Principles of Tax Imposition and Practice in Indonesia : Tax is the main source of state revenue, People who qualify as a Taxpayers suppose to pay tax. Indonesia is no exception.
Currently there are four types of taxes that apply in Indonesia, namely income tax (PPh), value added tax and sales tax on luxury goods (PPN and PPnBM), land and building tax (PBB), and other taxes set by the government.
There are a number of considerations for every government to collect taxes from its citizens. The imposition of taxes carried out at random can be a problem, not a fiscal instrument that encourages economic growth.
Among the considerations in the practice of taxation is the suitability of the principle of taxation and the principle of tax collection. Various principles of tax imposition The imposition of taxes must pay attention to objects in the form of income or additional economic capacity, as well as tax subjects who are individuals or entities that are design as taxpayers.
The determination of tax subjects and objects must be based on the principle of taxation. In the international realm, there are three principles of taxation, namely the principle of the world wide income tax, the principle of the territorial tax, and the principle of the national tax.
1. The principle of world wide income
The world wide income system is also know as the domicile tax principle or the residence principle. In this system, the imposition of taxes will only pay attention to the location or place of the taxpayer and exclude the origin of income.
As long as it is receive by an individual who is domicile in that country or an entity which is domicile in that country, income will pay Tax. However, countries that apply the principle of domicile or world wide income are actually at the same time applying the territorial principle, especially for the income of foreign taxpayers originating from that country.
2. Territorial principle
Countries that use the territorial principle for their taxation will impose taxes on income received from that country, regardless of the taxpayer. This principle is often refer to as the source principle.
Using the territorial principle, the state does not question who is the recipient of income, domestic taxpayers or foreign taxpayers. As long as it originates from that country, the income will be tax in that country.
The application of this principle risks encouraging investors to prefer to invest abroad. Also read: Legal and Tax Aspects in Company Liquidation
3. Nationality principle
The principle of imposition of a national tax is also know as the principle of nationality or citizenship tax. In this principle, taxation is only carry out base on citizenship status. The state will not question the origin of the income received by the taxpayer.
As long as the individual or entity has the status or domicile in that country, the income is subject to tax. The principle of hybrid taxation The existence of the world wide income tax principle and the territorial principle are at first glance like two opposite poles.
However, in fact there is not a single country in this world that adopts it absolutely. Experts such as J Clifton Fleming, Robert J Peroni, and Stephen E Shay also stated that a country that claims to implement a territorial tax system or a world wide income tax does not necessarily mean that the country fully adopts the principle.
Generally, countries in the world combine these two principles. The term that is then apply is the hybrid world wide income tax or the principle of the territorial hybrid tax.
Income Tax: Classification, Tariffs, and Deadlines Principles of imposing Indonesian taxes As quoted from the pajak.go.id page, the Indonesian government basically adheres to the principle of imposing taxes on all income, including income from abroad.
For domestic taxpayers
The imposition of taxes is based on the principle of domicile. Wherever the source of income comes from, including from abroad, Indonesian taxpayers will be subject to tax. As for foreign nationals who live and earn income in Indonesia, the tax is impose by checking the time limit for their existence in Indonesia.
Principles of imposition of Indonesian taxes As quoted from the tax.go.id page, the Indonesian government basically adheres to the principle of imposing taxes on all income, including income from abroad. For domestic taxpayers, the imposition of taxes is based on the principle of domicile.
Wherever the source of income comes from, including from abroad, Indonesian taxpayers will be subject to tax. As for foreign nationals who live and earn income in Indonesia, the tax is impose by checking the time limit for their existence in Indonesia.
Expanded Tax Subjects, Unchanged Calculation Method Foreign citizens will be categorized as domestic taxpayers if they stay in Indonesia for more than 183 days in 12 months.
On the other hand, they will become foreign taxpayers if they stay in Indonesia for a maximum of 183 days in 12 months. For foreign nationals who are categorize as foreign taxpayers, the tax is impose on income earn in Indonesia only.
Practice of taxation
Then, as is the usual practice of taxation in various countries, tax treaties are regulated between countries to avoid double taxation. However, in accordance with the enactment of Law Number 11 of 2020 concerning Job Creation (UU Cipta Kerja), which among other things revises the provisions of the Law on Income Tax (UU PPh), Indonesia has arguably changed the taxation system from a world wide income system to a tax system.
territorial tax, especially for Indonesian taxpayers who have income from abroad. Read also: Tracking the Trace of the Draft Bill on Job Creation Prior to the issuance of the omnibus law, the Income Tax Law stipulates that all income of Indonesian taxpayers from abroad is a tax object.
Since the enactment of the Job Creation Law, dividends originating from abroad and after-tax income from a permanent establishment (BUT) abroad are excluded from income tax objects or are not taxed in Indonesia. Although, there are conditions too.
The condition is that the profit after tax from the income dividend is invested in Indonesia at least 30 percent. The hope is that there will be more capital inflows into the country from dividends earned by Indonesian taxpayers from abroad.