TaxUpdate
December2017
Update on Thin Capitalisation Rules TheIndonesianthincapitalisationrulesaregovernedunder:
a) theMinisterofFinanceRegulationNo169/PMK.010/2015dated19September2015(“MoF169”),whichisapplicablecommencingfromfiscalyear2016;and
b) theDirectorGeneralofTaxregulationNo.PER-25/PJ/2017dated28November2017(“PER25”),whichreportingrequirementsareapplicablecommencingfromfiscalyear2017.
KeyfeaturesofMoF169areasfollows:
Topics KeyFeatures
DebttoEquityRatio(“DER”)
a) ApplicabletoIndonesiancorporatetaxpayers,exceptfortaxpayerssubjecttofinalincometax(e.g.construction,land/buildingrental,andshipping),miningandoil/gascompanieswithcontractsthatcontainspecificDERprovisions(e.g.upstreamoil&gasProductionSharingContracts/PSCandminingContractsofWork/CoW),banks,financinginstitutions,insurancecompanies,andinfrastructurecompanies.
b) ThemaximumDERis4:1forfinancingcostdeductionintheCorporateIncomeTaxcalculation.IftheDERexceeds4:1,deductiblefinancingcostwillbelimitedtoanallowabledeductibleamountbasedonthe4:1DER.
Debt
Debtconsistsofshort-termandlong-termloans,includinginterestbearingtradepayable.DebtforthepurposeofDERcalculationistheaveragedebtbalanceduringtheyear/period,whichiscalculatedfromtheaverageofendofmonthdebtbalanceduringtherelevantyear/period.
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Topics KeyFeatures
Equity
EquityconsistsofequitybalanceinaccordancewiththeIndonesianStatementsofFinancialAccountingStandard(PSAK)andnon-interestbearingloanfrompartywithspecialrelationship(affiliates).EquityforthepurposeofDERcalculationistheaverageequitybalanceduringtheyear/period,whichiscalculatedfromtheaverageofendofmonthequitybalanceduringtherelevantyear/period.Iftheequitybalanceisnilordeficit,allfinancingcostsarenotdeductible.
FinancingCosts
Financingcostsconsistofinterest,discountandpremiumrelatedtodebt,debtarrangementcost,financingchargesinaleasing,guaranteefees,andtheirassociatedforeignexchangegainorloss.
RelatedPartyDebt
Financingcostsonrelatedpartydebtmustalsoobservethearm’slengthprincipleundertheIndonesiantransferpricingrules.
ForeignDebt
TaxpayerwithforeigndebtisobligedtosubmitareporttotheDirectorateGeneralofTax,otherwisetheassociatedfinancingcostswillnotbedeductible.
KeyfeaturesofPER25areasfollows:
Topics KeyFeatures
Non-deductiblefinancingcosts
PER25providesthatinadditionto4:1DERrequirement,non-deductiblefinancingcostsalsoincludethosepaidonrelatedpartydebtabovethearm’slengthrate(inwhichcasethefinancingcostsaredeemedasdividend)anddebtusedtogeneratenon-taxableincomeand/orincomesubjecttofinaltax.Thesearenotnewrulesastheyhavebeengovernedundertheprevailingtaxlawsandregulations.Inthecasewhereanynon-deductiblefinancingcostsarecapitalisedaspartofassetcosts,depreciationrelatedtosuchfinancingcostsisnotdeductible.
Additionalreportingrequirements
CorporatetaxpayerthatclaimsinterestdeductionisnowrequiredtoattachDERanddeductible/non-deductibleinterestcalculationstoitsannualCorporateIncomeTaxReturns(CITR).Ifthecorporatetaxpayeralsohasforeigndebt,theCITRshouldalsoincludeanattachmentreportingtheforeigndebtinformation.FailuretocomplywiththiswillresultintheCITRbeingdeemedincompletebythetaxofficeandfinancingcostsonforeigndebtwillnotbedeductible(irrespectivemeetingthe4:1DER).Thesenewreportingrequirementsareapplicablefromfiscalyear2017(e.g.forthefiscalyearending31December2017,thetaxpayerneedstoreport2017CITRanditsattachmentsby30April2018).
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ThenewCITRreportingrequirementsunderPER25shouldbeobservedbycorporatetaxpayersthatwillclaimfinancingcostsinits2017CITR.Furthermore,thetaxpayersmaywishtoreconcilethefinancingcostsandforeigndebtsinformationdisclosedintheCITRattachmentstothosedisclosedinwithholdingtaxreturns.
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ThisTaxUpdatepublicationisnotintendedtoprovideacomprehensiveanalysisoftaxlawsandpracticedevelopments.Readersshouldseekindependentprofessionaltaxadvicebeforeapplyingtheinformationcontainedinthispublication.Whisteveryefforthasbeenmadetoensuretheaccuracyofthispublication,AliHermantoStrategicConsulting(“AHSC”)isnotresponsibleforanyinaccuracies,errorsoromissionsinthispublication.AHSCacceptsneitherresponsibilitynorliabilitiestoanypartiesfortheoutcomesorresultsofusingorrelyingonthispublication.
