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Currently, an increasing number of foreign nationals are working, doing business, or residing temporarily in Indonesia. However, many foreign nationals remain unclear about their tax obligations—especially regarding a crucial question: should their income be taxed in Indonesia, in their home country, or in both?
To understand this issue, there are two key concepts that foreign nationals need to be aware of: double taxation and tax residency status. By understanding these two concepts, foreign nationals can avoid the risk of paying taxes twice while ensuring compliance with both Indonesian tax regulations and the tax laws of their home country.
What Is Double Taxation?
Double taxation occurs when the same income is taxed by two different countries. In Indonesia, this concept is regulated under Law No. 36 of 2008 on Income Tax, as amended by the HPP Law (Law on the Harmonization of Tax Regulations) of 2021.
For foreign nationals in Indonesia, double taxation typically arises when the same income is subject to tax both in Indonesia and in the foreign national’s home country. This usually happens due to differences in tax residency status determination or because the work is performed in Indonesia even though the income is paid from overseas.
What Is Tax Resident?
Tax residency is a status that determines the country in which an individual is considered a resident for tax purposes. In Indonesia, a person is classified as a tax resident if they meet one of the following criteria:
Resides in Indonesia for more than 183 days within a 12-month period, or
Resides in Indonesia and has the intention to reside permanently.
If a foreign national is classified as an Indonesian tax resident, all income earned both domestically and overseas (worldwide income) must be reported in the Annual Tax Return (SPT). This status is crucial because it determines where taxes must be paid, whether foreign-sourced income is taxable in Indonesia, and the individual’s eligibility to benefit from Double Taxation Avoidance Agreements (DTAs).
How Does Indonesia Address Double Taxation for Foreign Nationals?
Double Taxation Avoidance Agreement (DTA / Tax Treaty)
Indonesia has entered into Double Taxation Avoidance Agreements (DTAs) with more than 60 countries. The key benefits of these tax treaties include:
The taxing rights are allocated between Indonesia and the foreign national’s home country.
Tax rates may be reduced or exempted under the applicable tax treaty.
Certain types of income may be taxed in only one country.
Tax treaties (DTAs) do not apply automatically. Foreign nationals must submit a Certificate of Domicile (COD) in order to be eligible for and benefit from the applicable tax treaty provisions.
Certificate of Domicile (COD)
A Certificate of Domicile (COD) is an official document issued by the tax authority of the foreign national’s home country, confirming that the individual is a tax resident of that country. For foreign nationals in Indonesia, the COD is used to:
Prove their tax residency status
Reduce or avoid tax withholding in Indonesia
Activate the benefits of applicable Double Taxation Avoidance Agreements (DTAs)
Without a valid COD, Indonesia is entitled to impose withholding tax using higher domestic tax rates.
Foreign Tax Credit
If a foreign national is classified as an Indonesian tax resident and has already paid tax overseas, the tax paid abroad may be credited against the tax payable in Indonesia. This mechanism helps foreign nationals avoid double taxation.
However, it is important to note that the foreign tax credit is subject to certain limitations and must be supported by official documentation as valid proof of tax payment.
Right Now Consulting is tax consultant in Bali who is focusing to help individuals and businesses with their Accounting and Taxation matters. Right Now Consulting provides accounting / bookkeeping, tax consultant / taxation, and company formation / incorporation / setup services (CV / PT / PT PMA).
