The tax system in Indonesia can be complex for new investors, expatriates, and entrepreneurs. Taxation in Indonesia is primarily governed by Tax Law No. 7 of 2021 on Harmonisation of Tax Regulations (UU HPP), which consolidates various tax laws including income tax, VAT, and other general procedures.
The system operates under a self-assessment principle, where taxpayers are responsible for calculating, paying, and reporting their own tax payments in compliance with the Directorate General of Taxes (DJP) regulations.
The main taxes relevant to expatriates and foreign-owned businesses include income tax (PPh), value-added tax (VAT/PPN), and withholding tax (WHT), each governed by specific regulations under the Directorate General of Taxes (DJP).
Each of these tax types applies to different income categories, payment schemes, and business relationships.
Types of Tax in Indonesia
1. Personal Income Tax (PPh 21)
Personal income tax law applies to both tax residents and non-residents earning income from work or professional activities in Indonesia. Residents are taxed on worldwide income, while non-residents are taxed only on income earned within Indonesia. Indonesian tax rates are progressive starting from 5% and going up to 35% depending on income levels.
2. Withholding Tax (PPh 23 and PPh 26)
These taxes apply to specific payments such as interest, dividends, royalties, and professional service fees. For domestic entities, PPh 23 rates range from 2% to 15%, while cross-border payments to non-residents fall under PPh 26 with a 20% rate — unless reduced under a Double Taxation Agreement (DTA).
3. Corporate Income Tax (PPh 25 / PPh 29)
Companies operating in Indonesia are subject to a 22% flat rate corporate income tax. This includes local companies (PT) and foreign-owned entities (PT PMA). Corporate taxpayers must make monthly instalments under PPh 25 and reconcile the balance at the end of the fiscal year through PPh 29.
4. Value Added Tax (VAT or PPN)
Indonesia’s sales tax, officially known as Value-Added Tax (Pajak Pertambahan Nilai), applies to most goods and services at a general VAT rate of 11%. Businesses registered as PKP (Pengusaha Kena Pajak) must charge, collect, and remit VAT to the government, ensuring compliance with national tax regulations.
5. Local Tax (Pajak Daerah)
Indonesia’s regional governments have the authority to impose local tax on activities within their jurisdiction. This includes vehicle tax, hotel and restaurant tax, billboard tax, and entertainment tax. These revenues support local infrastructure, community services, and tourism development.
6. Land and Building Tax (PBB)
Applicable to landowners and property holders, the Pajak Bumi dan Bangunan (PBB) is calculated based on the property’s assessed value. It’s paid annually to local tax offices and applies to both individuals and corporations.
7. Import Duty and Excise
Imported goods are subject to import duties and excise taxes, with rates depending on product type and classification. Certain luxury goods and alcohol also face Luxury Goods Sales Tax (PPnBM).
Understanding Personal Income Tax: PPh 21 and PPh 23
What Is PPh 21?
Pajak Penghasilan PPh 21 (Income Tax Article 21) is the tax on income earned by individuals, typically employees, consultants, and professionals, from work, services, or activities performed in Indonesia.
Employers are generally responsible for withholding this tax from salaries, bonuses, allowances, and other compensation. For expatriates working in Indonesia, this is often the main tax deducted from monthly payroll.
- Who pays: Employers (withholding tax agents) deduct PPh 21 from employees’ income and remit it to the government.
Tax base: Employment income (salary, benefits, commissions, etc.). - Rates:
- Progressive rates for resident individuals:
- 5% for annual income up to IDR 60 million
- 15% for income between IDR 60 million – IDR 250 million
- 25% for income between IDR 250 million – IDR 500 million
- 30% for income between IDR 500 million – IDR 5 billion
- 35% for income above IDR 5 billion
- For non-residents, a flat rate of 20% is applied on gross income, unless a tax treaty specifies otherwise.
Key takeaway:
PPh 21 is personal, it applies to individuals earning income from employment or professional work in Indonesia.
What Is PPh 23?
PPh 23 (Income Tax Article 23) applies to certain types of income other than employment income, typically related to services, dividends, interest, royalties, and rent.
In contrast to PPh 21, which covers salaries, PPh 23 focuses on business-to-business transactions, where one entity withholds a portion of the payment to another as tax on behalf of the recipient.
- Who pays: The party making the payment (usually a company) must withhold and remit the tax on behalf of the recipient (service provider or vendor).
Tax base: Non-employment income such as:- Management or consulting fees
- Interest or dividends
- Royalties, rent, or prizes
- Rates:
- 15% for dividends, interest, and royalties
- 2% for service fees and rent (of assets other than land or buildings)
If the recipient doesn’t have a Taxpayer Identification Number (NPWP), the rate is increased by 100%, effectively doubling the tax withheld.
Key takeaway:
PPh 23 applies to income earned from services or capital investment activities, not salary. It’s commonly faced by consultants, vendors, and investors.
What Is PPh 25?
PPh 25 (Income Tax Article 25) relates to corporate and individual income tax instalments, essentially, advance payments toward your annual income tax liability.
Both individuals and companies that earn income (whether from employment, business, or investment) are required to estimate their annual tax and pay it in monthly instalments under PPh 25. At the end of the year, the taxpayer reconciles these payments in their Annual Tax Return (SPT Tahunan).
- Who pays: The taxpayer (individual or company) directly.
- Tax base: Estimated annual taxable income.
- Rates:
- Corporate income tax rate: 22% (flat)
- Individual income tax: based on progressive rates (see PPh 21).
Key takeaway:
PPh 25 is about managing your annual tax liability through instalments — not a separate tax on income, but a mechanism to prevent underpayment.
Key Differences Between PPh 21, PPh 23, and PPh 25: Tax Rates, Procedures and More
| Tax Type | Applies To | Paid / Withheld By | Typical Rate | Description |
| PPh 21 | Individual employment income | Employer (withholding) | 5%–35% progressive or 20% flat (non-resident) | Tax on salaries, bonuses, and allowances |
| PPh 23 | Non-employment income (dividends, royalties, services) | Paying company (withholding) | 2%–15% | Tax on service payments and capital income |
| PPh 25 | Monthly income tax instalments (corporate or individual) | Taxpayer (self-assessed) | 22% (corporate), progressive (individual) | Advance instalment towards annual income tax |
Tax Residency for Expatriates in Indonesia
Besides Indonesian citizens, foreigners working or earning income in Indonesia are classified as resident taxpayers if they:
- Stay in Indonesia for more than 183 days within 12 months, or through a permanent establishment in Indonesia
- Resident taxpayers are subject to worldwide income tax, while non-residents are taxed only on their Indonesian-sourced income.
To ensure compliance, expatriates must obtain an NPWP (Tax ID), file annual income tax returns (SPT), and maintain records of both Indonesian and overseas income.
Common Mistakes Expats Make and How to Avoid Them
- Not registering for NPWP – Without a Tax ID, your employer must withhold double under PPh 21.
- Misclassifying income – Many consultants and freelancers wrongly report service fees under PPh 21 instead of PPh 23.
- Ignoring PPh 25 obligations – Failure to pay monthly instalments can lead to underpayment penalties.
- Assuming a tax treaty automatically applies – Double taxation treaties must be formally invoked through documentation.
How LMI Consultancy Can Help with Your Tax Reporting Process in Indonesia
Managing tax compliance in Indonesia can be time-consuming and confusing, especially for expatriates navigating multiple income sources and visa obligations. As a subsidiary of LMI Consultancy, Lets Move Indonesia provides end-to-end and expert assistance in:
- PPh 21, PPh 23, and PPh 25 filings for both individuals and corporate entities
- Tax registration and NPWP issuance
- Payroll and withholding management for employers of expatriates
- Tax planning and compliance audits
- Visa and work permit coordination to align immigration and taxation
Contact us today and partner with our in-house tax specialists ensure your filings are accurate, timely, and fully compliant with Indonesian regulations. Focus on your business and career growth without the stress of navigating bureaucracy.
