Indonesia and Regulations on Article 21 Withholding Tax
There have been some recent developments in Indonesia with regards to article 21 Withholding Tax on Individuals resulting from the new Tax Laws No. 28/2007 and No. 36/2008.
The Director General of Taxation has issued Regulation No. PER-31/PJ/20091
Article 21 Income Tax on Compensation Received by Specialists Who Perform Independent Services
and No. PER-32/PJ/2009, which cause some significant changes to article 21 Withholding Tax calculation and reporting.
Previously, tax withholders were required to withhold 7.5 percent on compensation paid to specialists who performed independent services, including attorneys, accountants, architects, doctors, consultants, notaries, appraisers, and actuaries.
See the table below that clarifies the rates and thresholds…
Companies and Keeping “Quasi” Payroll Records
Independent professionals other than those noted above, who provide their services to companies and receive regular compensation, are also subject to the article 17 calculation. Consequently, companies would need to maintain a “quasi” payroll record for payments to these professionals in order to establish withholding tax is performed properly.
The new calculation methods seem to suggest that the Indonesian government would like to “standardize” the income tax calculation for individual income recipients, regardless of their employment status. This approach also simplifies tax reporting for an individual specialist who receives remuneration from one employer only as his/her income tax would also be fully withheld every month. Consequently, the individual would also be free of the monthly administrative burden of paying and reporting article 25 Income Tax returns. Companies would now need to establish better controls in respect of their monthly withholding tax compliance, in anticipation of potentially more frequent monthly compliance audits by the Indonesian Tax Authority.
New Calculation Methods
New Form for Article 21 Income Tax Reporting
PER-32/PJ/2009 regulates the utilization of a new Form 1721 and its attachments to accommodate the changes in the method of calculation of article 21 Income Tax. The notable changes are:
• The new Form 1721 is utilized for monthly tax reporting. There is no article 21 Annual Income Tax Return. Hence, the final reconciliation shall be done for the December tax return, which is due for payment and reporting by the 10th and the 20th of January of the following year, respectively.
• Companies that have been submitting article 21 tax returns before this regulation is effective were required to submit Attachment 1721-T with the July 2009 tax returns. Attachment 1721-T lists out the names, Tax Identification Numbers (NPWP), and marital status of all employees. New companies that are submitting article 21 tax returns for the first time are also required to attach form 1721-T together with their first monthly tax returns.
• Going forward, an employer is required to report any movement in the workforce on a timely basis. If there is any employee joining or leaving the company, or if an employee has just obtained a NPWP (which will eliminate the 20-percent tax surcharge), the necessary details shall be reported in Attachment 1721-II.
• In the December article 21 tax return, each employee’s total compensation and the article 21 or article 26 Income Tax withheld for the whole year shall be listed out in Attachment 1721-I.
• At the end of the year, companies are not required to report the employees’ Forms 1721-A1 to the tax office. Nevertheless, they are still required to prepare this form, which shall be distributed to each employee to be used to prepare his/her individual income tax return.
It would appear that this new requirement is another effort to strengthen the tax administration relating to individual taxpayers following the government’s “Pintar” Program which is aimed at modernizing tax administration, reforming policies, and providing a better collection system.
Together with the effort in respect of recording a taxpayer’s profile, this move is perhaps an initial step to establish a nationwide taxpayers’ database. Individual taxpayers, especially Indonesian nationals, should be vigilant about their compliance.