Expatriate hiring often requires employers to coordinate Indonesian payroll with salary, allowances, or benefits paid overseas. Compensation for work performed in Indonesia can still create Indonesian tax and reporting obligations even when part of the employee’s remuneration is paid by a foreign parent company.
When Expatriate Salary Becomes Taxable in Indonesia
An individual generally becomes an Indonesian resident taxpayer if they reside in Indonesia, spend more than 183 days in Indonesia within a 12-month period, or are present during a tax year with the intention to reside in Indonesia.
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Foreign nationals who become Indonesian tax residents may qualify for special treatment during their first four tax years of Indonesian residency if they meet specific expertise requirements. Qualifying individuals who obtain approval for the regime can be taxed only on Indonesian-source income during this period rather than their worldwide income.
Remuneration for services performed in Indonesia can remain taxable even if the employee receives some or all of the payment overseas.
How PPh 21 and PPh 26 Apply
Resident expatriate employees generally fall within Indonesia’s PPh 21 employee withholding system.
For permanent employees, monthly withholding generally uses the applicable effective tax rate, or Tarif Efektif Rata-rata (TER), based on the employee’s income and tax status. The employer then performs the required annual or final-period calculation using Indonesia’s progressive individual income tax rates.
The progressive rates range from 5% on the first IDR 60 million (US$3,700) of taxable income to 35% on taxable income exceeding IDR 5 billion (US$307,000).
Non-resident individuals receiving Indonesian-source employment income can instead be subject to PPh 26 withholding at 20% of gross income, subject to any relief available under an applicable tax treaty.
Treaty relief depends on whether the relevant treaty conditions are satisfied and the required tax-residency documentation is available. A short stay in Indonesia does not, by itself, mean that employment income is automatically exempt from Indonesian tax.
Employers generally must pay the monthly PPh 21 withholding by the 15th of the following month and file the return by the 20th through Coretax DJP.
Offshore Salary Still Needs to Be Captured
Paying part of an expatriate’s salary outside Indonesia does not automatically remove it from Indonesian taxation.
An expatriate may receive a local rupiah salary from the foreign-owned limited liability company (PT PMA) while continuing to receive base salary, bonuses, housing support, or other benefits from the overseas parent company.
Where those payments relate to employment exercised in Indonesia, the employer needs to determine whether they form part of the employee’s Indonesian taxable remuneration. Indonesian payroll should therefore account for relevant remuneration paid overseas rather than only the amount transferred from the local company’s bank account.
Which Exchange Rate Should Employers Use?
Foreign-currency remuneration included in the Indonesian tax calculation must be converted into rupiah using the applicable exchange rate prescribed by the Minister of Finance, commonly referred to as the Kurs Pajak.
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Companies should distinguish this tax conversion from the exchange-rate treatment used for financial accounting. The Kurs Pajak determines the rupiah value used for relevant Indonesian tax calculations, while foreign-currency accounting follows the applicable Indonesian accounting standards and the company’s accounting policies.
BPJS Obligations for Foreign Employees
Foreign employees who work in Indonesia for at least six months generally become subject to Indonesia’s social security requirements, including BPJS Kesehatan and the applicable BPJS Ketenagakerjaan programs.
Employers should assess BPJS separately from the employee’s tax residency. The six-month employment threshold for foreign workers is not the same as the 183-day test used in determining individual tax residency.
How Expatriate Compensation Should Appear in Indonesian Accounts
Where the Indonesian entity bears the cost of an expatriate working for its operations, remuneration paid on its behalf by an overseas parent may need to be recognized through an appropriate employee expense and intercompany balance or recharge.
Payroll records, PPh 21 or PPh 26 reporting, intercompany charges, and financial statements should reflect the underlying compensation arrangement. Unexplained differences between these records can create questions during tax reviews, financial audits, or examinations of related-party charges.
How Split-Paid Expatriate Salaries Work
Consider an expatriate CFO working for an Indonesian subsidiary who receives IDR 60 million per month from the PT PMA while the Singapore parent continues paying part of the employee’s salary overseas.
The relevant offshore remuneration is included in the Indonesian tax assessment and converted into rupiah using the applicable Kurs Pajak.
The accounting treatment depends on the arrangement between the Indonesian subsidiary and its parent. If the Indonesian company bears the offshore employment cost, the amount may also need to be reflected through an intercompany payable or recharge.
Manage Expatriate Payroll With MAP Resources Indonesia
MAP Resources Indonesia can help foreign investors manage expatriate payroll, including offshore compensation, Indonesian tax reporting, and the related accounting treatment. Contact us at info@mapresourcesindonesia.com.
