When starting or running a business in Indonesia, understanding the tax landscape is crucial. Businesses and corporations must comply with a range of tax obligations in Indonesia, and these vary depending on whether the business is classified as a PKP (Pengusaha Kena Pajak or Taxable Entrepreneur) or a non-PKP (Non-Taxable Entrepreneur).
PKP (Pengusaha Kena Pajak) vs. Non-PKP: What’s the Difference?
PKP (Taxable Entrepreneur)
A PKP is a business that has registered as a taxable entity with the Directorate General of Taxes (DGT) after meeting the required revenue criteria, which is at the moment IDR 4.8 billion per year. A PKP must charge VAT (Value Added Tax) on its products or services and provide tax invoices (Faktur Pajak) to its clients. They are also accountable for reporting and paying VAT to the government.
Non-PKP (Non-Taxable Entrepreneur)
A non-PKP is a company that has not registered as a PKP, typically because its annual revenue falls below the IDR 4.8 billion barrier. Non-PKP businesses do not have to charge VAT or issue tax bills. They are nevertheless subject to different types of taxation, depending on their commercial activity.
Taxes to Report and Pay: PKP vs. Non-PKP
For PKP (Taxable Entrepreneurs)
- Value Added Tax (VAT)
VAT is charged on the sale of goods and services. The standard VAT rate is 11%, but certain goods and services may have different rates. - Corporate Income Tax (PPh Badan)
This is a tax placed on a company’s profits. The standard rate is 22%. SMEs (Small and Medium Enterprises) with annual gross revenue under IDR 50 billion may benefit from a reduced rate of 50% on the first IDR 4.8 billion of taxable income. - Withholding Tax on Salaries (PPh 21)
Employees’ income is subject to taxation, including salaries, wages, benefits, and other types of compensation. As an employer, PKPs are responsible for calculating, withholding, and remitting this tax on behalf of their employees. - Withholding Tax on Payments to Vendors (PPh 23)
Tax is charged on payments for certain services, rent, royalties, interest, and dividends made to Indonesian residents (other than employees). This tax is deducted by the PKP business making the payment. The rates of Article 23 withholding tax vary according to the nature of payment:
2% of gross payments for services, consulting, management, and technical services, 15% on royalties, and 15% on dividends, interest, and other comparable income. - Withholding Tax on Dividends, Interest, and Royalties Paid to Non-Residents (PPh 26)
Non-residents are taxed on income received from Indonesia, including dividends, interest, royalties, and other forms of income. The PKP company must deduct tax from these payments before remitting the net amount to the non-resident. The standard withholding tax rate for payments to non-residents is 20% of the gross amount.
For Non-PKP (Non-Taxable Entrepreneurs)
- Final Income Tax (PPH Final)
Businesses with revenues of less than IDR 4.8 billion face a final income tax on gross revenue. Micro and small businesses should set aside 0.5% of their gross sales. However, there is a time-limit for this particular tax. The PPH Final regulation applies for up to 3 (three) tax years. After 3 (three) years, the company must switch to the PPH 25 regulation. - Corporate Income Tax (PPh 25)
The time limit for PPH Final has been exceeded. The business will then be taxed under the regular Corporate Income Tax regime (PPH 25), which charges a 22% rate on net income. - Employee Witholding Tax (PPh 21)
Similar to PKP, if you have employees, you must declare tax on employee salaries.
