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Hiring in Indonesia
Indonesia, officially known as the republic of Indonesia, is a country in Southeast Asia. Jakarta is the capital and the largest city of Indonesia. The largest sectors of the economy are services, industry and agriculture. Indonesia is rich in oil, natural gas, gold, copper, and coal. Its main trading partners are Japan, China, Singapore, and South Korea. Global PEO or Employer of Record (EOR) play a pivotal role in providing companies with services related to hiring employees, and ensuring compliance with Indonesia’s legal and tax regulations. Employment regulations including probation, holidays and termination are covered by the Labor Code. Labor Code stipulates that employees are entitled to 12 days of annual leave. Residents are taxed on their worldwide income. Non-resident individuals are subject to withholding tax (WHT) at 20% in respect of their Indonesian-sourced income. Global PEO’s facilitate companies by ensuring compliance with Indonesia’s Labor Code and tax laws.
statutory labor requirements
Probation Period
- An employer may impose a probationary period of maximum of 3 months.
Annual Leave
- Based on article 79 (2) (c) of Indonesian Law number 13 of 2003 about Manpower (Labor Law), an employee in Indonesia is entitled to receive 12 days of annual leave per year.
- This right of annual leave will arise after the given employee has worked for a company for 12 months consecutively.
Public Holidays
- New Year’s Day (1st January)
- Chinese New Year (25th January)
- Prophet's Ascension
- Nyepi (25th to 26th March)
- Good Friday (10th April)
- Labor
- Day (1st May)
- Vesak (7th May)
- Ascension Day (21st May)
- Lebaran (in Indonesia)
- Pancasila Day (1st June)
- Eid al-Adha
- Independence Day (17th August)
- Islamic New Year
- Prophet's Birthday
- Christmas Day (25th December)
Maternity Leave
- Indonesian law mandates that businesses give three months' paid maternity leave to female workers
- At least half of the maternity leave must be taken after the birth
Paternity Leave
- Fathers in Indonesia working in the public sector are eligible for paid paternity leave for one month, while those in the private sector are eligible to two days of paid leave
Sick Leave
- For the first four months, the employee is entitled to 100% of their pay.
- After the first four months, the employee's pay is reduced by 25% and an employer may terminate an employee who has been sick for 12 months.
- Sick pay is covered by the employer, not the government.
Work Hours
- The Indonesia workweek is 40 hours, with either 7 hours a day for 6 days a week or 8 hours a day for 5 days a week.
Overtime
- If employers request extra hours, they must pay 1.5 times their regular wages for the first hour and 2 times their regular wages for any hour after that.
- Wages should include and fixed allowances.
- Maximum overtime allowed is 3 hours a day or 14 hours a week. Senior-level positions are excluded from overtime.
Notice Period
- There is no required notice period for employers.
- Employees may resign with 30 days’ notice.
Severance
- The Labor Law provides different formula of severance pay for the different reasons for the dismissal/employment termination.
- This includes events such as imprisonment, death, retirement, bankruptcy, etc.
- Standard Severance Pay: one month of wages for service of less than one year, plus an additional month of wages for every year of service, up to nine months’ salary.
- Long Service pay which amounts to two months’ salary after the first three years of service, followed by an additional one month’s salary for every three years of service thereafter, up to a maximum of ten months’ salary for 24 years of service.
- Compensation Pay must be paid to cover the following:
-
- annual leave that has not expired or been taken.
- relocation expenses (expenses to return the employee and their family to the place from which they were recruited).
- medical and housing allowance: 15% of the total severance pay and service appreciation pay, if any.
- other benefits provided under the employment agreement, the company regulations or the CBA.
- other compensation amounts as determined by the Industrial Relations Court (this can include special arrangements between the employer and employee).
13th / 14th Month Pay
- Yes (Mandatory)
- There is a statutory requirement to pay the 13th month salary.
- This is called THR and it is a religious holiday pay to reflect the religious diversity in the country.
- For non-Muslims the THR is paid by December and for Muslims before Eid.
income tax
- A tax resident is taxed on worldwide income.
- However, this may be mitigated by the application of double taxation agreements (DTAs).
- Non-resident individuals are subject to withholding tax (WHT) at 20% in respect of their Indonesian-sourced income. Concessions are, however, available where a DTA is in force.
- Taxable income of an employee includes wages, salary, commissions, bonuses, pensions, directors’ fees and other compensation for work performed.
- Compensation in kind for work or services is not taxable income for the employee and is not a deductible expense for the employer.
- An Indonesian national who works overseas for more than 183 days within a 12-month period is not subject to tax on his or her employment income that is earned overseas and that is subject to tax overseas.
|
Individual Tax Rates |
||
|
Taxable income (IDR) |
Tax rate (%) |
Tax (IDR) |
|
Up to IDR 50 million |
5 |
2.5 million |
|
Above IDR 50 million to IDR 250 million |
15 |
30 million |
|
Above IDR 250 million to IDR 500 million |
25 |
62.5 million |
|
Above IDR 500 million |
30 |
30% of the relevant amount |
- Severance payments are taxed separately at the following rates: -
|
Tax on Severance Payments |
||
|
Taxable income (IDR) |
Tax rate (%) |
Tax (IDR) |
|
Up to IDR 50 million |
0 |
0 |
|
Above IDR 50 million to IDR 100 million |
5 |
2.5 million |
|
Above IDR 100 million to IDR 500 million |
15 |
60 million |
|
Above IDR 500 million |
25 |
25% of the relevant amount |
|
Tax on Lump-sum Payments |
||
|
Taxable income (IDR) |
Tax rate (%) |
Tax (IDR) |
|
Up to IDR 50 million |
0 |
0 |
|
Above IDR 50 million |
5 |
5% of the relevant amount |
deductible expenses
To determine the taxable income of regular employees, gross income is reduced by the following amounts:
-
- Standard deduction at a rate of 5% of gross income, up to a maximum of IDR6 million a year
- Contributions to a pension fund approved by the Minister of Finance and to TASPEN (Pension Insurance Saving Agency), as well as old-age savings or old-age allowance contributions to TASPEN and to the Worker Social Security program (BPJS Ketenagakerjaan), paid by employees
- To determine the taxable income of a pensioner, the gross pension is reduced by a deduction of 5% of the gross pension, up to a maximum of IDR2,400,000 a year.
- Annual personal allowances are deductible from taxable income.
|
Type of allowance |
Amount of allowance (IDR) |
|
Personal allowance |
54,000,000 |
|
Married persons’ additional allowance |
4,500,000 |
|
Wife’s additional allowance if receiving income not related to husband’s or other family member’s income |
54,000,000 |
|
Additional allowance for each dependent family member in direct bloodline and for adopted children, up to a maximum of three individuals |
4,500,000 |
- A self-employed business person may deduct from gross income ordinary expenses connected with earning income, including costs of materials, employee remuneration, bad debts, insurance premiums and administrative costs.
- Taxes other than income tax are deductible.
- If employee income taxes are borne by an employer, a grossing-up calculation must be made to claim the expense as a deduction from gross profit.
- A business may also deduct the following expenses:
-
- Depreciation and amortization, in accordance with specified rates
- Contributions to approved pension funds
- Losses from the sale of assets or rights used in a business
- Foreign-exchange losses
- Costs of research and development performed in Indonesia
- Scholarship, apprenticeship and training costs
- Fifty percent of the cost of automobiles provided to employees
- Fifty percent of the cost of mobile phones provided to employees
- Office refreshments provided to all employees
immigration
- Presidential Regulation Number 20 Year 2018, dated 29 March 2018, regarding Foreign Manpower Utilization was issued.
- In conjunction with the issuance of this regulation, the Ministry of Manpower (MoM) issued an implementing regulation No. 10 Year 2018 on 11 July 2018, and the Ministry of Law and Human Rights issued regulation No. 16 Year 2018 on 29 June 2018.
- The new regulation introduces significant changes with respect to the requirements of foreign manpower utilization.
- In brief, the new regulation has amendments in the following areas:
- The Foreign Manpower Utilization Plan (Rencana Penggunaan Tenaga Kerja Asing, or RPTKA) is not mandatory for a company shareholder who is on the board of directors or board of commissioners.
- The Work Permit (Izin Mempekerjakan Tenaga Kerja Asing, or IMTA) is no longer required.
-
- However, the company is still required to notify the use of foreign workers to the MoM and subsequently pay the Foreign Manpower Utilization Compensation Fund Levy (DKPTKA).
- The MoM then sends the notification to the Directorate General of Immigration (DGI) for further visa process.
- All foreign workers are still required to obtain a Limited Stay Visa (Visa Tinggal Terbatas, or VITAS) and a Limited Stay Permit (Izin Tinggal Terbatas, or ITAS).
- Both the VITAS and ITAS can be applied for directly at the appointed immigration authority located at the Indonesian Embassy or Consulate overseas, which is the representative of the Directorate General of Immigration.
- The ITAS approval is granted by the immigration authority to the foreign worker on arrival at the Immigration Check Point (Indonesian airport).
- The ITAS is valid as the stay permit for the foreign worker.
- The Indonesian government prefers that expatriates be employed in Indonesia only in positions that cannot currently be filled by Indonesian nationals.
- Companies that wish to hire expatriates must provide the necessary education and training programs for Indonesians who will replace the expatriates within a reasonable time period.
- In addition, employers must appoint Indonesian employees as the counterpart of the foreign workers and implement education and training for Indonesian employee as part of a transfer-of-knowledge program.
- The employer also is obliged to facilitate education and training of and the teaching of Indonesian language to the foreign workers.
- Employers must require their expatriate employees to obtain work and stay permits.
- Work permits are usually issued for a maximum period of 12 months and may be extended, subject to approval from the government.
|
Type of Visa/ Permit |
Documentation |
Validity |
Eligibility |
|
Limited Stay Visa (VITAS) |
a letter / statement of reference
issued by the Ministry of Justice |
2 years maximum |
A Limited Stay Visa (VITAS) is a visa for long term temporary stay that covers all aspects relevant, but not limited to: Investing, Working, Missionary (religious), Study/training, Research, Joint Family, Repatriation, and Retirement. |
|
Limited Stay Permit (ITAS) |
|
6 to 12 months |
This can be granted to the following: -
|
value added tax
- Generally, the VAT rate is 10 percent in Indonesia.
- However, the exact rate may be increased or decreased to 15 percent or 5 percent according to government regulation.
- VAT on the export of taxable tangible and intangible goods as well as export of services is fixed at 0 percent. Certain limitations for the zero-rated VAT apply to exports of services.
|
VAT |
|
|
Standard Rate |
10% |
|
Zero Rate |
0% |
|
Exempt Rate |
0% |
withholding tax
Dividends
- Dividends paid to a nonresident are subject to a 20% withholding tax unless the rate is reduced under a tax treaty.
- Dividends paid by a domestic corporate taxpayer to a resident company are subject to a 15% withholding tax, which represents an advance payment of tax liability
- A 10% final withholding tax is imposed on dividends paid to a tax resident individual
Interest
- Interest paid to a nonresident is subject to a 20% withholding tax unless the rate is reduced under a tax treaty
- Interest paid by a domestic taxpayer to a resident is subject to a 15% withholding tax, which generally represents an advance payment of tax liability
- Certain recipients are exempt from withholding tax (e.g. resident banks)
- Interest paid by a bank in Indonesia to a tax resident is subject to a 20% final withholding tax
Royalties
- A 20% withholding tax is imposed on royalties remitted abroad unless the rate is reduced under a tax treaty
- Royalties paid by a domestic taxpayer to a resident are subject to a 15% withholding tax, which represents an advance payment of tax liability
Technical Service Fees
- A 2% withholding tax applies on gross payments made by a domestic taxpayer to a resident taxpayer for technical, management and consulting services and rentals (except for land and building rentals, which are subject to a 10% final withholding tax)
- A 20% withholding tax is imposed on technical service fees remitted abroad unless the rate is reduced or eliminated under a tax treaty
|
Type of Payment |
Residents |
Nonresidents |
|
Dividends |
|
|
|
Interest |
|
|
|
Royalties |
|
|
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Fees for technical services |
|
|
termination
- The termination of employment in Indonesia is regulated by the Labor Law and Law No. 2 of 2004 on the Settlement of Industrial Relations Disputes. In principle, a 30-day notice period must be given to terminate an employment contract.
- Termination without cause: -
-
- The employee is terminated for reasons that are not related to misconduct but due to external factors such as bankruptcy, reorganization of the company, and mergers.
- Termination with cause: -
-
- The employee is terminated due to a violation of the employment contract or grave misconduct.
- The employee can also be dismissed if they have been unable to work for more than six months due to legal proceedings brought against them.
- Furthermore, if the employee has been absent from work for more than five consecutive working days without providing adequate evidence can have his/her employment contract terminated.
- Severance payments in Indonesia differ on whether an employee is considered a definite term employee or an indefinite term employee.
- For indefinite term employees, severance payments consist of:
-
- Severance pay;
- Long service pay;
- Compensation of rights.
- For definite term employees:
-
- Definite term employees are not entitled to severance payment, long service pay, or compensation of rights.
statutory benefits
- These are mandatory benefits as postulated by law
- These include probationary period, annual leave, public holidays, sick leave, maternity leave, paternity leave, overtime pay, notice period, severance pay and 13th month pay
- Statutory benefits also include social security benefits
|
Statutory Benefits |
|
Probationary Period |
|
Annual Leave |
|
Public Holidays |
|
Sick Leave |
|
Maternity Leave |
|
Paternity Leave |
|
Overtime Pay |
|
Notice Period |
|
Severance Pay |
|
13th month pay |
|
Social Security Benefits |
payments and invoicing
- The tax year in Indonesia is the calendar year.
- Married persons can separately file their own income tax returns even if they did not enter into a prenuptial agreement. Employee taxes are withheld by the employer.
- The employer must file a monthly return by the 20th day of the following month. The monthly tax return for December serves as the annual return because it also reports the cumulative income and related tax for the respective calendar year.
- Individuals are required to file individual income tax returns by 31 March following the end of the tax year.
- Individuals earning income only from employment are not required to file monthly tax returns
- Self-employed individuals must make monthly advance tax payments.
- The monthly payment amount is based on the previous year’s tax liability, reduced by tax withheld at source during the preceding year.
- The payment is due on the 15th day of the month following the income month.
- Nonresident foreign taxpayers are not required to file tax returns in Indonesia, unless they conduct business or activities in Indonesia through permanent establishments.
ease of doing business
- The ease of doing business index is an index created by Simeon Djankov, an economist at the Central and Eastern Europe sector of the World Bank Group.
- Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.
- According to the World Bank Indonesia ranked 73rd in the World in 2019 in terms of ease of doing business.
employee accruals
| Christmas Bonus% |
|
| Christmas Bonus Over Vacations % |
0% |
| Severance per Year % |
Employees are entitled to severance pay that equals 15 days of pay for each completed year of service (4.28% of annual salary) |
| Vacations % | The annual leave duration is 15 working days (4.28% of annual salary) |
| Notice % |
Employees are entitled to 30 days of notice period for one year of service or more (8.24%) |
| Christmas Bonus Over Notifications% | 0% |
| Vacations Plus% | 0% |
| Total percentage of Salary (yearly) | The total employment accruals as a percentage of salary per anum are equal to 16.89% |
employer accruals
Additional information (Country Accruals)
| Working accident protection | 1.74% |
| Death Insurance | 0.30% |
| Old age saving | 3.70% |
| Healthcare | 4.00% |
| Pension | 2.00% |
| Maternity | 3months |
| Christmas Bonus | 8.33% |
| Vacations | 7.40% |
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|
Employer Accruals Additional information
| Employment Accruals | ||
| Annual Leave | Based on article 79 (2) (c) of Indonesian Law number 13 of 2003 about Manpower (Labor Law), an employee in Indonesia is entitled to receive 12 days of annual leave per year. | This equals 3.28% (12/365 days) of annual income |
| Maternity Leave | Indonesian law mandates that businesses give three months' paid maternity leave to female workers | This equals 25% (3/12 months) of annual income |
| Paternity Leave | Fathers in Indonesia working in the public sector are eligible for paid paternity leave for one month, while those in the private sector are eligible to two days of paid leave | This equals 8.33% (1/12 months) of annual income |
| Sick Leave | For the first four months, the employee is entitled to 100% of their pay. | This equals 33.33% (4/12 months) of annual income |
| Overtime | If employers request extra hours, they must pay 1.5 times their regular wages for the first hour and 2 times their regular wages for any hour after that. Maximum overtime allowed is 3 hours a day or 14 hours a week. |
Normal hourly rate is around 75,625 IDR. Overtime is paid at an additional 37,812.5 IDR. |
| Severance | Standard Severance Pay: one month of wages for service of less than one year, plus an additional month of wages for every year of service, up to nine months’ salary. | This equals 8.33% (1/12 months) of annual income |
| 13th Month Pay | Employees are paid a mandatory 13th-month salary payment in Indonesia, often referred to as THR. | This equals 8.33% (1/12 months) of annual income |
| Social Security | The following percentage contributions of monthly salary are required for employers under the Worker Social Security program. Accident benefit (Jaminan Kecelakaan Kerja) 0.24% to 1.74%; Life insurance benefits (Jaminan Kematian) 0.3%; Old-age benefit (Jaminan Hari Tua) 3.7%; Pension benefit (Jaminan Pensiun) 2%. |
This equals 7.74% of annual income |
