Capital expenditures when calculating corporate income tax

You have opened your company in Indonesia, engaging in or considering an investor visa application, as well as purchasing real estate to include on your company’s balance sheet.

Expenditures on capital assets play a crucial role in calculating corporate income taxes. Reducing these liabilities can have a significant impact on your business’s financial health.

Let’s explore strategies to minimize corporate income tax when acquiring real estate and other assets and how to register them on the balance sheet of a company.

Depreciation of physical assets

Depreciation of physical assets is an important factor in calculating income taxes. Understanding how to use depreciation to reduce a company’s tax liabilities plays a significant role.

Depreciation is a method of accounting for the gradual loss of value of a company’s physical assets (such as buildings or equipment) due to their natural wear and tear or obsolescence.

This process allows companies to gradually write off the value of assets over their useful lives, which is reflected in the financial statements and is used to reduce the company’s tax liabilities.

Expenses related to assets with a useful life of more than one year are determined and amortized starting from the month of acquisition using either the straight-line depreciation method or the declining balance method.

Notes:

*Taxpayers are allowed to take into account the actual useful life based on accounting records if the useful life exceeds 20 years.

There are main categories of tangible assets: buildings and structures; cars and equipment; vehicles; computers and software. The detailed lists of assets included in each category are defined as per the Ministry of Finance (MoF) regulations. There are also special rules for assets used in certain industries, such as oil and gas, forestry, plantations and livestock.

Amortization of intangible assets

 Intangible assets or expenses, such as rights to use buildings, businesses, or companies, that have a useful life of more than a year are also subject to depreciation. This means that their value must be spread over a period greater than one year, according to certain write-off rates or methods to account for the gradual loss of value of these assets.

Intangible assets are amortized on the following basis:

a)   It is possible to use the straight-line or accelerated depreciation methods based on rates from categories 1,2,3 and 4, determined by the asset’s useful life for:

• general intangible assets;

• costs of creating and expanding the capital of the enterprise;

• costs incurred before the start of commercial activities and with a useful life exceeding one year.

If the useful life of the intangible asset exceeds 20 years, it can be amortized over 20 years using the straight-line method or based on the taxpayer’s accounting using the actual useful life.

b) Costs for rights to extract oil, gas, minerals, forest areas, and other rights to use natural resources are depreciated using the unit-of-production method if their useful life is more than one year.

The depreciation of these rights, with the exception of oil and gas rights, should not exceed 20% per year.

Assets arising from tax amnesty and voluntary disclosure of information

Assets re-declared under tax amnesties and the 2022 Voluntary Disclosure Program cannot be written off or depreciated for tax purposes. The acquisition cost of these assets is based on the value stated in the asset declaration letter.

Transfer of assets

The sale of company assets (other than land and buildings) can result in a capital gain or loss calculated as the difference between the proceeds of sale and the tax residual value of the related assets.

Capital gains are taxable, while capital losses can only be written off as tax if the asset was used in the business to generate income.

Revaluation of fixed assets

With the consent of the Directorate General of Taxation (DGT), legal entities and representative offices of foreign companies maintaining accounting records in Indonesian currency (IDR) can evaluate fixed assets for tax purposes. This can be done once every five years. Each revaluation must include all business-related assets owned by the company and located in Indonesia, excluding land.

Before seeking DGT consent, a company must ensure that it has calculated all of its outstanding tax liabilities.

The revaluation must be based on the market or fair value approved by the government appraiser, and may be adjusted by the tax authorities if they consider that the values ​​do not correspond to the market value of the assets.

The approved revaluation affects how long the company will write down the value of its assets. Depreciation will be calculated as if the assets were new.

If the new value of assets is higher than the old value, the tax on this difference will be 10%. If a company has financial problems, it can pay this tax in installments throughout the year.

Assets of the first two categories must be held by the enterprise until the end of their service life. Assets of categories 3 and 4 must be held by the enterprise for at least 10 years after their revaluation.

If revalued assets are sold before the minimum holding period, an additional tax of 10% will be incurred. However, this is not applicable in certain cases such as:

• selling assets due to extraordinary circumstances by government decision or court decision;

• transferring assets during a merger, consolidation or business division;

• if the assets have been damaged and can no longer be used.

Inadmissible deductions when calculating corporate income tax

Such deductions include:

a) private expenses;

b) gifts and charitable contributions, unless they relate to business, with the exception of certain religious donations and charitable contributions;

c) various reserves, with the exception of those that:

• for doubtful debts for banks and some financial institutions;

• for insurance companies;

• for the Deposit Insurance Corporation (Lembaga Penjamin Simpanan/LPS),

• for reclamation of the mining industry;

• for forestry;

• for the technical servicing of enterprises engaged in industrial waste processing.

d) income tax payments;

e) tax penalties;

f) distribution of profits;

g) employer contributions to certain pension funds;

h) expenses related to tax-exempt income, for example, interest on loans used to purchase shares;

i) salaries or compensation received by members of a partnership or firm, if their participation is not divided into shares.

Losses

If the company had losses, they can be taken into account in future profits over a period of five years. For some companies this period can be extended to 10 years. Losses cannot be used to reduce tax payments for previous periods. You also cannot combine the tax data of multiple companies or use the losses of one company to reduce the taxes of another company in a group of organizations.

Profit distribution

Tax on dividends is withheld as follows:

a) for residents, dividends from Indonesian companies are not taxed if:

• the recipient is a resident individual who reinvests them in Indonesia during a certain period;

• the recipient is a resident corporation.

Dividends received by resident individuals that do not meet the reinvestment requirements are subject to a final tax of up to 10%.

b) non-residents are subject to an income tax of 20% on dividends paid.

Special industries and activities

In Indonesia, there are different types of contracts that are used for companies extracting oil, gas, metals and coal. These methods determine how taxes are calculated and what rules need to be applied depending on the type of activity.

There are types of contracts such as PSC (Production Sharing Contracts), CoWs (Contracts of Work) and IUP (Mining Business Permits). It is important to remember that there are general tax rules for most industries.

Income tax on e-commerce and online sales of foreign establishments

Tax on profits from e-commerce in Indonesia is regulated depending on the volume of activity carried out by foreign representative offices.

If an organization does not have a permanent establishment, it is subject to the Electronic Transaction Tax (ETT). This tax is levied on sales made directly or through online marketplaces.

Details of the rate, base and method of calculation of the tax are specified in the Government Regulation (GR), and payment and reporting procedures are specified in additional regulations.