Income Tax Article 23

Intro to Income Tax Article 23?

Income Tax Article 23 (PPh 23) is a withholding tax provision within Indonesia’s tax system that applies to specific types of income derived from capital investments, services, and other activities. This tax provision requires the payer of such income to withhold a percentage of the payment and remit it to the tax authorities on behalf of the income recipient. Understanding Income Tax Article 23 is crucial for businesses operating in Indonesia to ensure proper tax compliance.

Definition of Income Tax Article 23

Income Tax Article 23 (Pajak Penghasilan Pasal 23, commonly abbreviated as PPh 23) is a specific withholding tax regulation in Indonesia’s Income Tax Law (UU PPh) that applies to certain types of income paid to resident taxpayers. This provision mandates that the party making specified payments must withhold tax at the source and remit it to the government, effectively making the payer a collection agent for the tax authority.

The standard withholding rate under Article 23 is 2% of the gross amount for most technical services, management services, consulting services, and rental of assets other than land and buildings. For dividend payments, interest, royalties, and prizes/awards, a higher rate of 15% applies. The rates may be reduced if the income recipient possesses a valid tax identification number (NPWP); otherwise, a 100% surcharge on the standard rate may apply.

Income Tax Article 23 differs from other withholding tax provisions in Indonesia’s tax system, such as Article 21 (which applies to employment income), Article 22 (which applies to certain goods and imports), and Article 26 (which applies to payments made to non-residents). The withheld tax under Article 23 generally represents an advance payment of the recipient’s annual income tax obligation, which can be credited against their final tax liability when filing an annual tax return.

Importance of Income Tax Article 23 in HR

Income Tax Article 23 has significant implications for human resources and finance departments in organizations operating in Indonesia. First, it creates compliance obligations for companies that make payments subject to this withholding requirement. HR and finance teams must correctly identify which payments fall under Article 23, apply the appropriate withholding rate, and ensure timely remittance of the withheld amounts to the tax authority.

From a cash flow perspective, Article 23 affects both the payer and recipient of the income. For the payer, it creates administrative responsibilities for calculating, withholding, reporting, and remitting the tax. For service providers and other income recipients, it reduces the immediate cash received but provides a tax credit that can be utilized when filing their annual tax returns.

Understanding Article 23 is particularly important when companies engage external consultants, trainers, or service providers, as many of these payments will trigger withholding obligations. HR departments must coordinate closely with finance to ensure proper documentation is maintained, including withholding tax slips (bukti potong) that must be provided to income recipients as evidence of the tax withheld.

For multinational companies, Income Tax Article 23 represents one element of Indonesia’s complex tax ecosystem that must be navigated carefully to avoid non-compliance penalties while optimizing tax efficiency. As noted in resources on federal income tax systems, withholding mechanisms are common across jurisdictions but vary significantly in their specific requirements and applications.

Examples of Income Tax Article 23

Management Consulting Services: PT Maju Sejahtera hires a local Indonesian consulting firm to provide management advisory services for their business restructuring project. The consulting firm charges Rp 100,000,000 for these services. As the payer, PT Maju Sejahtera must withhold 2% of this amount (Rp 2,000,000) under Income Tax Article 23 and remit it to the tax authority. The consulting firm receives a net payment of Rp 98,000,000 along with a withholding tax slip (bukti potong) documenting the Rp 2,000,000 tax withheld, which they can use as a tax credit when filing their annual corporate tax return.

Equipment Rental: PT Teknologi Baru rents specialized equipment from an Indonesian equipment leasing company for six months at a cost of Rp 60,000,000. Since rental of movable assets falls under Income Tax Article 23, PT Teknologi Baru must withhold 2% (Rp 1,200,000) from the payment and remit this amount to the tax office. The equipment leasing company receives Rp 58,800,000 and a withholding tax slip. If the leasing company did not provide their tax identification number (NPWP), PT Teknologi Baru would be required to withhold 4% (Rp 2,400,000) instead of the standard 2% rate.

Dividend Payment: An Indonesian corporation declares dividends to its domestic corporate shareholders. For a shareholder receiving a dividend of Rp 50,000,000, the corporation must withhold Income Tax Article 23 at the rate of 15% (Rp 7,500,000) before distributing the net amount of Rp 42,500,000 to the shareholder. The shareholder receives a withholding tax slip documenting the tax withheld, which can be used as a tax credit. However, if the shareholder is a qualifying Indonesian corporation that owns at least 25% of the shares, the dividend may be exempt from withholding under certain conditions as stipulated in Indonesian tax regulations.

How HRMS platforms like Asanify support Income Tax Article 23

Modern HRMS platforms provide valuable support for managing Income Tax Article 23 obligations through several key functionalities:

Payment Classification System: These platforms help organizations properly classify different types of payments to vendors, service providers, and contractors, automatically flagging transactions that may be subject to Income Tax Article 23 withholding based on payment type and recipient information.

Automated Calculation: HRMS systems with integrated finance modules can automatically calculate the correct withholding amount (2% or 15% depending on the income type, or higher rates if the recipient lacks a tax ID number), reducing the risk of calculation errors and ensuring consistent application of withholding requirements.

Withholding Tax Management: Advanced platforms provide specialized modules for managing withholding tax obligations, including generating withholding tax slips (bukti potong) in the format required by Indonesian tax authorities and maintaining a comprehensive register of all withholding transactions.

Tax Reporting: These systems can generate monthly SPT Masa PPh 23/26 reports required for submission to the tax authority, tracking deadlines and alerting relevant personnel about upcoming filing and payment obligations.

Vendor Management: HRMS platforms with supplier management capabilities maintain critical tax information for vendors and service providers, including their tax status, tax ID numbers (NPWP), and withholding history, ensuring consistent and compliant handling of recurring payment relationships.

As highlighted in resources about tax rebates and employer wage taxes, modern HRMS solutions help organizations navigate complex tax requirements across multiple jurisdictions while maintaining accurate records for compliance and audit purposes.

FAQs about Income Tax Article 23

What types of payments are subject to Income Tax Article 23 withholding?

Income Tax Article 23 applies to several categories of payments made to Indonesian resident taxpayers. The 2% withholding rate applies to technical services (including engineering, architectural, and IT services); management services; consulting services; rental of movable assets; non-employee labor services; mining services except those covered by Article 22; freight forwarding; security services; event organization services; waste management services; cleaning services; catering services; and similar business activities. The 15% withholding rate applies to dividends (unless specific exemptions apply); interest including premiums, discounts, and loan guarantee fees; royalties for use of intellectual property; prizes and awards related to business activities; and rental of immovable assets other than land and buildings (which are covered by Income Tax Article 4(2) at different rates).

What are the consequences of failing to withhold Income Tax Article 23?

Failing to withhold Income Tax Article 23 when required carries significant consequences in Indonesia. The payer becomes personally liable for the tax that should have been withheld, effectively increasing the cost of the transaction. Additionally, the tax authority will impose a penalty of 2% interest per month (up to a maximum of 48%) on the unpaid tax amount, calculated from the payment date until the tax is settled. Administrative sanctions may include a tax assessment letter with additional penalties up to 100% of the unpaid tax. For repeated or serious non-compliance, the tax office may conduct a comprehensive tax audit covering other tax obligations, potentially uncovering additional issues. In extreme cases of deliberate evasion, criminal sanctions could apply. Furthermore, failure to withhold may create complications for the income recipient, as they won’t receive proper documentation of tax credits for their annual filing.

How does Income Tax Article 23 differ from Income Tax Article 21?

Income Tax Article 23 and Article 21 differ primarily in the types of income they cover and how the withholding is calculated. Income Tax Article 21 applies specifically to employment income including salaries, wages, honoraria, allowances, and other forms of remuneration related to work or services performed by individuals. The withholding is calculated using progressive tax rates (5%-30%) after considering personal relief (PTKP) and deductions. In contrast, Income Tax Article 23 applies to certain types of non-employment income paid to resident taxpayers (both individuals and entities), such as dividends, interest, royalties, and payments for various services. Article 23 uses flat rates (2% or 15% depending on the income type) applied to the gross payment amount without deductions. Article 21 is focused on the employee-employer relationship, while Article 23 generally covers business-to-business transactions and passive income flows.

Are there any exemptions from Income Tax Article 23 withholding?

Yes, several exemptions exist for Income Tax Article 23 withholding in Indonesia. Payments to banks and financial institutions licensed in Indonesia are exempt from Article 23 withholding on interest income. Dividends paid to resident corporate taxpayers owning at least 25% of shares in the dividend-paying company are exempt under certain conditions. Payments to entities with specific tax exemption letters (Surat Keterangan Bebas or SKB) issued by the Directorate General of Taxes are exempt from withholding for the period specified in the exemption letter. Rental payments for land and buildings are exempt from Article 23 as they fall under Income Tax Article 4(2) instead. Payments below certain thresholds (which vary by payment type and are specified in tax regulations) may be exempt from withholding requirements. Additionally, payments to government institutions and certain state-owned enterprises may qualify for exemption under specific conditions detailed in tax regulations.

How is Income Tax Article 23 reported and remitted to the tax authorities?

The reporting and remittance process for Income Tax Article 23 in Indonesia follows a specific timeline and format. The withheld tax must be remitted to the state treasury through appointed banks or electronic channels by the 10th of the month following the month when the income was paid or accrued. The withholding entity must then report the withholding by submitting SPT Masa PPh Pasal 23/26 (the monthly tax return for Articles 23 and 26) to the tax office by the 20th of the following month. This return must include details of all withholding transactions, categorized by income type and recipient. For each withholding transaction, the withholding agent must issue Bukti Potong PPh Pasal 23 (withholding tax slip) to the income recipient as proof of tax withheld. This document is crucial for the recipient to claim tax credits. The withholding agent must maintain records of all transactions, withholding calculations, tax payments, and withholding slips for a minimum of 10 years for potential tax audits.