Tax Depreciation and Amortization in Indonesia: Rules for Foreign Companies

Foreign-owned companies in Indonesia can deduct depreciation and amortization expenses when calculating taxable corporate income. The allowable deductions depend on prescribed asset classifications, useful lives, and calculation methods.

For businesses investing heavily in fixed assets, the timing of these deductions can significantly affect annual tax liabilities and cash flow.

What Assets Qualify for Tax Depreciation and Amortization in Indonesia?

Foreign-owned companies (PT PMA) can generally depreciate tangible business assets and amortize qualifying intangible assets used to generate, collect, or maintain taxable income.

Tangible assets eligible for depreciation include:

• Machinery and manufacturing equipment.
• Business vehicles and transportation equipment.
• Office furniture and computers.
• Factories, warehouses, and other qualifying buildings.

Intangible assets and expenditures eligible for amortization may include:

• Patents and intellectual property rights.
• Qualifying licenses and software.
• Certain business rights and capitalized expenditures with benefits extending beyond one year.

Land held under ownership or specified land-use rights is generally not depreciable. Certain costs associated with extending land rights may qualify for amortization, depending on their nature and tax treatment.

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Routine maintenance may be deducted as an operating expense, while qualifying capital improvements are added to the asset’s remaining tax book value. If improvements extend the asset’s useful life, the remaining depreciation period is adjusted based on the additional useful life, subject to the applicable maximum for its asset group.

Tax Depreciation Rates and Useful Lives in Indonesia

Non-building tangible assets fall into four depreciation groups.

For non-building assets not listed in the prescribed classifications, Group 3 generally applies unless the Directorate General of Taxes (DGT) approves classification under Group 1, 2, or 4.

Buildings must use the straight-line method. Permanent buildings with actual useful lives exceeding 20 years may be depreciated over their recorded useful lives rather than the standard 20-year period, subject to applicable notification requirements.

Tax Amortization Rates for Intangible Assets

Qualifying intangible assets and capitalized expenditures generally follow four amortization groups.

Intangible assets with actual useful lives exceeding 20 years may qualify for amortization over their recorded useful lives, subject to applicable requirements.

General application software can generally be deducted as an operating expense in the year incurred. If included in the purchase price of computer hardware, its cost is depreciated with the hardware.

Special application software designed to automate specific administrative systems or business activities is generally amortized under Group 1 over four years. This may include qualifying applications used in banking, capital markets, hospitality, healthcare, and aviation.

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Costs incurred to upgrade qualifying special application software are added to its remaining tax book value and amortized under Group 1 from the month of the upgrade.

Certain natural-resource rights and expenditures follow separate amortization rules based on production.

How Are Tax Depreciation and Amortization Calculated?

Indonesia permits straight-line and declining-balance methods for qualifying non-building assets and intangible assets. The selected method must be applied consistently.

Straight-Line Method

Under the straight-line method, the acquisition cost is deducted evenly over the prescribed useful life.

Consider a foreign-owned manufacturing company purchasing Group 2 machinery for IDR 800 million (USD 50,000, using an illustrative exchange rate of IDR 16,000 per USD).

With an eight-year useful life and a 12.5 percent annual rate, the depreciation expense for a full year is:

IDR 800 million × 12.5 percent = IDR 100 million (USD 6,250)

Declining-Balance Method

Under the declining-balance method, depreciation is calculated using the asset’s remaining tax book value.

For the same Group 2 machinery, the applicable rate is 25 percent.

The figures assume full-year depreciation. At the end of the prescribed useful life, the remaining tax book value is deducted.

The declining-balance method accelerates deductions into earlier years without increasing the total depreciable cost.

When Does Depreciation or Amortization Begin?

Depreciation generally begins in the month the acquisition expenditure is incurred. The first tax year’s deduction is calculated based on the number of months from the applicable commencement date.

Exceptions include:

• Assets under construction, which generally begin depreciation upon completion.
• Assets that have not been used or have not begun generating income, where a different commencement date may be approved by the DGT.
• Assets subject to special sector-specific provisions.

Amortization generally begins in the month the qualifying expenditure is incurred, subject to applicable exceptions.

Companies should maintain fixed asset registers, acquisition documents, and depreciation schedules to substantiate their deductions.

What Happens if a Company Sells or Disposes of a Depreciable Asset?

When a company sells a depreciable asset, the sale proceeds are generally treated as taxable income. The company can usually deduct the asset’s remaining value after depreciation, subject to applicable tax rules.

For instance, if machinery with a remaining value of IDR 300 million (USD 18,750) is sold for IDR 400 million (USD 25,000), the company generally pays corporate income tax on the IDR 100 million (USD 6,250) gain.

If the asset is sold for less than its remaining value, the company may claim the difference as a tax deduction. However, different rules apply to certain transactions, including sales of land and buildings subject to final income tax.

If an asset is damaged or destroyed, the company can generally deduct its remaining value and must report any insurance compensation as income. Where the insurance amount is confirmed in a later tax year, the company may request approval from the Directorate General of Taxes (DGT) to claim the loss in that year instead.

How Do Tax Depreciation Rules Differ from Accounting Depreciation?

Companies may calculate depreciation differently for financial reporting and tax purposes. Accounting depreciation is based on how long an asset is expected to be useful, while tax depreciation follows Indonesia’s prescribed rates and useful lives.

For instance, a company may depreciate machinery over ten years in its financial statements but must use eight years for tax purposes.

To calculate taxable income, the company removes the accounting depreciation expense from its profit calculation and deducts the amount allowed under tax rules instead. This adjustment may increase or decrease the company’s taxable income.

Differences in the timing of these deductions may also affect how future tax obligations are recorded in the company’s financial statements.

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Certain qualifying investments may receive tax incentives that allow faster depreciation or amortization. Companies must meet the relevant eligibility and approval requirements to claim these benefits.

Contact MAP Resources Indonesia for Tax Depreciation and Amortization Support

MAP Resources Indonesia assists foreign-owned companies with tax depreciation calculations, fiscal reconciliation, and corporate income tax compliance. Contact us at info@mapresourcesindonesia.com to discuss your company’s tax and accounting requirements.