Indonesia, as a country with a population of over 200 million, is an attractive market for foreign companies to expand its business for trade, services or other industry demands. In order to improve and secure the domestic products, the Ministry of Trade issued a regulation Number 10/M-DAG/PER/3/2006, which stipulates that foreign companies cannot trade in goods in Indonesia except throught an investment and make a foreign investment company.
These foreign companies can only make Foreign Representatives in the form of Sales Agent (selling agent), and / or agent factory (Manufactures Agent) and / or the purchasing agent (buying agent.) in Indonesia. These representatives are prohibited from trading activities and sales transactions, either from the beginning up to completion such as submitting tenders, signing contracts or settling.
Representation of foreign trade enterprises may only :
a) conduct activities to introduce, promote and develop the marketing of goods produced by a foreign company or combined foreign companies, as well as providing explanations or instructions for the use of or import regulations to industries / users;
b) perform market research and sales supervision in marketing goods from a foreign company or combined foreign companies;
c) perform market research on goods needed by a foreign company or combined foreign companies also linking and providing indications about the conditions of exporting goods to companies in the country;
d) closing the contract for and on behalf of the foreign company in the country in order to export.
How is the taxation of the representative office in Indonesia? Also, are these representative offices equall to permanent establishments (BUT)?
In accordance with Income Tax Law No. 36 of 2008 on the fourth amendment to No. 7 of 1983 on, in article 2, paragraph (5) stated that a permanent establishment is an establishment used by an individual who does not reside in Indonesia, an individual who has been present in Indonesia for not more than 183 (one hundred and eighty-three) days within any period of 12 (twelve) months, and an
entity which is established out side Indonesia and is not domiciled in Indonesia
conducting business or carrying out activities which may include: a place of management; a branch; a representative office; an office; a factory; a workshop; a warehouse; a space for promotion and selling; a mine and a place of extraction of natural resources; an area of oil and gas mining; a fishery, animal husbandry, agriculture, plantation, or forestry; a construction, installation or assembly project; any kind of services provided by employees or any other persons, provided that the services were done in more than 60 (sixty) days within a period of 12 (twelve) months; an individual or entity acting as a dependent agent; an agent or employee of insurance company which is established outside Indonesia
and is not domiciled in Indonesia, receiving insurance premium or insuring risk in Indonesia; and computer, electronic agent or automatic equipments owned, rented, or used by any electronic transaction provider to conduct business through internet.
In accordance with Tax Treaty (P3B), almost all treaties, mentioned in the article 5, : Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include: the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; the maintenance of a fixed place of business solely for the purpose of advertising, or for the supply of information; the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of preparatory or auxiliary character; the maintenance of a fixed place of business solely for any combination of activities mentioned above, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. (Treaty with China)
But, according to the Director General of Tax Decree Kep-667 / PJ / 2001 of Norm of Net Income for taxpayers who have foreign trade representatives in Indonesia, each trade representative office is taxed at 1% of the gross export value, and the net payment of income tax is 0.44% of the gross export value and are final (uncreditable)
This is furthermore asserted through the Director General of Tax Circular Letter SE-02 / PJ / 2008, that the rate of 0.44% is for firms from countries that do not have a treaty in Indonesia, and to companies that have, the calculation adapted to the branch profit tax rate is as listed in the treaty.
The important question is, could foreign representative offices be taxed in Indonesia, while according to the treaty these activities does not constitute a Permanent Establishment? Is it possible that the Indonesian government does not heed any treaties and is still taxing the representative offices in Indonesia?
If the Indonesian government continues to tax, are the tariffs on SE-02 / PJ / 2008 already appropriate? Given the details in calculating the rates on circular letter still uses the rate of 30%, while the corporate income tax rate is 28% in 2009 and 25% for years thereafter.
There are several key points in the matter, if you are interested in marketing products in Indonesia through a Representative Office, consider discussing it with us at TBrights.
