Indonesian Income Tax Law adopts source principle to levy income tax for non resident tax payer. By this principle the income which be earned by  non resident individual or entity tax payer will be taxed by Indonesian authority. The engagement of this principle is done trough witholding tax mecanism which called Income Tax Article 26. The name is based on the article in Indonesian Income Tax Law which rule this matter.

The rate of this witholding tax is 20 (twenty) percent based on gross income received or accrued by non resident taxpayer. But if this taxpayer is a resident of a country that Indonesia has tax treaty, so the rate is based on the tax treaty between

Indonesia and this country. The definition of income which is object of this witholding tax is also must be based on the tax treaty.

The withholding tax under this provision is obliged to be carried out by a government entity, a resident taxable person, organizer of activities, permanent establishment or the representative office of a foreign company who make payment to a non-resident Taxpayers other than a permanent establishment in Indonesia, at a rate of 20% (twenty percent) of the gross amount.

 The types of income on which withholding must be done can be categorized into:

  1. Income derived from capital in the form of dividend, interest including premium, discount, premium swap with respect to interest swap and compensation for a guarantee loan, royalties, rent and other income related to the use of property;
  2. Compensation for services, employment and activities;
  3. Gift and rewards in whatever name or form;
  4. Pensions and other periodic payment.

Under this provision, for instance, a resident taxable person who pays royalty of Rp100,000,000.00 to a non-resident Taxpayer is obliged to withhold tax of 20% (twenty percent) of Rp100,000,000.00.

Another example, a foreign athlete who participates marathon in Indonesia and wins a cash prize is subject to withholding tax of 20% (twenty percent).

Completely, the Income Tax Art. 26 rate based on tax treaty is presented by this table below.

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