Indonesian Tax Treatment For Foreign Drilling Companies (FDC) : A Brief Guidance For Tax Compliance

Background

Due to the high capital costs and technical expertise required, most drilling rigs, particularly offshore rigs, are owned by foreign entities. Up to 1985 these rigs were contracted directly with production sharing contractors to provide drilling services. However, following an amendment to Indonesian foreign investment regulations, production-sharing contractors were required to enter contracts with companies established in Indonesia – either wholly Indonesian owned or those with an approved foreign shareholding (PMA companies). In turn those companies holding the contracts would enter into rig charter, technical assistance and other agreements with the foreign companies to provide the necessary facilities and expertise.

Taxation regime for drilling industries

Indonesian tax regime distinguishes the drilling companies into: (i) National drilling companies (NDC), with local investment (PMDN) legal status or foreign investment (PMA) companies; and (ii) Foreign drilling companies (FDC). NDCs are considered as Indonesian tax resident, whilst FDCs are treated as permanent establishment thus non-resident taxpayer.

Special taxation considerations, which apply to FDC, include among others:

1. Corporate income tax and branch profit tax

According to the prevailing Income Tax Law, FDC are taxed based on a special calculation norm (so called “deemed profit”). The current percentage of deemed profit is 15% of gross income derived from drilling contracts of the FDC. Exception should be given to reimbursable costs and handling charges if they are not exceeding 10% of the drilling fees.

Tax rates
A progressive tax rate of the following schedule will be applied to such deemed taxable profit:

Taxable income bracket (Rp) Rate
On the first 50,000,000 10%
On the next 50,000,000 15%
Over 100,000,000 30%

Other income, if any, is subject to progressive tax rate.

Example calculation of the corporate and branch profit taxes are as follows:

Corporate Income Tax Amount Notation
Revenue from drilling services 100 A
Deemed taxable profit (15%) 15 B=15%*A
Other income 10 C
Taxable income 25 D=B+C
Corporate Income Tax
(progressive rate of 10%, 15%, and 30%)
Effective Corporate Income Tax
(Using the highest rate = 30%) 7.5 E=30%*D

Branch Profit Tax
Branch Profit Tax Base 17.5 F=D-E
Branch Profit Tax
(in general 20%) 1.575 G=20%*F
(Could be reduced pursuant to the tax treaty provision)


Monthly Installment Art. 25
Monthly installment Article 25 for FDC is one-twelfth of the income tax computed on the annualized monthly deemed profit.


The following are other Indonesian tax issues that we consider applicable to the FDC:

2. Employee Income Tax

The FDC is responsible to withhold Article 21/26 income tax on the monthly salary/ remuneration payable/paid to the employees. Objects of the withholding tax are basically all payment of cash remuneration in whatever forms to individuals, including payments of insurance premium by the employer. Starting from year 2001, any benefits in kind provided to the employees are also subject to employee income tax withholding.

Whilst for local employees basis of the withholding tax is the gross amount of remuneration paid to the employees, for expatriates there was a decree issued by the Minister of Finance (MoF) in 1994 (Decree of MoF ref. No. 433/KMK.04/1994 dated August 26, 1994) which stipulated the deem salaries as basis for calculating Article 21 income tax of the expatriates working in the oil and gas drilling business in Indonesia.

The deemed salaries are categorized in accordance to the position of the employees and have covered all of the income components, including benefits in kind accounts. Further there is no deductions allowed to offset the deem income in calculating the income tax.

The deemed salaries are as follows (on monthly basis):

General Managers US$ 11,275
Managers US$ 9,350
Rig Supervisors/Rig Superintendent/Tool Pushers US$ 5,830
Assistant Rig Supervisors/Assistant Rig Superintendents/
Assistant Tool Pushers US$ 4,510
Other crews US$ 3,245

There is no further explanation of what the categories are, however in practice, the business practice or industry understanding is applied.

The deemed salary rates will apply irrespective of the tax status of the individual (i.e. a resident or non resident).

Tax Rates
Tax rates applicable depend on tax residency status of the employees. The Indonesian tax laws define an Indonesian tax resident as:

an individual residing in Indonesia or present in Indonesia for more than 183 days within any 12 months period, or
an individual present in Indonesia in a tax year and intending to reside in Indonesia
As such, an expatriate may be considered as an Indonesian tax resident, provided the above conditions are met.

The income tax rates for Indonesian-residents are as follows:

Taxable income Tax Rates
Up to Rp 25,000,000 5%
Rp 25,000,001 up to Rp.50,000,000 10%
Rp 50,000,001 up to Rp 100,000,000 15%
Rp 100,000,001 up to Rp 200,000,000 25%
above Rp. 200,000,000 35%

The rate for non-resident individuals is a flat rate of 20%, subject to tax treaty relief.

Further, provided the expatriate is qualified as an Indonesian tax resident, he/she will be required to register for tax with the Indonesian tax authorities and comply with all Indonesian tax regulations, including reporting of his/her own individual tax returns in Indonesia on his/her worldwide income.

Period of withholding tax
The FDC is required to calculate and withhold the Article 21/26 income tax on a monthly and annual basis. It is likely starting from year 2008, no longer annual employee income tax return required to be submitted. Withholding tax should be made and reported on the month the salaries/remuneration are paid or accrued. These constitute tax prepayments, which will deduct the final Article 21/26 withholding tax dues, which will be computed at the end of the fiscal year.


3. Withholding income taxes

Payment/accruals of dividends, interests, royalties, technical & management fees for services performed in Indonesia to Indonesian and non-Indonesian residents are subject to withholding tax.

Tax Rates/Effective Tax Rates
The withholding tax [Article 4(2)/15/22/23/26] rates may vary, depending on whether it is paid to a resident or non-resident as follows:

Rates applied on payments to Indonesian residents or permanent establishment vary from 1.5% to 15% depending on the nature of the payment or service rendered. The withholding tax may be final in nature (e.g. in the case of rental payment for the lease of real property) or non-final (e.g. payment for management, administration or technical services).
Rate applied on payment to non-Indonesian residents is 20 %, subject to tax treaty relief.


Period of withholding tax
The taxes should be withheld at the payment date of the fees or at the date the fee become payable, whichever comes first.

Due dates of Payment & filling the Tax Return
The FDC must remit the withholding income tax to the Kas Negara (State Treasury) by the 10th of the month following the tax withholding and submit the tax return to the tax office by 20th of the following month. Interest penalty for late payment is 2% per month for a maximum 24 months of tax due whilst penalty for late reporting is Rp 50,000 per return (become Rp 100,000 starting from year 2008).


4. Value Added Tax and Sales Tax on Luxury Goods

Basically, Value Added Tax (VAT) is applied to:

Delivery of taxable goods and services inside the Indonesian customs area
Import of taxable goods into the Indonesian customs area.
Services performed by a non-resident for an Indonesian resident (self-payment basis by the service recipient)
VAT and sales tax on luxury goods becomes payable at the time of the delivery of the goods/services, or at the receipt of payment if the payment is made in advance. The seller must issue tax invoice at the end of the month following deliveries, at the latest, or at the receipt of payment if the payment is made in advance.

Output VAT

As the drilling fee provided by the FDC is subject to VAT, it is required by law to register as a VATable company and assess VAT on each delivery. This will become FDC’s output VAT due.

Input VAT

The FDC’s suppliers will collect input VAT on purchases of goods/services that are subject to VAT. If the seller is not an Indonesian tax resident, then the FDC, as the purchaser, has the obligation to pay the VAT on self-assess basis. Examples of such VAT objects are importation of goods and utilization of services provided by overseas company that does not have permanent establishment in Indonesia.

Tax Rates
Tax rate applicable for deliveries within Indonesia customs area is 10%, whilst export of goods is subject to VAT at 0%.

In addition, there is also sales tax on luxury goods ranging from 10% to 75%.

Due dates of Payment & filling the Tax Return
Any excess of output VAT over input VAT must be paid to Kas Negara (State Treasury) at the latest on the 15th of the following month and VAT return must be reported to the tax office within the 20th of the following month.

In practice, most of the FDC’s customers are VAT collector companies, which will settle payment of the FDC’s output VAT due directly to the State Treasury. As such, the FDC’s input VAT amount will most likely exceed its output VAT amount. This excess may be carried over to the following month or requested for refund. Such VAT refund might be claimed on either annual or monthly basis.

Written by : Iman Santoso - Tax Partner at PSS Consult-Ernst & Young Indonesia and lecturer at University of Indonesia, 8 Nopember 2007