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Foreigners Subject to Income Tax? Here's the Regulation

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Foreigners Subject to Income Tax? Here's the Regulation

Foreigners Subject to Income Tax? Here's the Regulation
Dian Dwi Jayanti, S.H.Si Pokrol
Si Pokrol
Bacaan 10 Menit
Foreigners Subject to Income Tax? Here's the Regulation

PERTANYAAN

Is a foreigner's income in Indonesia protected from double taxation? Does Indonesia also have the right to collect tax for other income from foreigners that they earn outside Indonesia?

DAFTAR ISI

    INTISARI JAWABAN

    In essence, taxes are public contributions to the state, whose tax subjects are obliged to pay according to law, in order to finance public expenditures related to the state's duties to organize the government.

    So, are Foreign Citizens (foreigners) included as tax subjects? Are foreigners required to pay income tax?

    Please read the review below for a further explanation.

    ULASAN LENGKAP

    This article is an English translation of WNA Kena Pajak Penghasilan? Begini Aturannya, written by Dian Dwi Jayanti, S.H., and published on Thursday, 25 May 2023.

    This article below is an update of the article with the same title written by Ikatan Kuasa Hukum dan Advokat Pajak Indonesia (IKHAPI) from Ikatan Kuasa Hukum dan Advokat Pajak Indonesia (IKHAPI), and was first published on Wednesday, 27 January 2021.

    All legal information available on Klinik hukumonline.com has been prepared for educational purposes only and is general in nature (read the complete Disclaimer). In order to obtain legal advice specific to your case, please consult with Justika Partner Consultant.

    Are Foreigners Tax Subjects?

    Before answering your question, we should first understand the definition of tax. Rochmat Soemitro explains that tax is the transfer of wealth from the people to the state treasury to finance routine expenditures and the surplus is used for public saving which is the main source to finance public investment. Meanwhile, according to P.J.A. Adriani, taxes are public contributions to the state (which can be imposed) owed by those who are obliged to pay them (tax subjects) according to the law, in order to finance public expenditures related to the state's duty to organize the government.[1]

    Thus, what are tax subjects? The tax subject is divided into domestic tax subject and foreign tax subject.[2] As for domestic tax subjects, one of them is a Foreign Citizen who:[3]

    Belajar Hukum Secara Online dari Pengajar Berkompeten Dengan Biaya TerjangkauMulai DariRp. 149.000
    1. resides in Indonesia;
    2. has been in Indonesia for more than 183 (one hundred and eighty-three) days within a period of 12 (twelve) months; or
    3. resides in Indonesia in a tax year and has the intention to reside in Indonesia;

    The presence of an individual in Indonesia for more than 183 (one hundred and eighty-three) days does not have to be consecutive but is determined by the number of days the said person has been in Indonesia within a period of 12 (twelve) months since the arrival in Indonesia.[4]

    Then, Article 111 number 1 Perppu Cipta Kerja (Job Creation) which amends Article 2 section (4) letter b Income Tax Law, one of the foreign tax subjects is foreigners who are in Indonesia, not more than 183 (one hundred eighty-three) days within a period of 12 (twelve) months.

    Moreover, in relation to domestic tax subjects, domestic individual tax subjects become Taxpayers if they have received or obtained an income that exceeds the Non-Taxable Income.[5] A similar thing is also stipulated under Article 3 section (3) Regulation of Director General of Taxes 43/2011, namely individuals who are domestic tax subjects become domestic taxpayers if they have received or obtained income originating from Indonesia or from outside Indonesia and the amount of income exceeds Non-Taxable Income.

    Meanwhile, foreign tax subjects, both individuals and entities, also become Taxpayers due to receiving and/or earning income originating from Indonesia or receiving and/or obtaining income originating from Indonesia through a permanent establishment in Indonesia.[6]

    Therefore, when the foreigner meets the above criteria, he/she becomes a domestic tax subject, and the foreigner will automatically be subject to Income Tax 21 (in Bahasa Indonesia is known as PPh 21), which is a domestic individual taxpayer.[7] Meanwhile, foreigners who are foreign taxpayers are subject to Income Tax 26 (in Bahasa Indonesia known as PPh 26) and shall be subject to 20% (twenty percent) tax withholding of the gross amount by the party obliged to pay:[8]

    1. dividends;
    2. interests, including premiums, discounts, and returns in connection with debt repayment guarantees;
    3. royalties, leases and other income in connection with the use of assets;
    4. remuneration in connection with services, job and activities;
    5. prizes and awards;
    6. pensions and other regular payments;
    7. swap premiums and other hedging transactions; and/or
    8. profit due to debt relief.

    So to answer your question, foreigners' income is certainly protected from double taxation as you mentioned because it is clearly regulated who is the tax subject and what is the tax object as well.

    PPh 26 for Foreign Citizens

    Basically, workers/laborers are entitled to a decent living for humanity, one of them is through wage policy, which includes wages as the basis for calculating or paying other rights and obligations.[9] It means, such wages are for severance pay or wages for income tax calculations.[10]

    For this reason, foreigners who work and earn income in Indonesia and are included as foreign taxpayers will be subject to Income Tax 26 at 20% of the gross amount by the party who is obliged to pay as stipulated in Article 111 number 2 Perppu Cipta Kerja which amends Article 26 section (1) Income Tax Law.

    For income received or obtained by foreign Taxpayers from Indonesia, this Law adopts two tax systems, namely:[11]

    1. the self-fulfillment of tax obligations for foreign Taxpayers who run a business or carry out activities through a permanent establishment in Indonesia; and
    2. withholding by the party that is obliged to pay for other foreign taxpayers.

    Answering your question, in the case of other income of foreigners obtained outside Indonesia, it is not the right to collect income tax because the income is clearly not originated or obtained in Indonesia.

    Example of Income Tax 26 Calculation

    To make it easier for you to understand the calculation of Income Tax 26, we will illustrate an example. For example, a domestic tax subject entity pays a royalty of IDR100,000,000.00 (one hundred million rupiahs) to a foreign Taxpayer, the domestic tax subject is obliged to withhold Income Tax amounting to 20% (twenty percent) of IDR 100,000,000.00 (one hundred million rupiahs).[12]

    As another example, an athlete from overseas who takes part in a marathon race in Indonesia then wins a prize in the form of money, the prize shall be subject to a 20% (twenty percent) Income Tax withholding.[13]

    Furthermore, regarding the withholding, remittance, and reporting of Income Tax 21 and Income Tax 26, you can refer to the Regulation of Director General of Taxes 16/2016.

    Enrich your legal research with the latest bilingual legal analysis, as well as the collection of regulatory translations integrated into Hukumonline Pro, click here to learn more.

    These are the answers we can provide, we hope you will find them useful.

    Legal Basis:

    1. Law Number 7 of 1983 on Income Tax as amended by Law Number 7 of 1991 on the Amendment to Law Number 7 of 1983 on Income Tax as secondly amended by Law Number 10 of 1994 on the Amendment to Law Number 7 of 1983 on Income Tax as amended by Law Number 7 of 1991 as thirdly amended by Law Number 17 of 2000 on the Third Amendment to Law Number 7 of 1983 on Income Tax as lastly amended by Law Number 36 of 2008 on the Fourth Amendment to Law Number 7 of 1983 on Income Tax;
    2. Law Number 13 of 2003 on Manpower;
    3. Regulation of the Government in Lieu of Law Number 2 of 2022 on Job Creation which has been passed into law under Law Number 6 of 2023;
    4. Regulation of Director General of Taxes Number PER-43/PJ/2011 of 2011 on Determination of Domestic Tax Subjects and Foreign Tax Subjects;
    5. Regulation of the Director-General of Tax Number Per-16/Pj/2016 on Technical Guidelines on Procedures for the Withholding, Deposit, and Reporting of Article-21 Income Tax and Article-26 Income Tax in Relation to Works, Services, and Activities of Individual Persons.

    Reference:

    A. Ahsin Thohari. Epistemologi Pajak, Perspektif Hukum Tata Negara. Jurnal Legislasi Indonesia, Vol. 8, No. 1, 2011.


    [1] A. Ahsin Thohari. Epistemologi Pajak, Perspektif Hukum Tata Negara. Jurnal Legislasi Indonesia, Vol. 8, No. 1, 2011, pp. 72-73.

    [2] Article 111 number 1 Regulation of the Government in Lieu of Law Number 2 of 2022 on Job Creation (“Perppu Cipta Kerja”) which amended Article 2 section (2) Law Number 7 of 1983 on Income Tax (“Income Tax Law”).

    [3] Article 111 number 1 Perppu Cipta Kerja which amended Article 2 section (3) letter a Income Tax Law.

    [4] Elucidation to Article 111 number 1 Perppu Cipta Kerja which amended the Elucidation to Article 2 section (3) letter a Income Tax Law.

    [5] Elucidation to Article 111 number 1 Perppu Cipta Kerja which amended the Elucidation to Article 2 section (2) Income Tax Law.

    [6] Elucidation to Article 111 number 1 Perppu Cipta Kerja which amended the Elucidation to Article 2 section (2) Income Tax Law.

    [7] Article 1 number 16 Law Number 36 of 2008 on the Fourth Amendment to Law Number 7 of 1983 on Income Tax (“Law 36/2008”) which amended Article 21 Income Tax Law.

    [8] Article 111 number 3 Perppu Cipta Kerja which amended Article 26 section (1) Income Tax Law.

    [9] Article 81 number 27 Perppu Cipta Kerja which amended Article 88 Law Number 13 of 2003 on Manpower (“Law 13/2003”).

    [10] Elucidation to Article 81 number 27 Perppu Cipta Kerja which amended the Elucidation to Article 88 section (3) letter g Law 13/2003.

    [11] Elucidation to Article 111 number 3 Perppu Cipta Kerja which amended the Elucidation to Article 26 Income Tax Law.

    [12] Elucidation to Article 111 number 3 Perppu Cipta Kerja which amended the Elucidation to Article 26 section (1) Income Tax Law.

    [13] Elucidation to Article 111 number 3 Perppu Cipta Kerja which amended the Elucidation to Article 26 section (1) Income Tax Law.

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