Understanding Withholding Tax in Indonesia

Withholding tax, or retention tax, is an income tax deducted at the source of income rather than being paid directly by the income recipient. This tax is typically withheld by the payer and remitted to the government on behalf of the payee. The purpose of withholding tax is to ensure that the government receives its share of income tax on time.

 

Differences in Withholding Taxes

It’s important to note that withholding tax rates can vary based on the location of the taxpayer and the type of income involved. Residents and non-residents face distinct rates, and these variations apply to payments such as dividends, interests, and royalties.

Withholding Tax Rates

For Indonesia residents, the withholding tax rates are 15% for dividends, interests, and royalties. On the other hand, non-residents are subject to a slightly higher rate of 20% for the same types of income.

Withholding Tax on Salaries

Employers in Indonesia are responsible for withholding taxes from salaries and severance payments made to employees. They must then remit these taxes to the State Treasury on behalf of their employees. Resident taxpayers without a tax ID are subjected to a 20% withholding tax rate on their salaries.

Major Types of Payments

Apart from the conventional income sources, withholding tax extends to various payments related to imports, purchases, and more. These include import of certain consumer goods, fuel oil purchases, sale of gold bars, and even the purchase of luxurious items like private aircraft or yachts, each with its specific tax rate.

Specific Types of Incomes

In addition to the common income sources, withholding tax also applies to specific payments made to resident taxpayers. These include rental of land or buildings, construction work, construction consulting, income from lottery prizes, and proceeds from the sale of shares on the Indonesia Stock Exchange. The rates for these specific income types vary, depending on certification and business size.

Understanding Indonesia’s withholding tax system is essential for both residents and non-residents conducting business or receiving income within the country. Compliance with these regulations ensures smooth financial transactions and adherence to the nation’s tax laws.