PPh 26 generally applies to Indonesian-source employment income received by a foreign employee who remains a non-resident taxpayer, while resident employees are generally subject to PPh 21. The treatment depends on the employee’s tax residency and the income connected with work performed in Indonesia, not simply where the salary is paid.
Is the Expat Employee a Resident or Non-Resident Taxpayer?
A foreign employee can become an Indonesian resident taxpayer by residing in Indonesia, being present in Indonesia for more than 183 days within a 12-month period, or being present during a tax year with the intention to reside in Indonesia.
The 183 days do not need to be consecutive. Multiple periods spent in Indonesia can count toward the threshold, making tax residency particularly important for foreign employees who travel in and out of Indonesia.
An employee may also be treated as resident before exceeding 183 days if there is evidence that they intend to live in Indonesia. This can include their immigration status and the expected length of their employment or stay.
Unsure whether PPh 21 or PPh 26 applies? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Employers should not automatically apply PPh 26 simply because a foreign employee has spent fewer than 183 days in Indonesia. The employer must also check whether the employee meets any of the other residency tests.
What Expat Income Is Subject to PPh 26?
Where a foreign employee remains a non-resident taxpayer, Indonesian-source employment income is generally subject to PPh 26 at the domestic rate of 20% of the gross amount, unless an applicable tax treaty changes the tax treatment.
The calculation is not limited to salary transferred through an Indonesian payroll. Bonuses, allowances and other payments connected with work performed in Indonesia may also need to be included.
Where an expatriate’s compensation is split between an Indonesian company and an overseas group company, Indonesian tax may extend beyond the amount appearing on the local payroll.
Can a Tax Treaty Change the PPh 26 Treatment?
Indonesia’s tax treaties can change how employment income received by a non-resident is taxed, but there is no standard reduced PPh 26 rate that applies to expatriate employees across all treaties.
Tax treaties typically consider where the work is performed, how long the employee is present in Indonesia, who pays the employee, and whether the pay is borne by an Indonesian permanent establishment (PE) or another Indonesian presence.
Where treaty relief is available, the employee must also meet Indonesia’s documentation requirements for claiming treaty benefits. This generally requires the applicable Form DGT or certificate of tax residence, with the information submitted through Coretax. Without the required documentation, the domestic PPh 26 treatment may apply.
Contact MAP Resources Indonesia at info@mapresourcesindonesia.com for expatriate tax and payroll support
An employee’s Indonesian tax residency and their treatment under a tax treaty are separate questions. Even if the employee is a non-resident under Indonesian law, the applicable treaty must still be checked to determine whether Indonesia can tax the employment income.
How Should Employers Handle Split and Offshore Payroll?
Multinational groups often split expatriate pay between the Indonesian entity and an overseas parent or affiliate. For example, base salary may be paid overseas while allowances, housing, or other compensation are handled in Indonesia.
The payment location does not by itself determine whether the income is taxable in Indonesia. The employer needs to consider the employee’s residency status, where the work is performed, the type of payment, and any applicable treaty provisions.
The Indonesian company needs visibility over both local and overseas pay. If its payroll records only the local component, it may not have the information needed to calculate Indonesian withholding correctly.
The issue can be more complex for foreign employees on short-term or rotational assignments. Repeated visits can accumulate toward the 183-day residency test, while evidence that the employee intends to live in Indonesia may affect residency even before that threshold is exceeded.
Tax-related books, records and supporting documents must generally be retained for 10 years.
Withholding and Reporting PPh 26
Where PPh 26 applies, the Indonesian withholding agent is responsible for calculating, withholding, paying and reporting the tax through Coretax DJP. If the employee’s residency status changes, the company may need to change the withholding treatment from PPh 26 to PPh 21.
The payroll tax treatment of foreign employees in Indonesia must reflect both the employee’s residency status and the income subject to Indonesian tax.
Managing Expatriate Withholding Tax With MAP Resources Indonesia
MAP Resources Indonesia supports foreign-owned companies with expatriate tax residency, PPh 21 and PPh 26 withholding, and cross-border payroll treatment. Contact us at info@mapresourcesindonesia.com.
