonesia are taxed on their worldwide income, which means they report all income earned globally. This is advantageous for individuals who may have income sources outside of Indonesia, as they can benefit from tax treaties that prevent double taxation on the same income. 
3. Apply for Tax Exemptions – Businesses can apply for tax exemptions by submitting the DGT 1 Form along with a Certificate of Residence from their home country’s tax authority. This form must be submitted before any income transfer occurs to benefit from reduced withholding tax rates. Failure to submit this form on time can result in a standard withholding tax rate of 20% being applied. 
4. Explore New Visa Options – Recent initiatives such as the digital nomad visa may allow remote workers to reside in Bali without incurring local income taxes under certain conditions. Understanding these options can provide additional avenues for reducing your tax burdens. 
5. Engage Professional Tax Advisors – Consulting with local tax professionals like Emerhub can provide insights into the complexities of Indonesian tax law and help navigate the application processes for DTAAs and exemptions effectively.

How to Apply for Tax Exemptions in Bali

Who is eligible for Tax Exemptions in Bali

In certain circumstances, individuals and organizations may be eligible for tax exemptions. These exemptions can apply to various categories, such as specific investments, charitable contributions, or activities that align with government incentives. For instance, individuals investing in equity crowdfunding may qualify for income tax exemptions based on their investment amounts and conditions set forth by tax authorities.

To apply for a tax exemption in Bali, you must have the following requirements: 

1. DGT 1 Form and Certificate of Residence. The foreign entity must prepare and present a Certificate of Domicile (DGT 1 Form) and a Certificate of Residence. The foreign entity’s tax authority must issue the certificates. Their tax authority must also sign and stamp the DGT 1 Form.
2. Withhold taxes and submit the DGT 1 Form. The company in Bali must withhold taxes and submit the DGT 1 Form. The local company must submit the form no later than the deadline for submitting the withholding tax return.

If the company fails to submit the DGT 1 Form within the allotted period, the relevant amount will be subject to a 20% withholding tax. It is important to note that it is not possible to apply for tax exemption retroactively. The business must apply prior to making the transfer.Emerhub can facilitate the submission of the DGT 1 Form as well as properly help manage corporate compliance in Bali.

How to apply for Tax Exemptions in Bali

To apply for tax exemptions in Bali, particularly for entities seeking to benefit from reduced withholding tax rates, it is essential to follow a systematic process set by the Directorate General of Taxes. Emerhub’s team of local consultants can help review your submission as well as manage the key steps in the process:

1. Prepare Required Documents – We can help you with all the necessary documentation including the DGT 1 Form and a Certificate of Domicile issued by the foreign entity’s tax authority. 
2. Complete the DGT 1 Form – With Emerhub, we can guide you on how to fill the DGT 1 Form accurately, as it is crucial for claiming reduced tax rates on income such as dividends, royalties, or interest sourced from Indonesia. 
3. Submit Documentation – Once the DGT 1 Form and Certificate of Domicile are ready, they need to be submitted to the Indonesian tax authorities before any income transfer occurs. Emerhub can facilitate this submission process, ensuring that it is done timely to avoid default withholding tax rates, which can be as high as 20%.
4. Fulfill Anti-Treaty Abuse Tests – It is important to ensure that your company meets specific conditions outlined in Indonesian Tax Regulations including having genuine business activities and maintaining independent management. 
5. Await Approval – After submission, our team will liaise with the tax authorities and keep you updated with your tax exemption status approval. 

With Emerhub, you can navigate the requirements to avoid double taxation and ensure compliance with local tax regulations. Our team is here to provide guidance and assistance tailored to your specific situation, helping you understand your options and obligations. If you’re interested in learning more, feel free to reach out for a consultation.

Taxation and accounting is crucial for legal compliance when living in Bali. By engaging with our experts, you can navigate the complexities of Bali’s tax regulations with confidence. Talk to our experts by filling out the form below!