Failure to Pay Employee Salaries: How to Avoid Problems with the Tax Office
Our client, a company with foreign stakeholders, has been utilizing our services since July 2023. They operate in consulting, real estate services, and wholesale trading. The company already generates revenue and incurs expenses, and it employs a team of local workers. We routinely request monthly transaction data from the client, including payroll details.
In March 2024, we issued a notice stating that holders of KITAS (Kartu Izin Tinggal Terbatas) must submit annual reports. We also communicated this requirement specifically to clients who receive accounting services from us. After reviewing the notice, the client requested clarification on whether all KITAS holders need to submit these reports. Our accountant clarified that the requirement pertains to holders of a working KITAS (i.e., foreign employees with work permits in Indonesia) as well as KITAS holders who have an NPWP (Nomor Pokok Wajib Pajak).”
Based on data previously provided by the client upon our request, such employees were not listed in their company.
However, it was discovered that the company had been issued four working KITASs, and all four employees possessed NPWP. The client concealed this fact, and during our engagement, we did not receive payroll information for one of them. Given that the KITASs and tax identification numbers were issued in 2023, these workers were required to submit personal annual reports this year. Additionally, the company should have been providing monthly payroll reports and paying taxes for them throughout this period.
This situation could have serious implications
If this were about an investor’s KITAS, the situation might not be so severe, as there is no unified regulation concerning salaries for holders of an investor’s KITAS. However, a working KITAS mandates the payment of a salary that is stipulated in the work permit and detailed in the employment contract. It is not permissible to withhold salary from a foreign worker. Although no minimum salary is set, the planned salary is specified in the work permit, so actual payments should be roughly equivalent.
As a result, the client could face fines for falsifying tax reports, and consequently, the tax authorities may conduct more thorough inspections of the company’s reports.
We have proposed three options for resolving the issue to the client:
Amend the company’s 2023 tax report to include the minimum salary for foreign employees. File personal tax reports for these employees for the year 2023 (deadline by April 1, 2024, considering the time needed to personally obtain an EFIN—Electronic Filing Identification Number).
Risks: Amending the reports and reporting a low salary for foreign employees could draw the attention of the tax authorities.
Declare the salary for foreign employees starting from March 2024, as if they have only just begun receiving it.
Risks: The tax authority may question why the employees were not paid earlier despite having a working KITAS.
Leave everything as is.
Risks: Sooner or later, the tax authority may inquire why registered foreign employees are not receiving a salary.
The decision must be made by the company owner; we will strive to minimize risks in the chosen scheme to avoid potential fines and issues with the tax authorities.
This case highlights the importance of competent tax support for businesses abroad and the necessity of timely accounting for all tax obligations to avoid potential inconveniences. Our experience and expertise help our clients successfully navigate complex tax issues and processes.
