FOREWORD

This booklet provides brief information on income tax rules and laws in Indonesia. It is presented in a systematic way in order to guide the investor through the various requirements. It is meant to be a general, though not necessarily comprehensive, overview of the major Indonesian tax implications, which Canadian investors need to be aware of when making investments and conducting business in Indonesia.

The Canada Indonesia Business Development Office (CIBDO) is project of the Alliance of Manufacturers and Exporters Canada and is funded by the Canadian International Agency, Industrial Cooperation Program. CIBDO is ready to assist prospective Canadian investors by providing them with specific information and assistance to help them develop their business ventures in Indonesia. Please see the contact information at the end of the booklet.

Executive Director

Canada Indonesia Business Development Office

Deborah Tumbull

I. General

There are 3 basic categories of taxes in Indonesia' taxes, regional taxes and customs and excise taxes.

national

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National Taxes include income tax, value added tax, sales tax on luxury goods, land and building tax and fiscal exit tax.

Regional Taxes include development tax, motor vehicle tax and other relatively minor taxes.

Customs and Excise Taxes include import duty, export tax and taxes on certain commodities such as tobacco, alcohol, sugar and gasoline.

B. Income Tax Rates and Collection

The basic principles of Indonesia's Income Tax Law (Law No. 10 of 1994) apply to businesses and individuals alike. There is a three-tier rate structure for all taxpayers with a maximum rate of 30% on taxable income over Rp. 50 million. Tax is generally based on self-assessment, but there is an extensive system of domestic withholding taxes to ensure regular and early collection of income tax. There are significant penalties for non- compliance.

Special tax rates apply to certain specific types of companies including petroleum companies, mining companies, geothermal companies, foreign drilling companies and non-resident international shipping and airline companies.

C. Tax Residents and Non-Residents

Resident tax subjects include corporations and other legal entities formed under Indonesian law and individuals resident in

Indonesia for 183 or more days in any twelve-month period or present in any tax year with the intention to reside in Indonesia.

Non-resident tax subjects are entities or individuals not recoqnized as a resident tax subject but generating income from Indonesia, including those conducting business in Indonesia through a permanent establishment.

A permanent establishment is not necessarily "permanent" nor an "establishment'. Examples of permanent establishments mentioned in the Income Tax Law include a branch office, a representative office, a dependent agent, a construction project, a consulting team, and a dependent person or oragnization acting in the name of a foreign enterprise. (Note that the holding of shares in an Indonesian company, e.g., in a foreign capital investment ('PMA') comapny or through the capital market, does not constitute a permanent establishment.)

Consolidated tax returns are not permitted, although inter- company dividends within Indonesia are exempt from income tax. A June 1999 Decree of the Capital Investment Coordinating Board, now reconstituted as the Board of Investment and State-Owned Enterprises ("BPM-PBUMN") permits the establishment of PMA holding companies, thereby opening up some new tax structuring possibilities even if consolidation is not allowed.

As of August 1999, Indonesia has entered into tax treaties with 47 countries, including Canada, thereby opening up various tax planning opportunities.

II. Income Tax

A. Taxable Income

Taxable Income includes virtually any "increase in economic benefit" received by a taxpayer, including wages, profits, prizes, gifts and capital gains.

Tax residents are taxed on world-wide income (whether or not remitted to Indonesia), although the tax authorities still lack the resources to effectively monitor and enforce full compliance where offshore income is involved.

Non-residents are taxed only on Indonesian-source income, including income attributable to "permanent establishments" in Indonesia.

Most normal types of business deductions are permitted, except charitable contributions. Standard deductions apply for individuals.

In-kind benefits are not treated as taxable income to the employee, but are not deductible by the company. Generally, losses may be carried forward for up to five years, but may not be carried back.

B. Depreciation

Fixed assets, other than buildings, may be depreciated using either the straight-Iine method or declining-balance method. Buildings must be depreciated on a straight-Iine basis. The depreciation method adopted must be consistently applied. Depreciation rates are set according to the category of depreciable asset. Set out in the inset box is a summary of the asset categories and depreciation rates of general application.

There are separate lists of assets and depreciation rates for the oil and gas industry, and special depreciation options apply for investors in remote areas.

                  Asset Categories and Depreciation Rates

• Category 1: Assets with a beneficial life of up to four years, e.g., wooden furniture, office equipment, certain transport vehicles and special tools, 50% (declining-balance) or 25% (straight-Iine).

• Category 2: Assets with a beneficial life of up to eight years, e.g., metal furniture and equipment, air conditioners, cars, buses, containers, light industrial machinery , computers. printers, scanners, certain heavy vehicles, 25% (declining-balance) or 12.5% (straight-Iine).

• Category 3: Assets with a beneficial life of up to 16 years, e.g., hard mineral mining machinery, textile and chemical industry machinery, heavy equipmen~ piers and vessels for transportation and communication, and other assets not included in other categories, 12.5% (declining-balance) or 6.25% (straight-Iine).

• Category 4: Assets with a beneficial life of up to 20 years, e.g., heavy machinery for construction. heavy vessels and piers, locomotives, railway coaches, 10% (declining-balance) or 5% (straight-Iine).

• Pennanent Buildings: Buildings with a useful life of up to 20 years as determined by the Minister of Finance, 5% (straight-Iine).

• Non-perrnanent Buildings: Buildings with a useful life of up to 10 years as determined by the Minister of Finance, 10% (straight-Iine).

Taxpayers must prepare both monthly and annual returns. Monthly returns must be filed by the 20th day of each month for corporate tax, employee income tax, VAT and withholding taxes. Annual returns must be submitted within three months after the end of the financial year

D. Taxation of Particular Forms of Income

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Dividends: Withholding tax applies to dividends paid by Indonesian corporations. An important exception is domestic inter-corporate dividends, on which no withholding tax is imposed. If the recipient is a resident individual or non-corporate entity, the rate is 15% and represents an advance against the taxpayer's annual income tax. If the recipient is a non-resident from Canada, the rate is 15% (in accordance with the tax treaty between Canada and Indonesia) and the tax is considered final.

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Interest: Interest paid by resident borrowers to resident banks or financial institutions is exempt from tax. Interest paid to offshore lenders is subject to 20% withholding tax (subject to applicable tax treaty). Under the treaty between Canada and Indonesia, this rate is reduced to 10%.

Royalties: If the royalty recipient is a resident taxpayer, tax is withheld at the rate of 15%. If the recipient is a non- resident, tax is withheld at the rate of 20% ( subject to applicable tax treaty}. Under the treaty between Canada and Indonesia, the rate is reduced to 10%.

Capital Gains: Capital gains are generally taxable as ordinary income and capital losses are tax deductible. Special rules apply for publicly traded shares.

Capital Taxes: Other than land and building tax, Indonesia imposes no tax on the capital or assets of companies or individuals, although annual tax returns require disclosure of assets.

III. Other Taxes

Scope of Application and Rates: VAT is imposed upc the delivery of most categories of goods and service within Indonesia. The basic VAT rate is 10%. Imports al generally subject to VAT at a rate of 10%, but exports al effectively exempted from VAT by application of a 0% rate

Raw land transfers do not attract VAT I but land prepared for residential or industrial estate development is subject VAT at 8%.

Payment and Reporting: VAT liability arises at the time delivery of the goods or services, or upon receipt payment, whichever is earlier. As a practical matter, tt date of the tax invoice (faktur pajak) is used to determir when tax liability arises. The taxable individual corporation must issue the tax invoice no later than the er of the month following the month of delivery or payment. monthly return of all taxable purchases and sales must t filed by the 20th of each month.

If output VAT is greater than input VAT, the net differenc is payable to the tax office. In practice, payment of tax mc be delayed up to a maximum of 75 days following the da of delivery. If input VAT is greater than output VAT, tt excess may be carried over to the following month to offs against that next month's output VAT. In principle, tt excess of input VAT over output VAT may be refundE once a year, although actual collection may by difficl and/or time-consuming.

VAT Relief: Various means of reducing the burden of VI have been introduced. Deliveries of goods into bondE zones are VAT -exempt, as are goods and services foreign aid projects, sales of cattle and poultry feed, and the import of certain specified goods and services.

Services in certain sectors have been specifically exempted from VAT, e.g., services related to medical and health care, social welfare activities, banking and insurance, radio and television broadcasting, telephone and telegram services, educational and religious activities, public transpor1ation, postage, manpower supply, and hotel accommodations.

Additionally, deferrals of VAT are available to PMA and domestic capital investment (PMDN) companies on the import of Masterlist equipment, machinery and raw materials used in the production process.

Presidential Decree No.37 of 1998 provides for a VAT exemption on the transfer of capital goods in the form of machinery and factory equipment.

Under the Bapeksta facility created by Minister of Finance Decree No. 615/KMK.O1/1997, production companies may import raw materials free of VAT, Sales Tax on Luxury Goods and import duties, provided that such raw materials are processed and re-exported.

Additionally, under the so-called PET facility (Perusahaan Eksportir Tertentu) established by the Minister of Industry and Trade and the Minister of Finance, specially designated exporting companies are granted a facility to purchase certain types of locally sourced basic and auxiliary materials on a VAT -free basis. .

B. Sales Tax on Luxury Goods

Luxury houses, apartments, condominiums and townhouses are subject to 10% Sales Tax on Luxury Goods.

Every Indonesian resident departing Indonesia by air is required to pay a Rp. 1 million "Fiscal Exit Tax", with limited exceptions.

Development Tax is a municipal tax intended to aid the development of cities. Where applicable, it is levied at the rate of 10% on restaurant bills. There is also a tourism development tax of an extra 2% on the service charge imposed by some hotels and restaurants.

IV. Tax Treaties

Indonesia has ratified tax treaties with 47 countries, including Canada, and others are under negotiation. Several older treaties are being renegotiated. In general, the modern tax treaties of Indonesia borrow freely from the OECD and UN model tax treaties. Tax treaties normally contain the following types of provisions:

A. Reduced Withholding Tax: The normal withholding tax rate of 20% on dividends, interests, royalties and certain types of fees is generally reduced to 10% or 15%. The treaty between Canada and Indonesia reduces the rate to 10% of the gross amount of dividends if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividends. It is 15% in all other cases.

B. Permanent Establishment: The typical treaty definition of a permanent establishment is more narrow than that contained in the Indonesian Income Tax Law. The definition of a Permanent Establishment in the Canada Indonesia tax treaty is "a building site, a construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 120 days; or the furnishing of services, including consultancy services, by an enterprise through an employee or other person where the activities continue within a Contracting State for more than 120 days within any twelve month period".