In the business, contract manufacturing services are very helpful for companies to produce products in accordance with company requirements and specifications. Basically, contract manufacturing is a service provided by a third party, namely a party that cooperates with a company to complete the required products. In other words, it helps companies to fulfill the products requested in accordance with the specifications of the company using the contract manufacturing services. Literally, contract manufacturing services are services provided by third-party companies to produce products in accordance with the requests and specifications of other parties. Examples of companies that use contract manufacturing services can be found in the cosmetics, textile, herbal or supplement, food and beverage industries, and others.
How are contract manufacturing services treated for tax purposes?
Contract manufacturing services are very practical, but they pose unique challenges in terms of taxation because they involve many parties and even cross-border transactions. Contract manufacturing services are services provided for the completion of a specific product as requested, while the raw materials and product specifications are provided by the service user, so that ownership of the raw materials remains with the service user. The tax provisions governing contract manufacturing services are Minister of Finance Regulation Number 141/PMK.03/2025 Regarding Other Types of Services as Referred to in Article 23 Paragraph (1) Letter C Number 2 of Law Number 7 of 1983 on Income Tax as amended several times, most recently by Law Number 36 of 2008.
- Income Tax
A contract manufacturing company is a company whose activities are based on requests from other parties to manufacture a product according to the specifications of the other party, so that the contract manufacturing company’s income is in the form of services because it only manufactures, while the raw materials come from the contract manufacturing service user. Therefore, this income is subject to Income Tax Article 23 at a rate of 2%. Thus, the income received by the contract manufacturing company has been deducted by Income Tax Article 23 and receives a tax deduction certificate from the contract manufacturing service user. For example, a contract manufacturing company receives income of IDR 5,000,000 for contract manufacturing services provided to service users. The contract manufacturing service user only pays the contract manufacturing company IDR 4,900,000 and provides a withholding slip for Income Tax Article 23 worth IDR 100,000. The withholding slip received by the contract manufacturing company can be used as a tax credit when the contract manufacturing company calculates corporate income tax in its corporate income tax return.
- Value Added Tax (VAT)
Contract manufacturers that have been confirmed as taxable entrepreneurs are required to collect income tax of 12% using a tax base of 11/12 of the contract price. This regulation is stipulated in Minister of Finance Regulation No. 131 of 2024 concerning the Treatment of Value Added Tax on Imports of Taxable Goods, Delivery of Taxable Goods, Delivery of Taxable Services, Utilization of Intangible Taxable Goods from Outside the Customs Area within the Customs Area, and Utilization of Taxable Services from Outside the Area.
Using contract manufacturing services from third parties is a practical way to produce products according to the specifications of the company using the contract manufacturing services. The use of contract manufacturing services is considered highly efficient because it does not require new employees to produce products as this is handled by the contract manufacturer, thereby minimizing salary costs. From the contract manufacturer’s perspective, it is also highly efficient because there is no need to purchase raw materials as these are provided by the user of contract manufacturing services, eliminating the need for raw material purchases.
By Olina Rizki Arizal – Partner
TBrights is a tax consultant in Indonesia that is currently an Integrated Business Service in Indonesia that can provide comprehensive tax and business services.
Reference:
- The Minister of Finance Regulation Number 141 of 2025 on Other Services as referred to in Article 23(1)(c)(2) of Law No. 7 of 1983 on Income Tax, as amended several times, most recently by Law No. 36 of 2008.
- The Minister of Finance Regulation Number 131 of 2024 on the Treatment of Value Added Tax on the Import of Taxable Goods, Delivery of Taxable Goods, Delivery of Taxable Services, Utilization of Intangible Taxable Goods from Outside the Customs Area within the Customs Area, and Utilization of Taxable Services from Outside the Area.
