Provisions on establishing a foreign representative office in Indonesia. It’s rights and obligation.
Representative Offices of Foreign Companies (“KPPA”) are offices established by foreign companies or a combination of foreign companies in other countries as their representatives in Indonesia, which aim to take care of the interests of affiliated companies and to prepare for the establishment and development of business activities of Foreign Investment Companies (PT PMA).
The following are some important provisions that need to be known in establishing KPPA, including:
Conditions and Limitation of KPPA Activities:
- The office is headed by one or more foreign nationals or Indonesian citizens who act as office managers based on a letter of appointment made by a foreign company or a combination of foreign companies outside the territory of Indonesia;
- Office activities are limited to its role as supervisor, liaison, coordinator, and take care of the interests of the company or its affiliated companies in Indonesia and or countries outside Indonesia.
- The office will not look for any income from sources in Indonesia, including not being allowed to carry out activities or carry out an agreement / transaction of the sale and purchase of goods or services with companies or individuals in the country.
- The office will not participate in any form in the management of a company, subsidiary or branch company in Indonesia.
- Office Managers should be residing in Indonesia.
- KPPA location must be in an office building that is already available.
Representative Office License
- Request to obtain permission to establish KPPA, submitted to the Head of the Investment Coordinating Board (“BKPM”) Perka BKPM No.5 / 2013 Jo Perka BKPM No.12 / 2013 XI, by attaching the required documents, namely:
- Articles of Association of foreign companies to be represented;
- Letter of appointment from foreign companies to be represented;
- Photocopy of passport (for foreigners) or KTP (for Indonesian citizens) who will become the Representative Executive;
- Declaration of willingness to stay and work as a Representative Executive only, not doing other business;
- Power of attorney, if the application is not submitted by the management of the foreign company
Furthermore KPPA License is issued in the form of a License signed by the Head of BKPM or appointed official no later than 5 (five) working days from receipt of a complete and correct application, with a copy to:
– Minister of Finance;
– Minister of Trade;
– Minister of Manpower and Transmigration;
– The Head of Indonesian Representative in the country of origin of the foreign company;
– Governor / Regent / Mayor.
After obtained approval from BKPM, Representative Office must immediately report to PTSP-PDPPM to get direction and guidance in completing regional licensing, no later than 3 (three) months after the issuance of the Approval Letter. The area licenses in question include:
– Company domicile certificate;
– Tax ID number;
– Taxable Inauguration Letter;
– Main Business Number (NIB);
– and other required permits
Obligations after obtained Representative Office License from BKPM
Representative Offices of Foreign Companies (KPPA) must comply with the provisions in accordance with the Decree of the Head of the Investment Coordinating Board Number 22 / SK / 2001 dated August 1, 2001 as follows:
- KPPA Manager must submit an annual report, no later than January 31 of the following year to the Head of the Investment Coordinating Board using the KPPA report form;
- Amendments to the provisions contained in the Approval Letter must obtain prior approval from the Investment Coordinating Board before the changes take place, which include:
- Change in company name;
- Change in the Head of Representative Office;
- Moving office locations to other Provinces;
- Changes in the number of foreign workers employed
Representative Office Tax Obligations
Article 2 of the Income Tax Law states that a Permanent Establishment/Badan Usaha Tetap (“BUT”) is a form of business that is used by individuals who do not reside in Indonesia, individuals who are in Indonesia for no more than 183 (one hundred eighty three) days within a period 12 (twelve) months, and a body that is not established and is not domiciled in Indonesia to run a business or conduct activities in Indonesia, including a representative office.
The representative office did not classify the extent of its activities. However, in article 5 the Tax Treaty explains the exceptions to the BUT, i.e:
- Use of facilities solely for the purpose of storing or displaying merchandise belonging to the company;
- Arrangement of a stock of goods or merchandise belonging to the company solely for the purpose of being stored, exhibited or delivered;
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by other companies;
- The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the company;
- The maintenance of a fixed place of business solely for the purpose of advertising, to provide information, to carry out scientific research or for similar activities which are preparatory or supportive for the interests of the company;
- The maintenance of a fixed place of business solely for each of the combined activities mentioned in points 1) to 5), provided that all parts of a particular place of business are of a preparatory or supporting nature.
In general, taxation rates are in accordance with article 17 paragraph (1) and paragraph (2a) of the Income Tax Law, and there are taxation that uses special final tariffs, namely a foreign trading company that has a trade representative office in Indonesia.
The subject of taxation in this case is the Foreign Taxpayer / Wajib Pajak Luar Negeri (“WPLN”), which is the Representative Office or Liaison Office in Indonesia originating from countries that have not yet or who already have a double taxation avoidance agreement (P3B) with Indonesia, but which has the limitations as mentioned above, namely ” solely “.
The object of the tax is the gross export value, which is all the value of compensation or compensation received or obtained that has a trade representative office in Indonesia from the delivery of goods to individuals or entities that are located or domiciled in Indonesia.
The tax rate for the WPLN that has a Trade Representative Office in Indonesia is 0.44% of the gross export value and is final.
The basic calculation of 0.44% is:
- Income tax for taxable income payable is 30% x 1% = 0.3%
- Taxable income after deducting tax from permanent establishment = 20% x 1- 0.3 = 0.14
- For KPD from P3B partner countries with Indonesia, the amount of tax payable is adjusted to the BPT tariff of a Permanent Establishment as referred to in the related P3B (SE-2 / PJ.03 / 2009).
Procedure for Deduction, Deposit and Tax Reporting
Payment and reporting of PPh from WPLN which has a Trade Representative Office in Indonesia and its administration at the Tax Service Office is as follows:
- WPLN’s that have a Trade Representative Office in Indonesia are required to pay income tax payable in a tax period to the perception bank or Post and Giro Office no later than the 15th of the following month after the month of receipt or income, using one Final Tax Deposit (SSP) ;
- The WPLN that has a Trade Representative Office in Indonesia is required to report income tax payments made to the Tax Service Office no later than the 20th of the following month after the month of receipt or income, using the form according to attachment I KEP-667 / PJ. / 2001 and attached with the 3rd SSP Final sheet.
Obligations as a tax cut
Representative offices (foreign companies) are also included as income tax cut Article 4 paragraph (2), Article 21/26, Article 23/26, which is when the representative office (foreign company) provides an amount of money from an activity, job, or service to a party third.
Based on the description above, it is explained that KPPA is a subject of permanent corporation tax, but if the representative office is merely:
- for the purpose of storing or displaying merchandise belonging to the company
- the purpose to be stored, exhibited or submitted
- the intent to be processed by another company
- for the purpose of buying goods or merchandise or for collecting information for the benefit of the company
- for advertising purposes, to provide information, to carry out scientific research or for similar activities which are preparatory or supportive for the interests of the company;
Then the representative office is not BUT. So in this case the representative office is not subject to Corporate Income Tax rates because it does not meet BUT criteria.