Essential Tax Knowledge to Understand When Implementing an Accounting System in Indonesia

Recharging in Japan during the final week of Lebaran. Freed from the blaring loudspeaker sounds of the mosque, I’ve fully recovered both physically and mentally. Why is Japan so quiet?
In Japan, the consumption tax increase law has been passed by the Diet, preparing to raise the consumption tax from 5% to 8%. It seems that pre-tax-hike panic buying has led to condominiums selling like hotcakes.

Value-Added Tax PPN (Pajak Penambahan Nilai)

In Indonesia, the equivalent of Japan’s consumption tax is PPN (VAT = Value-Added Tax). However, unlike Japan’s ledger method (determining tax amounts based on accounting records, as with consumption tax), Indonesia uses the invoice method (determining tax amounts based on Tax Invoices). Thus, PPN payments or refund amounts are calculated based on Faktur Pajak (Tax Invoice).
The PPN imposed on sales (Output) is offset against the PPN imposed on purchases (Input). If the sales PPN exceeds the purchase PPN, tax is paid by the end of the following month. If the purchase PPN exceeds the sales PPN, a refund is claimed at year-end (refund = returning to the original owner) or carried over to the next fiscal year—a “give-and-take” tax.

Non-residents are exempt from paying above a certain amount. In Jakarta, about 20 souvenir shops in shopping malls are designated as PPN refundable stores (for purchases over Rp.500,000 at the same store).
However, this falls far short of countries like Singapore, where GST (Goods and Services Tax) refunds (for purchases over S$100 at the same store) are well-established. In Japan, consumption tax refunds at 8% are now possible not just at airports but even at drugstores.
During our annual temporary return to Japan, we go on a shopping spree at Bic Camera and Matsumoto Kiyoshi, and the refund amount alone adds up to quite a sum.

Income Tax PPh (Pajak Penghasilan)

While PPN corresponds to Japan’s consumption tax (though consumption tax applies only to consumer goods, whereas PPN, as a value-added tax, applies to services and production goods like land), what complicates Indonesian tax law is income tax (PPh).

Goods and services produced are broadly classified into consumer goods and production goods based on their economic use. Goods and services demanded by households (or consumers) for consumption are called consumer goods. In contrast, goods and services demanded by companies (or producers) for production are called production goods. The same good, like kerosene, is considered a consumer good when used for household heating but a production good when used commercially in factories or shops. (From “Kotobank”)

Personal income tax withheld from salaries is PPh21 (Article 21 = Pasal 21 of Tax Law No.10/1994). Corporate income tax includes PPh25 (Bulanan), a monthly estimated tax based on the previous year’s income, and PPh29 (Tahunan), paid annually after deducting withholdings to settle the difference.
These align with Japan’s tax system and are easy to remember. Beyond these, there’s PPh23, a withholding tax on service income earned by Indonesian residents; PPh4(2), applied to office rent and similar; and PPh26, a withholding tax on service income (e.g., dividends) earned by non-residents. For Japanese managers, knowing these is more than sufficient.

Transaction Examples (Sales and Purchases)

When a system company sells a PC for Rp.1,000,000 plus an installation fee of Rp.500,000, the total is Rp.1,500,000, but with 11% PPN included, the invoice amount becomes Rp.1,665,000.
However, the customer deducts Rp.10,000 (2% PPh23 on the Rp.500,000 installation fee) and pays Rp.1,655,000, incurring an obligation (Payable) to pay Rp.10,000 to the tax office (Kantor Pajak) by the 10th of the following month.
The seller effectively prepays income tax (Prepaid) through this withholding.
The customer issues a withholding certificate (Bukti potong PPh pasal 23) to the system company, which can deduct this amount at year-end—a “give-and-take” mechanism similar to PPN.
Taxation like PPh23, where income taxes are combined and offset, is called comprehensive taxation (PPh Non-Final Tax), representing a prepayment of undetermined income tax.
In contrast, taxation like PPh4(2), where the tax amount is finalized by withholding at payment, is called separate taxation (PPh Final Tax).

System Company’s Entries

Customer’s Entries

Other Income Taxes

Fiscal tax was referred to as “exit tax” or “income tax prepayment,” but it was also considered an outdated tax aimed at curbing residents’ overseas travel to reduce foreign currency outflows.
Initially, it was “1 million rupiah for all residents exiting abroad, no exceptions,” but it changed to “no fee for NPWP holders, 2.5 million rupiah for non-holders.” This was nominally to encourage tax awareness and unearth non-NPWP holders, positioned as a “provisional income tax payment,” but it has since been abolished.
The foreigner tax involves paying US$1,200 to the Skills Development Fund (DPKK = Dana Pengembangan Keahilan Keterampilan) at a designated state bank to obtain an IKTA (Ijin Kerja Tenaga Asing), followed by processing a work permit with the payment certificate.
(IKTA is the predecessor of the current IMTA (Izin Mempekerjakan Tenaga Asing).)
A side note on IKTA:
To obtain an IKTA, you first need a KITAS (Kartu Ijin Tinggal Terbatas) temporary residence permit. With this, you become an Indonesian resident, requiring an Immigration Card (Kartu Imigrasi) obtained at the airline check-in counter during departure, submitted to Immigration upon exit.
The exit card is collected at departure, but you must retain the entry card stub and present it upon re-entry, ensuring it isn’t lost.
(The Immigration Card was discontinued in March 2015.)
In the past, extending a KITAS with the same company five times upgraded it to a KITAP (Kartu Ijin Tinggal Tetap = permanent residence permit). I wonder what the rule is now?
Residents have three exit options from Indonesia. KITAS holders exiting with intent to re-enter as KITAS holders must obtain a MERP (Multiple Exit/Re-entry Permit) or Single Re-entry Permit in advance. To abandon a KITAS, an EPO (Exit Permit Only) is required beforehand.
(As of September 2015, only Multiple permits are available.)
After an EPO is issued, you must leave Indonesia within two weeks. Both entry and exit cards are taken, so don’t panic in Singapore thinking, “I lost my card stub!”
Re-entry occurs via VOA (Visa On Arrival), requiring completion of the entry/exit card and preparation of an onward ticket (for exiting after obtaining a Telex Visa for a new KITAS). Otherwise, you’d need to buy and discard a ticket to Singapore just for immigration.
While awaiting Telex Visa approval from Immigration until the next departure, losing the exit card stub complicates departure. During this period, remember you’re still a tourist.
(Again, Immigration Cards were discontinued in March 2015, so they’re no longer needed. Left as a “memory heritage lol” of past systems.)

Foreign Currency Transactions and Tax Entries

The Tax Rate is officially set by the tax office to prevent companies from arbitrarily lowering taxable amounts in foreign currency transactions, so it doesn’t apply to rupiah-based transactions.
Transaction entries are, in principle, recorded in the transaction currency (Original Currency).
For example, if the functional currency (Base Currency) is US$, and an A/P invoice for repair fees is Rp.900,000, with a transaction rate of Rp.9,500/$ and a Tax Rate of Rp.10,000/$:

Since it’s a rupiah-based transaction, the amount payable to the tax office is fixed in rupiah, and the Tax Rate doesn’t appear.
For accounting, the BI (Bank Indonesia) Rate is used to convert to the functional currency.
Now, if the A/P invoice for repair fees is $90, the PPN entry is in IDR. Although the transaction currency is dollars, the tax calculation records A/P in rupiah, which is apparently unavoidable.

However, if the accounting system cannot reference multiple rates (BI Rate and Tax Rate) from the exchange rate master on the transaction screen, functional currency conversion options are:

Both impose high operational burdens. Alternatively, during mid-month foreign currency transactions, both transaction and tax portions can be auto-calculated using the BI Rate from the exchange rate master, with the 11% PPN aggregated in a Temporary account, offset (Re-class) at month-end with a rupiah-based PPN Payable calculated using the Tax Rate.

Aggregate Faktur Pajak amounts monthly and offset in bulk: