Indonesia Withholding Tax: How the System Works

Indonesia’s tax system uses a withholding mechanism for the timely collection of revenue on specific income types. This approach places the responsibility of deducting, remitting, and reporting the tax on the entity making the payment, not the one receiving it. The system functions as a prepayment of tax liabilities, streamlining collection for the government. It affects a wide range of transactions, particularly on income generated by foreign entities within Indonesia.

Scope of Indonesian Withholding Tax

Withholding tax in Indonesia covers various payments made by resident taxpayers across several income categories. Understanding which transactions are subject to this tax is a necessary step for any entity making payments in the country.

Dividends

When an Indonesian limited liability company distributes profits to its shareholders, it is required to withhold tax from the payment. This applies to distributions made to both individual and corporate shareholders.

Interest

Interest income is also subject to withholding tax. This includes interest on loans between companies and on deposits with financial institutions. The regulation covers a wide array of lending and deposit scenarios, making it a common consideration in corporate financing and cash management.

Royalties

Royalties paid for the use of intangible assets fall within the scope of withholding tax. This includes payments for the rights to use patents, copyrights, trademarks, and other intellectual property. It also extends to payments for know-how or the transfer of such rights.

Rent and Property Income

Income from the rental of land and buildings is subject to a 10% final withholding tax on the gross rental amount. This rule ensures tax is collected on income from real estate assets within the country.

Service Fees

Fees for a broad range of services performed in Indonesia trigger withholding tax obligations, including for technical, management, and consulting services. If the service is performed within Indonesian territory, the payer must withhold tax from the fee. This applies regardless of where the paying entity or service provider is domiciled.

Withholding Tax Rates and Payer Categories

The withholding tax rate in Indonesia depends on the recipient’s tax residency status. The system differentiates between payments to domestic residents and non-residents, with international tax agreements adding another layer. The payer must identify the recipient’s status to determine the correct tax amount to withhold.

Domestic Withholding Tax

For payments to Indonesian tax residents, rates vary by income type. Dividends paid to resident individuals are subject to a 10% final income tax, though this is exempted if the dividends are reinvested in Indonesia within a specified period. Fees for most services rendered by a domestic taxpayer are subject to a 2% withholding tax.

Interest from non-bank entities and royalties paid to residents face a 15% withholding tax. This amount serves as a creditable prepayment, meaning the recipient can offset it against their total income tax due at the end of the year.

Cross-Border Withholding Tax

When an Indonesian entity pays a non-resident, a different set of rules applies. The standard rate for most payments to non-residents, including dividends, interest, and royalties, is a 20% final tax. This flat rate applies to the gross amount of the payment and is considered a final settlement of the Indonesian tax liability for that income.

The Role of Double Taxation Agreements

The 20% withholding tax rate for non-residents can be reduced through a Double Taxation Agreement (DTA). Indonesia has a network of DTAs with other countries to prevent double taxation, and these treaties may set a lower rate for income like dividends, interest, or royalties. For example, a DTA might reduce the rate on dividends to 15% or on interest to 10%.

To access these preferential rates, the foreign income recipient must provide valid documentation to the Indonesian payer proving their tax residency in a treaty partner country. Without this proof, the payer must apply the standard 20% rate.

Key Documentation for Tax Compliance

Proper documentation is necessary for navigating Indonesia’s withholding tax system, especially for cross-border payments. The taxpayer has the burden of proof to justify applying a specific tax rate, so gathering correct information before a transaction is a required step.

Certificate of Domicile

To claim DTA benefits, a non-resident must provide a Certificate of Domicile (COD) to the Indonesian payer as proof of tax residency. Indonesian tax regulations mandate the use of Form DGT for this purpose. The form must contain the recipient’s name, address, and Taxpayer Identification Number (TIN) from their home country.

It also requires a statement of its validity period and must be certified by the tax authority of the recipient’s country. The foreign entity is responsible for obtaining this certified form from its tax administration before payment.

Information for the Withholding Tax Slip

The Indonesian payer issues an official withholding tax slip, known as a Bukti Potong, to the income recipient. To generate this document, the payer must collect the recipient’s full legal name, official address, and Taxpayer Identification Number (TIN). For non-resident recipients, their foreign TIN is required. Accurate recipient information is necessary for the payer to fulfill their electronic reporting obligations.

The Withholding Tax Reporting and Payment Process

After determining the tax rate and securing documentation, the Indonesian payer must follow a time-sensitive, electronic process for remitting and reporting the funds. This procedure involves distinct steps for payment and filing. Failure to adhere to these steps can result in penalties.

Tax Payment

The payer must remit the withheld tax to the Indonesian State Treasury. This is done by generating a unique tax payment ID, or e-Billing code, through the tax authority’s online portal. The payment must be made by the 10th day of the month following the month the income was paid or became due.

Tax Reporting

After payment, the payer must file a monthly withholding tax return electronically using the government’s e-Bupot Unifikasi system. This platform is used to report details of all income payments and generate the official Bukti Potong tax slips. The deadline for filing this mandatory monthly return is the 20th day of the following month. Payers use the system to consolidate reporting for various withholding taxes into a single return.

Issuing the Bukti Potong

After filing the monthly return, the payer must provide the official Bukti Potong to the income recipient. This document is generated by the e-Bupot Unifikasi system. It serves as proof that Indonesian tax has been withheld and remitted on the recipient’s behalf.

Utilizing Withholding Tax for Foreign Tax Credits

For the non-resident recipient, the process concludes in their home country where they can mitigate double taxation. The Bukti Potong serves as the official evidence that they have paid Indonesian income tax. This proof of payment enables the foreign recipient to claim a Foreign Tax Credit (FTC) against their domestic income tax liability.

An FTC is a common feature in many tax systems designed to prevent income from being taxed by two different countries. The recipient includes the Indonesian-sourced income in their home country tax return and uses the Bukti Potong to claim a credit for the tax paid to Indonesia. The availability and calculation of this credit are subject to the tax laws of the recipient’s home country.