At a glance – the Indonesia Tax Amnesty
The long-awaited Indonesia's tax amnesty bill was finally passed by the parliament on Tuesday, 28 June 2016. The new tax amnesty scheme will apply from July 2016 until the end of March 2017, with a recent government announcement clarifying that the Bill will only take effect after Hari Raya Puasa, which falls on 6 and 7 July.
The new tax amnesty provides a waiver of tax dues, administrative sanctions, and tax crime sanctions if the taxpayer makes redemption payment as stipulated by the legislation.
Redemption payment rates
The redemption payment rates for declared assets/funds repatriated back to Indonesia are: 2% for declaration done before end of September 2016, 3% before end of December 2016 and 5% before end of March 2017, and the redemption payment rates for declared assets which continue to be maintained overseas are 4%, 6% and 10%, for the same corresponding 3-monthly period.
The announced rates of 2% to 10% are higher than the proposed rates under an earlier bill where the proposed rates then were 2% to 6%.
The Bill passed also clarifies that the lower rates of 2% to 5% are applicable not only to foreign assets remitted back to Indonesia but also assets currently within Indonesia provided that the applicant commits to retaining such assets within Indonesia for at least the next 3 years.
There is also an expanded list of assets that the remitted funds must be invested in for at least 3 years after repatriation. Other than Government securities/State Owner Enterprise bonds, it also includes private company bonds the trading of which is supervised by the Financial Services Authority, certain infrastructure investments effected through government cooperation with business entities, and certain real estate investments based on priorities set by the government through a separate MoF Decree and other investment forms. Further announcements on the range of permitted investments will therefore have to be made to elaborate on this list and this will impact on the rate of repatriation of declared funds. Remittances have to be done by 31 Dec 2016 for taxpayers seeking the 2% and 3% rates and by 31 March 2017 for the 5% rate.
Tax Amnesty application & procedure
To apply for the tax amnesty, the applicant must submit a Declaration Letter disclosing the net value (assets minus liability) of the under-declared assets (ie assets not declared in their last income tax return for year 2015. The applicable redemption payments are computed by multiplying the relevant rate and the net value of the additional assets declared. Each applicant is allowed to submit not more than 3 separate Declaration Letters up to 31 March 2017.
There is however a limitation on deductible debt for the purpose of determining the net value. For an entity taxpayer the debt must be no greater than 75% of the value of the additional assets and for an individual the limit is 50%.
The amnesty terms also require the applicant to settle all assessed tax arrears, to withdraw requests relating to outstanding tax objections/appeals and to make full payment of the redemption payment. It also specifies that the taxpayer must submit the latest tax return and a detailed list of assets together with information on the ownership of the assets that are reported.
For taxpayers with foreign trusts, foundations or holding entity structures with professional nominees in place, it will be important to have more clarity and confirmation on what constitutes sufficient information on the ownership of the assets held through such foreign structures, in order to avoid future disputes on the completeness of their submitted declarations.
It is provided that the Minister or his appointed official shall issue a Tax Amnesty Certificate within 10 working days from the date of receipt of the completed application with attachments. If the applicant does not receive such a Certificate within the promised 10-day period, then the Declaration Letter itself shall be deemed to be received as a Certificate. With such Certificate, the applicant is then entitled to the indemnity against tax audits and investigations for tax offences under the terms of the amnesty. For taxpayers who have already been subject to on-going tax audits or investigations, such process must also cease upon receipt of the Certificate.
However if it should be discovered subsequently that data or information were not completely disclosed in the Declaration Letter then additional taxable income (with applicable penalty) could be deemed to have been received or earned by the taxpayer at the time of such discovery. Clarity on what constitutes complete disclosure for the amnesty application purposes is therefore important to avoid lingering negotiations and disputes.
The amnesty also requires taxpayers to transfer title in any declared land, building and/or stocks back to the name of the taxpayers. Such title transfer shall be exempt from Indonesia income tax if the application for transfer of rights/title is done by 31 December 2017 or in the case where the title cannot yet be transferred, then a notarial statement done before 31 December 2017 stating that the assets is truly owned by the taxpayer.
The taxpayer should therefore understand the full legal and tax implications not only in but also outside Indonesia in connection with the unwinding of any foreign holding (and also local nominee holding) structures.
If the assets are retained in foreign holding structures, the continuing Indonesia tax exposure on such assets may be higher than holding the assets directly through Indonesia holding company or in individual names. The applicability of the Indonesia's Controlled Foreign Corporation (CFC) laws and the deemed domiciled and permanent establishment rules will depend on the ownership and management of the assets and structures. If the foreign holding structures are only unwound beyond the above specified period, then the taxpayer will have to factor in the additional Indonesia tax costs for doing so.
The tax amnesty only includes obligations of income tax, value added tax and sales tax on luxury goods up to 31 December 2015. If any income or gains have accrued this year (whether due to current year restructuring, transfers or receipts not otherwise producing tax exempt income/gains) then such income and gains would not appear to fall within the scope of the amnesty.