Imposition of Income Tax for Foreigners – Tax is an obligation for every citizen. Without exception, foreign nationals who work or earn income in other countries that are not their countries of origin. A taxpayer is generally taxed on the income he earns, although this can be reduced by implementing a double taxation treaty.

Under the law, any person who receives income will be subject to income tax. No exception for foreign nationals who work and earn income in Indonesia will be subject to Income Tax (PPh).

The ”Omnibus Law” regulation has added a provision in the Income Tax Law which stipulates that foreigners who are subject to domestic tax by reason of being a taxpayer in Indonesia may only be subject to tax on income originating from Indonesia (including if paid outside the country).  If it meets certain skill requirements.

If your company employs a foreign employee for a fairly long period of time, then your company must be subject to ”Income Tax-PPh” for foreign employees.

Below, we will briefly discuss PPh 26 and PPh 21 for foreign workers.

What is PPh 26?

According to Law No. 36 of 2008, PPh Article 26 is an income tax imposed on income received by foreign taxpayers from Indonesia other than a permanent establishment (BUT) in Indonesia.

What is PPh 21?

The definition of Article 21 Income Tax is taken based on the Regulation of the Director General of Taxes Number PER-32/PJ/2015. Income tax article 21 is a deduction from income paid to individuals in connection with domestic work, position, services and activities.

The Difference Between PPh 26 and PPh 21

Both are income taxes, PPh 21 and PPh 26 are applied to different tax subjects. PPh article 21 is withholding on income paid to individuals in connection with work, position, services, and domestic activities, The definition of Income Tax Article 21 is taken based on the Director General of Taxes Number PER-32/PJ/2015. While PPh 26 is a tax on foreign tax subjects who earn income from Indonesia. For PPh 26 regulated in PPh Article 26 of Law Number 36 Year 2008.

Types of Income of Foreign Taxpayers Subject to Article 26 Income Tax include:

1. Gross income on:
+ Dividend
+ Interest includes premiums, discounts and rewards in connection with guaranteed debt repayments
+ Royalties, rent and other income in connection with the use of property
+ Rewards in connection with services, work and activities
+ Prizes and awards
+ Pensions and other periodic payments
+ Swap premiums and other hedging transactions, and/or
+ Profits due to debt relief.

2. Estimated net income from:
+ Sale or transfer of property in Indonesia
+ Sale of shares
+ Insurance premiums paid to insurance companies abroad

Types of income of the taxpayers subject to Article 21 Income Tax include:

Income Tax as regulated in Article 21 is a tax on income for taxpayers for employees who earn income in the form of salaries, wages, allowances, honoraria, or other payments in any form.

Income tax payments are usually made every month every time you get a salary. Often, companies take a direct deduction from the employee’s salary. There are 5 kinds of calculation of Income Tax Article 21 according to Article 21, i.e:

+ Permanent employees and periodic pension recipients
+ Temporary employees / casual workers
+ Members of the supervisory board / board of commissioners who do not serve as permanent employees
+ Pension program participants are employees who withdraw pension funds
+ As well as other recipients of irregular rewards

Things that determine that an individual (foreigner) or a company must be subject to PPh 26

Foreign employees (expatriates) in the company are subject to income tax PPh 26, because they receive salaries as compensation in connection with work. Therefore, the company is required to withhold PPh 26 tax on this income.

Withholding of PPh 26 is a government agency, domestic tax subject, activity organizer, BUT, and other foreign representatives, who make payments to foreign taxpayers other than BUT.

Individual foreigners are categorized as foreign taxpayers and are subject to PPh 26 if they do not reside in Indonesia, or stay in Indonesia for no more than 183 days a year. However, if the foreigner is domiciled and works in Indonesia for more than 183 days, he/she is subject to income tax of PPh 21.

Who Should Pay PPh 21 and 26?

Taxpayers who are required to fulfill the payment of PPh 21 are individuals in the case of employees of a company who receive a fixed salary or income, periodic pension recipients, non-permanent employees with monthly income of more than Rp. 4,500,000, and are not permanent employees mentioned in PER. -16/PJ/2016 article 3(c) who receive rewards with a sustainable nature.

Meanwhile, taxpayers for PPh 26 include foreign taxpayers who earn income in Indonesia, foreign taxpayers who stay in Indonesia for not more than 183 days in a year as well as companies that are not established or located in Indonesia that operate their business through a Permanent Establishment in Indonesia.

What are the Rates for Paying PPh 21 and 26?

For PPh 21 and 26 payment rates have different provisions. For PPh 21 which is intended for individuals with income, PPh 21 has a rate of 5% to 30% for those who have an income of more than IDR 450,000 per day for casual and non-permanent employees or individuals who have an income of more than IDR 4,500,000.

Here are the details:
+ Taxpayers with income up to IDR 50,000,000 per year are subject to a 5% tax rate
+ Taxpayers with an income of IDR 50,000,000 to IDR 250,000,000 per year are subject to a tax rate of 15%
+ Taxpayers with an income of IDR 250,000,000 to IDR 500,000,000 per year are subject to a 25% rate
+ Taxpayers with income above Rp. 500,000,000 per year are subject to a tax rate of 30%

While specifically for PPh 26, 20% of the total gross income is the final rate that must be paid annually.

Notes: The tax rate for expatriates from countries that have signed a tax treaty or known as the Double Taxation Avoidance Agreement (P3B) with Indonesia, applies a special PPh 26 rate, which is usually lower than the normal rate.

Conclusion

Foreign Citizens are included in the Foreign Tax Subjects. However, if the foreigner concerned has met the above criteria to become a Domestic Tax Subject, then the foreigner will automatically be subject to Income Tax (PPh).

After knowing various things about PPh 21 and 26, you now understand how complicated and difficult it is to determine and calculate the amount of tax that must be paid either every month or year.

Indoservice offers outsourcing services for calculating the rates of PPh 21 for Indonesian citizens and PPh 21 or 26 for foreigners & Companies Tax based on businesses in Indonesia. At Indoservice, we have a dedicated team of professionals who will work with the needs of a good Tax, Accounting and Payroll system for your business. You can count on us to provide the quality of service that best suits your needs.

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