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Discrimination in Income Tax Liability

Lately, a large number of foreign contractors operating in Indonesia have been complaining about receiving warning letters from the Corporations and Foreign Individuals Tax Office advising them to increase income tax payments in respect of income from construction services by 1%.

The request for additional payment is due to the fact that project owners have been withholding and remitting income tax at a rate of only 3% from payments made to these foreign contractors , whereas in fact the project owners should be withholding and remitting at a deducting withheld 4% rate.

After seeking written confirmation from the Indonesian Tax Authority (ITA), it was stated that in accordance with Government Regulation No. 51/2008, foreign contractors that have operating permits from the Construction Industry Association (Gapensi) but have not received certification from the Construction Services Development Institute (LPJK) must pay final income tax at a rate of four percent. Taxand Indonesia details the income tax liability for global organisations.

Under both the Income Tax Law and the tax treaties between Indonesia and its tax treaty partners, where a foreign contractor generally has a permanent establishment (PE) in Indonesia, the existence of such a PE affords taxing rights to Indonesia in respect of income earned by the foreign contractor.

Under Government Regulation No. 51/ 2008, which applies to PEs income from construction services is subject to withholding tax to be deducted and withheld by the payer of that income (i.e., the project owner) or the withholding tax agent at the following rates of income tax:

  • Construction services provided by a small-scale contractor, at the rate of 2%
  • Construction services provided by a certified large contractor, at the rate of 3%
  • Construction services provided by a non-certified large contractor, at the rate of 4%
  • Construction planning and supervision services provided by a certified contractor, at the rate of 4%
  • Construction planning and supervision services provided by a non-certified contractor, at the rate of 6%

Certification and business operating permits
The certification and business operating permits for both domestic and foreign contractors are issued by the Construction Services Development Institute (LPJK).

The operating permit for a large contractor is also issued by the LPJK and is applicable throughout Indonesia. Unlike a local construction firm, however, a foreign contractor is only permitted to work on large projects and must enter into a joint operation with a local firm.

To be able to operate, foreign contractors normally register with, and obtain licenses from, two institutions: Gapensi and the Ministry of Public Works. It is based on these two certificates that a foreign contractor (BUJKA) certificate is issued. Armed with its BUJKA certificate, the contractor must submit an application for recognition by the LPJK. It is only after such recognition has been obtained that the withholding at the three percent income tax rate can be made.

However, it turns out that the LPJK has never issued recognition for a BUJKA certificate issued by the Ministry of Public Works. As a result, foreign contractors are liable to have income tax deducted withheld at a rate of 4%

The tax burden that will need to be borne is as shown below: (In US $)

Corporate Income tax Rate 25%

    3% Tax Rate   4% Tax Rate

Contract Value

Taxable Income
Article 4(2) Income Tax 3%


4% 400,000

Tax Base of Branch Profit Tax

  2,200,000   2,100,000

Branch Profit Tax
10% 220,000
10% 210,000

Total Taxes (A+B)
  520,000   610,000

Your Taxand contact for further queries is:
Prijohandojo Kristanto
T. +62 21 835 6379



Taxand's Take

The inconsistent treatment of contractors has given rise to tax discrimination, particularly where the foreign contractor comes from a jurisdiction with which Indonesia has a tax treaty.

In addition, in accordance with Article 26 of the Income Tax Act and the provisions of an applicable tax treaty, where the PE in Indonesia is registered as a resident taxpayer, such PE should be subject to final branch profit tax of 20 percent, or a lower rate under the tax treaty.

To avoid the issuance of similar warnings, a foreign contractors who has yet to obtain recognition of its certificates from the LPJK are advised to pay the final income tax directly to the Indonesian tax authorities at the prevailing rate of 4%, if only 3% tax has been withheld.


Taxand's Take Author

Prijohandojo Kristanto