Resident
Taxpayers and Permanent Establishments qualified as small scale
contractors have been potential to be imposed with Final Income Tax of
Article 4 paragraph (2) or with Income Tax Article 23. This is based on the Government Regulation Number
140 Year 2000 and Regulation of Director General of Taxes Number
PER-70/PJ./2007 (later referred to as PER-70). Final Income Tax of
Article 4 paragraph (2) (later referred to as Final Income Tax) would be
imposed if the
procurement value per project executed is up to IDR 1 Billion. If the
procurement value per project is more that IDR I Billion, Income Tax
Article 23 would be imposed.
On the other hand, those qualified as medium and large scale contractors are only potential to be subject to Income Tax Article 23.
Entrepreneurs rendering construction services but not qualified as
contractors are also only potential to be subject to Income Tax Article
23. However, in contrast to the entrepreneurs already legalized
themselves as contractors, the types of service rendered could not be
categorized as construction services but as other services as meant in
the appendix of PER-70.
In
other words, Final Income Tax would only be imposed to small scale
contractors having procurement value up to IDR 1 Billion. However, in
practice, it is quite many taxpayers who would be confused in
determining type of Income Tax to be imposed to construction service
providers.
Definitely Final Income Tax
Now, PP
No.140 Year 2000 has been revoked and replaced by PP No. 51 Year 2008
issued on 20 July 2008 and become effective since 01 January 2008. This
new PP states that, “Upon income from construction service business, final Income Tax is imposed.” Further, this PP stipulates that, “Income Tax tariff for construction service business is as follows:
a. 2% (two percent) for Construction Execution conducted by service providers having small scale qualification;
b. 4% (four percent) for Construction Execution conducted by service providers having no business qualification;
c. 3% (three percent) for Construction Execution conducted by service providers other than those as meant in letter a and letter b;
d. 4%
(four percent) for Construction Planning or Construction Supervisory
conducted by service providers having business qualification; and
e. 6%
(six percent) for Construction Planning or Construction Supervisory
conducted by service providers having no business qualification.
From
the above provisions, it can be concluded that whichever the criteria
is, a construction service entrepreneur is now definitely subject to
Final Income Tax.
It is worth noting that the difference is in the tariffs applied. For
those qualified as contractors, lower tax is imposed compared to those
not qualified as ones. Entrepreneurs already legalized as contractors
shall not be taxed more than 4%, whereas those who have not legalized/do
not legalize themselves, can be taxed up to 6%.
Inevitably Paying Tax
One
of the things that should be now considered by all construction service
providers, is the condition that construction operating expenses can no
longer be calculated as deductible expenses. It is because PP
No. 138 Year 2000 stipulates that expenses related to income subject to
Final Income cannot be deducted in Taxable Income calculation. It means
that even in loss position, construction service entrepreneurs should
still pay the tax. This is significantly different from those of the
past time, where those subject to Income Tax Article 23 would still be
able to calculate their operating expenses.
Separate Recording
Since expenses related to income subject to Final Income Tax cannot be calculated as deductible expenses, construction service entrepreneurs
who also run other business not subject to Final Income Tax, should
maintain separate recording of income and expenses from construction
service with those from other business.
This is highly important for the purpose of Corporate Income Tax
calculation on other business if any. If there are assets/expenses
difficult to be separated since they are related to both construction
and other businesses carried out, the calculation of expenses can
proportionally be made based on the percentage of income received from
construction business and other business not subject to Final Income
Tax.
Revision of Periodic Income Tax Return
In the Article 10 0f PP No.51 Year 2008, it is stipulated that upon contracts signed prior to 1 January 2008, the following provisions are applied:
· For payments of contracts/parts of contracts up to 31 December 2008, Income Tax imposition refers to the previous PP, which is PP No. 140 Year 2000;
· For payments of contracts/parts of contracts after 31 December 2008, Income Tax imposition is based on this new PP.
What
is meant by the above provision is that, if contract is signed after 01
January 2008, the reference for Income Tax withholding is the
provisions of PP
No. 51 Year 2008. Thus, if a contract is signed after 01 January 2008
and the related taxpayer has already recognized the deductible
expenses/paid construction service fee, tax that should be withheld is
Final Income Tax. The revision to the Periodic Income Tax Return should
be made if the related taxpayer has actually withheld Income Tax Article
23. The revision should also be made when a taxpayer has already
withheld Income Tax Article 23 on construction service fee whose
contract is signed before 01 January 2008 and already recognized it as
deductible expense in year 2008, but has recently received the payment
in year 2009.
No More Compensation Right
Another
new matter stipulated in PP No. 5 Year 2008 is that any loss from
construction service business which still remains up to Tax Year 2008
can only be compensated up to Tax Year 2008 as referred in its Article
10. For construction service entrepreneurs previously imposed with
Income Tax Article 23 and having loss not yet compensated in a material
amount, this provision may causes them to loose their right to
compensate the remaining loss.
For
example, if a medium scale contractor experiences a great loss in year
2007, referring to the previous tax provision, the loss would certainly
be compensated with the business profit within the subsequent five tax
years.
Now, the loss may only be compensated in year 2008. So, if the business
profit in year 2008 is lower than the loss in year 2007, there will be
loss amount that cannot be compensated. In fact, if there is no business
profit but loss in year 2008, there will be no chance to compensate the
total amount of loss in year 2007.
PE: No Calculation of Expense?
PP
No.51 Year 2008 affirms that construction service entrepreneurs with
the status of Permanent Establishment (PE) could not get away from Final
Income Tax imposition.
PEs, which are only engaged in construction service business,
accordingly could not also calculate their operating expenses. What
seems to be the problem is that the PEs are required to pay Branch
Profit Tax of 20% or the tariff under the Tax Treaty from their Taxable
Income after tax.
The amount of Branch
Profit Tax will not be obtained if a PE does not firstly calculate its
Taxable Income, by deducting operating expenses from gross income. In
other words, though already subject to Final Income Tax, PEs should
still bear the obligation to calculate their operating expenses as
accorded with the Article 6 and the Article 9 of UU PPh. After the
Taxable Amount is acquired, based on the Decree of Finance Minister
No.113/KMK.03/2002, Branch Profit Tax is calculated from the amount
resulting from Taxable Income amount minus Final Income Tax.
Tips
As already informed above, entrepreneurs already qualified as contractors shall not be taxed more than 4%, different if compared to those not yet qualified which can be taxed up to 6%.
Thus, it can be concluded that business qualification clearly
determines which tax tariff to be imposed. The question is what is meant
by the qualification it self?
According
to the Article 3 paragraph (1) letter a of PP No. 51 Year 2008,
business qualification is stratification determined based on the
certificate issued by a Construction Service Development Institution. In practice, Gabungan
Perusahaan Konstruksi Nasional Indonesia (GAPEKSINDO) is one of the
institutions having the authorization to issue the certificate.
If
you are a payer of construction service fee which should withhold
Income Tax, in order to avoid bearing higher Income Tax tariff than the
proper one, you should ascertain the existence of the certificate issued
by a Construction Service Development Institution such as GAPEKSINDO.
In the other hand, if you are a construction service provider, before
being imposed with higher tax tariff than the proper one, you should
provide the said certificate.
Another
more important thing to be underlined is the same perception on the
construction service itself. Both tax withholders and construction
service providers ideally own the same perception on the definition of
construction service. If not, it is possible that the tax withholders
will impose tax tariff not in accordance with the provision of Income
Tax on construction service business.
Indonesian Tax Learning
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