Guide to Withholding Tax in Indonesia for Business Owners

Understanding the impact of withholding tax is crucial to fiscal compliance as a business owner. You need to make sure that you deduct taxes from payments made to your employees, vendors, and service providers, as well as payment to property or remuneration services. 

To give you a better idea of your tax obligations, this article will cover the types of withholding taxes in Indonesia, withholding tax rates, and how you can qualify for exemptions. 

Overview of Withholding Tax in Indonesia

Withholding tax in Indonesia, known as Pajak Penghasilan (PPh), is a system where tax is withheld at the source of income. This requires the payer to retain a specific portion of certain payments as tax and remit it directly to the Indonesian tax authorities (Direktorat Jenderal Pajak – DJP).

This system simplifies tax collection, reduces the risk of tax evasion, and ensures timely revenue for the government. It applies to various types of income, making the payer responsible for deducting and submitting the tax on behalf of the recipient.

Types of Withholding Tax in Indonesia

In Indonesia, withholding tax is applied to various types of income, and it is categorized primarily based on the relevant articles of the Income Tax Law. Here are the different types of withholding tax you should know about: 

1. Withholding Tax on Salaries (PPh 21)

 If you have employees in Indonesia, you are required to withhold tax from their salaries and severance payments. Your payroll staff must remit the withheld amount to the state treasury on behalf of the employee, and credit it against their annual income tax return.

2. Withholding Tax on Imported Goods and Luxury Items (PPh 22)

Involves the importation of goods and the sale of luxury items. Registered importers face a 2.5% withholding rate while unregistered importers have 7.5%. Luxury goods purchases incur a 5% withholding tax. Certain exemptions apply, particularly for capital goods and raw materials imported by companies in Free Trade Zones.

3. Withholding Tax on Specific Income Payments (PPh 23)

This includes various income types subject to withholding tax at different rates. 

• Dividends, interests, royalties, swap premiums, prizes, awards, and bonuses are set at 15%. 
• Rental payments for property (excluding land and buildings) and remuneration for services like technical, management, construction, consulting, legal, and accounting services are at 2%. 

4. Withholding Tax on Non-Resident Income (PPh 26)

Non-tax residents are subject to a 20% fixed withholding tax but can be reduced based on tax treaties between Indonesia and other countries. 

5. Withholding Tax for Income at Fixed Rates Based on Gross Amounts (PPh Final)

Establishes a final withholding tax on specific types of income that are subject to final tax rates based on gross amounts, without allowing deductions for expenses. This tax applies to various transactions, including land and building rentals (10%), construction services (2%-6% depending on the type of service), interest bonds (15%), etc. 

Withholding Tax Exemptions in Indonesia

As a business owner, compliance with withholding tax ensures that obligations are collected at the source of income, which helps minimize tax evasion and streamline revenue collection.

Aside from obtaining a corporate tax residency status to enjoy lower withholding taxes on dividends and other services, you can also acquire exemptions through the following: 

• Free-trade Zones (FTZs) – Companies in Free Trade Zones are exempt from withholding tax on capital goods and raw material importation. You are also exempt from withholding tax for imports related to disaster relief, nature conservation, and educational materials. 
• Investment Holding Companies (IHCs) – withholding tax rate on dividends can be decreased from the usual 15% (non-tax residents) to 10% (tax residents). Furthermore, Indonesian Holding Companies can carry forward tax losses for a period of up to 10 years, allowing them to reduce future taxable income and lower their overall tax burden.
• Tax Treaties – Non-resident taxpayers can qualify for reduced withholding tax rates or exemptions based on tax treaties. 
• SMEs – companies with less than IDR 4.8 billion (~USD 320,000) gross receipts are eligible for simplified tax treatment and can include withholding tax exemptions. 

Ensure Tax Compliance and Meet Reporting Obligations with Emerhub

Ensure your compliance with Indonesian tax laws while reducing administrative stress. Our local tax advisors specialize in withholding tax and provide tailored support to help you claim exemptions and maintain accurate records effortlessly.

Beyond withholding tax, Emerhub offers a full range of accounting and bookkeeping services, including tax calculations, filings, financial reporting, and investment activity reports (LKPM).

Reach out to our local experts today by filling out the form below!