The changes have fundamentally transformed Indonesia’s tax system, from a worldwide tax system to a territorial tax system. Under a worldwide system, a tax resident is taxed on income earned in the country of residence and foreign countries. Indonesia had used a worldwide system for years before the enactment of the Job Creation Law.

Many countries been shifting from a worldwide system to a territorial system. Under a territorial system, a tax resident will only be taxed on income earned within the resident country. This means that no income sourced from foreign countries will be taxed in the country of residence.

The choice of a territorial system is commonly to encourage outbound investment. This is because, for a company that invests abroad through a subsidiary in a foreign country and receives a dividend from such subsidiary, the dividend will not be taxed in the company’s country of residence.

Nearly all Organization for Economic Cooperation and Development (OECD) countries have begun using a territorial system. By the end of 2011, 28 of the 34 OECD countries had shifted to territorial systems, followed by the United States in 2017. Among ASEAN countries, Malaysia and Singapore have adopted a territorial tax system. The IMF in a 2013 working paper, also classified countries that provide tax exemptions for particular offshore income as territorial countries.

The territorial system in the Job Creation Law provides exemptions for the following: (1) foreign dividends or profits after tax of a permanent establishment (PE) owned abroad, (2) other income earned or received abroad other than through a PE and (3) foreign income of certain expatriates working in Indonesia who are Indonesian tax residents.

The exemption will be applied to foreign dividends or profits after tax of a PE owned abroad, provided that at least 30 percent of the dividend or profit after tax of the PE is repatriated and invested in Indonesia for a certain period. The objective of such an exemption is to eliminate double taxation. Before the enactment of the Job Creation Law, Indonesia used a classical system in which profits were taxed twice, at the corporate level when the profit was booked and in the hands of the shareholders upon the distribution of dividends.

Popular

Not the Ministry of Magic

PISA gains belie Indonesia’s persistent education crisis

Safeguarding Indonesia's AI future