International Turnkey Contracting in ASEAN: EPC-Projects in Indonesia

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published on 16 March 2022 | reading time approx. 5 minutes


The importance of turnkey or EPC-projects (short for: Engineering, Procure­ment and Construction) has increased significantly in the Southeast Asia region – this also applies to Indonesia. Various factors play an important role in the realisation. In the following article, we take a closer look at tax, investment and manpower conside­ra­tions in Indonesia.



Tax Considerations

When is a permanent establishment (PE) generally established for on-site works? Does a double taxation agreement (DTA) between Indonesia and Germany affect this aspect?

Based on Indonesian Income Tax Law, on-site works related to construction projects, installation and assembly automatically trigger a Permanent Esta­blish­ment without any time limitation. However, based on the DTA, a building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months.


Is it a common approach in Indonesia to split EPC contracts in on- and offshore parts to mitigate tax risks?

If the duration of an EPC project leads to a PE creation, the taxable income of a foreign contractor’s PE con­sists of the value of the contracted goods and services. It is common to split onshore and offshore parts in order to distinguish the supplier of goods and the supplier of services carrying out the installation or construc­tion. This approach would limit the taxable income of the PE to the value of the installation or construction services.

The DTA in particular provides a beneficial provision in the DTA Protocol. It states that if machinery or equip­ment is delivered from the head office or another permanent establishment of the enterprise, or a third person in connection with those activities or independently therefrom, the value of such deliveries will not be attri­buted to the profits of the building site or construction, assembly or installation project.

 

Hence, according to the DTA Protocol, the supply of goods is not attributable to the taxable profit of the PE. Therefore, the PE taxable income is only limited to the value of construction and installation services without the need to segregate the supplier of goods and the supplier of services as mentioned above.


Are there any specific taxes to be observed for EPC contracts in Indonesia?

Final Income Tax
The construction industry is subject to Final Tax in accordance with Government Regulation Number 51/2008. A PE which carries out EPC activities is subject to this final tax provision.

 
The tax is collected largely through the withholding tax mechanism, whereby the project owner withholds income tax of 2 – 6 percent from every payment to the EPC contractor. The income tax base commonly is the gross income (contract value).



Branch Profit Tax (BPT)
A PE is also subject to Branch Profit Tax of 20 percent referring to the domestic Income Tax Law. BPT is similar to tax on dividend or profit distribution to home country, which is calculated on the profit after Corporate Income Tax.


Whilst the Corporate Income Tax is imposed on taxable profit, the Branch Profit Tax is imposed on the residual profit after Corporate Income Tax. The tax rate may be reduced in accordance with applicable tax agreements.  Based on the DTA, the branch profit tax rate amounts to 10 percent.


Investment Considerations

Are there specific investment conditions or permits/licences required for EPC-works in Indonesia?

Engineering-Procurement-Construction falls within the activity of “construction services”. To carry out con­struc­tion services, a service provider is required to obtain the corresponding business licenses (Perizinan Berusaha). Under the current legislature in Indonesia, the type of business licenses required for certain business activities is determined based on the risk level and the rating of the business scale of said activity.

From a regulatory perspective, business activities conducted by foreign parties must be classified as large scale business. Further, under the current regime, large scale construction services are rated as having “Medium High” risk and therefore require a Business Registration Number (Locally known as “Nomor Induk Berusaha” or short: NIB) and the standard certificate as business licenses.

In addition to NIB and the standard certificate, a foreign construction service provider is also required to obtain a Business Entity Certificate (locally known as “Sertifikat Badan Usaha” or short: SBU). Other additional permits and requirements such as the construction work competency certificate, water resources utilization permit and road parts utilization permit would also be applicable depending of the type of the construction services to be provided.


Would a mere tax registration of a PE be sufficient or is a certain investment vehicle required in Indonesia?

No, a mere tax registration of a PE would not be sufficient to obtain the business licenses required to provide construction services. In order to obtain these business licenses, foreign construction service providers shall either (i) open a representative office (“RO”) or (ii) establish a foreign investment company (“PMA Company”) in Indonesia.

If the foreign construction service provider decides to open an RO only, please note that the RO is required to form a joint operation (“JO”) with a large scale local construction service provider (which has also obtained the required business licenses) in order to provide construction services in Indonesia.


Can the PE get own bank accounts and handle local currency payments as well as FOREX transactions for the project?

Technically, a PE can open a bank account in Indonesia and subsequently handle IDR or foreign currency payments.

However, since a project must be carried out by a JO or a PMA Company (please refer to the explanations above) as opposed to a mere PE, payments with respect to such projects shall also be handled by the respec­tive JO or PMA Company accordingly.


Labour Law Considerations

Which immigration requirements commonly apply for foreign staff temporarily deployed to work on-site in Indonesia?

Foreign workers (for temporary work) must have a work visa and stay permit based on the work permit granted by the Ministry of Manpower. The temporary work permit can be granted to foreign workers working in Indonesia for temporary work such as a One-off service or work to be completed within less than 6 months.
In general, the requirements to obtain a work permit for foreigners include

  • a Foreign Workers Utilization Plan (RPTKA) approval from the Ministry of Manpower. This approval of the RPTKA cannot be extended for a temporary work permit; and
  • a payment of the Compensation Fee for the Use of Foreign Workers (DKPTKA).


The DKPTKA must be paid according to the foreign workers’ duration of employment, in the amount of 100 US-dollar per position, per person and per month.


Can work permits, if required, be applied for by an overseas company or the foreign individuals directly or is the involvement of a local entity required?

Local entity involvement is required for the application of foreigner work permits. This local entity will be the sponsor/guarantor for the foreign worker.


Are there taxes or social security contributions applicable for foreign staff temporarily working on-site in Indonesia? Under which conditions are foreigners required to pay income tax?

The employer/sponsor in Indonesia must register foreign workers working in Indonesia for more than 6 months in the national social security program (BPJS Ketenagakerjaan) or in corresponding insurance programs, if the working period is less than 6 months.

Foreigners who work in Indonesia for 183 days or less in a 12-months period and/or hold a limited stay permit, are categorized as non-tax resident in Indonesia. Income sourced from Indonesia received by non-tax residents is subject to Article 26 Income tax at 20 percent from the gross amount.

Foreigners staying in Indonesia for more than 183 days in a 12-months period and/or hold a working permit/stay permit valid for more than 183 days, are categorized as resident taxpayers in Indonesia. Resident taxpayers are obliged to obtain a tax-ID and to file an Individual Income tax return in Indonesia based on their worldwide income. The applicable individual income tax for resident taxpayer are illustrated below:


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