Indonesia Introduces New VAT Calculation Method under PMK-131 and Updates Corporate Income Tax Holiday Regulations

Indonesia's Harmonization of Tax Regulations Law (HPP Law), enacted in 2021, stipulated that the VAT rate would increase from 11% to 12% effective January 1, 2025. However, in light of the country's current economic challenges and strong public opposition to the tax hike, the Ministry of Finance issued Regulation No. 131/2024 ("PMK-131") on December 31, 2024, introducing a new approach to VAT calculation. PMK-131 serves as the implementing regulation for Article 8A of Law No. 8/1983 on VAT (as most recently amended by Law No. 6/2023) and came into effect on January 1, 2025.

Under PMK-131, an adjusted VAT base of 11/12 is introduced for the import or delivery of taxable goods (excluding luxury goods), the provision of taxable services within Indonesia, and the use of intangible taxable goods and/or services sourced from abroad. This adjustment effectively maintains an 11% VAT rate.

Key Provisions of PMK-131:

1. As of January 1, 2025, VAT-registered businesses must pay VAT at 12% on the importation and/or sale of taxable goods within Indonesia. Taxable luxury goods subject to Luxury Goods Sales Tax (LGST) are also subject to VAT at 12%. These include luxury cars (under Ministry of Finance Regulation No. 141/PMK.010/2021 as amended by No. 42/PMK.010/2022) and other luxury goods (under Regulation No. 96/PMK.032/2021, as amended by No. 15/PMK.03/2023, "PMK-15").

2. Luxury goods other than cars, as specified under PMK-15, are limited to:

2.1. Luxury residential properties such as mansions, apartments, and townhouses valued at a minimum of IDR 30 billion;

2.2. Hot air balloons and gliders;

2.3. Private firearms and ammunition;

2.4. Private helicopters and jets;

2.5. Private yachts and cruise ships.

3. For the importation and/or sale of taxable goods (excluding the luxury goods above) and the use of taxable intangible assets and/or services sourced from abroad, VAT must be calculated using the adjusted base. Specifically, VAT is levied at 12% on 11/12 of the import value, sale value, or exchange value, resulting in an effective VAT rate of 11%.

4. Input VAT incurred from the importation or procurement of taxable goods and/or services, and from the use of intangible assets and/or services from abroad, calculated based on the adjusted base, remains creditable against output VAT in accordance with prevailing VAT rules.

5. PMK-131 does not apply to taxable goods and/or services for which VAT is calculated based on a special amount or an adjusted base under existing laws. Such goods/services continue to follow existing VAT regulations.

6. For VAT-registered businesses selling taxable luxury goods directly to end consumers:

6.1. From January 1, 2025, to January 31, 2025, VAT will be calculated at 12% applied to the adjusted base (11/12 of the sales price), effectively maintaining the VAT rate at 11%.

6.2. Starting February 1, 2025, VAT will be calculated at 12% of the full sales or import value.

The Ministry of Finance also issued Regulation No. 69/2024 ("PMK-69"), effective from October 9, 2024, updating the corporate income tax holiday scheme previously governed by Regulation No. 130/2020 ("PMK-130"). PMK-69 extends the deadline for submitting tax holiday applications from October 8, 2024, under PMK-130, to December 31, 2025.

Key Updates under PMK-69:

1. Implementation of Pillar Two: Taxpayers benefiting from tax holidays whose multinational enterprise (MNE) groups are subject to the global minimum tax rules under Pillar Two must pay a domestic top-up tax. This obligation also applies to taxpayers already enjoying tax holidays prior to the enactment of PMK-69.

2. Anticipated Regulations: Although Indonesia has not yet issued domestic legislation aligning with the Global Anti-Base Erosion (GloBE) Rules, forthcoming regulations are expected to incorporate the Qualified Domestic Minimum Top-up Tax (QDMTT) provisions.

Other Updates under PMK-69:

1. Exceptions: Taxpayers benefiting from the special tax holiday scheme for investments in the new capital city "Nusantara" are not eligible for the tax holiday incentives provided under PMK-69.

2. Application Requirements: Applicants must submit a Tax Payment Certificate (SKP) online when applying for the tax holiday. Under PMK-130, this requirement applied only to Indonesian shareholders.

3. Reporting Obligations: Applicants must submit investment realization and production reports through the Online Single Submission (OSS) system.