Final Income Tax vs Art. 23 Withholding Tax on Construction Services

UPON closer examination, there are two income tax provisions relating to income from construction services in Indonesia, namely: (i) Article 23 Income Tax on construction services; and (ii) Article 4 paragraph (2) income tax on construction service businesses (Final Income Tax).

So, how does one distinguish between construction services subject to Article 23 Income Tax and those subject to Article 4 paragraph (2)?

Provisions on Article 23 on Income Tax Construction Services

Referring to Article 23 paragraph (1) subparagraph c number 2 of the Income Tax Law, Article 23 Income Tax at a rate of 2% of the gross amount is imposed on remuneration in connection with technical services, management services, construction services, consulting services and other services other than services already subject to Article 21 Withholding Tax.

Further provisions on the types of other such services are governed by the Minister of Finance Regulation (MoF Reg.) 141/2015. Referring to Article 1 paragraph (6) subparagraphs y and z of MoF Reg. 141/2015, the types of other services subject to Article 23 Income Tax at a rate of 2% of the gross amount include:

1. installation services of machinery, equipment, electricity, telephone, water, gas, air conditioning and/or cable TV, other than those performed by Taxpayers whose scope is in the construction sector and have permits and/or certification as construction entrepreneurs; and
2. care/repair/maintenance services of machinery, equipment, electricity, telephone, water, gas, air conditioning, cable TV and/or buildings, other than those performed by Taxpayers whose scope is in the construction sector and have permits and/or certification as construction entrepreneurs.

Based on the aforementioned article, it can be concluded that payments for certain construction services will be subject to Article 23 income tax if provided by a taxpayer whose scope of business is not in the construction sector and that does not hold a licence and/or certification as a construction entrepreneur.

Provisions on Article 4 Paragraph (2) Income Tax on Construction Service Businesses

Referring to Article 4 paragraph (2) subparagraph d of the Income Tax Law and Article 2 paragraph (1) of Gov. Reg. 51/2008, as last amended by Gov. Reg. 9/2022, income from construction service businesses is subject to final income tax. Construction services refer to construction consulting services and/or construction work.

Pursuant to Article 11 of the Construction Services Law, Article 11 paragraph (1) of Gov. Reg. 22/2020 and Article 2 paragraph (2) of Gov. Reg. 51/2008 as last amended by Gov. Reg. 9/2022, construction service businesses are classified as follows:

Further, pursuant to Article 2 paragraph (4) of Gov. Reg. 51/2008, as last amended by Gov. Reg. 9/2022, construction service businesses are conducted through 3 types of services:

1. construction consulting services, covering all or part of the activities that include the review, planning, design, supervision and management of the construction of a building;
2. construction work services, covering activities that include the construction, operation, maintenance, demolition and reconstruction of a building.
3. integrated construction work services, covering the integration of construction work and construction consulting services, including the integration of service functions in the integrated model of planning, procurement and development as well as the integrated model of planning and development.

Each of these construction service types is subject to a different final income tax rate depending on the qualification of the business entity's certificate. The following is a summary of the construction service business classifications and the applicable Final Income Tax rates pursuant to Article 3 paragraph (1) of Government Regulation 51/2008 as lastly amended by Government Regulation 9/2022:

This means that the imposition of final income tax on construction services depends on the type of business classification and the ownership of a construction service business entity certificate or a work competency certificate.

Based on the Elucidation to Article 3 paragraph (1) of Gov. Reg. 51/2008, as last amended by Gov. Reg. 9/2022, a "business entity certificate" refers to the proof of recognition of the classification and qualification of the Construction Services business capability, including results of the accreditation of foreign construction service capability. The business entity certificate is issued by:

1. a business entity association accredited by the Ministry of Public Works and Public Housing and recorded by construction service development agencies;
2. business entity certification agencies that have been accredited by the minister who administers governmental affairs in the field of energy and mineral resources; or
3. the minister who administers governmental affairs in the field of energy and mineral resources.

Meanwhile, "work competency certificates for individual businesses” refer to the proof of recognition of the competence of construction workers issued by professional certification agencies and recorded by construction service development agencies.

Conclusion

The imposition of tax on construction services depends on the object, the status of the service provider and its business classification. Income from construction services is subject to Final Article 4 paragraph (2) Income Tax, insofar as the services provided fall within the scope of the construction service business as regulated under the Construction Services Law and the Electricity Law.

Formally, a taxpayer engaged in construction service businesses is evidenced by ownership of a construction service business entity certificate and a work competency certificate. Meanwhile, there are provisions on other types of services subject to Article 23 Withholding Tax, namely:

1. installation services of machinery, equipment, electricity, telephone, water, gas, air conditioning and/or cable TV; and
2. care/repair/maintenance services of machinery, equipment, electricity, telephone, water, gas, air conditioning, cable TV and/or buildings.

However, if such services are performed by a taxpayer whose scope of business is in the construction field and who holds a licence and/or certification as a construction entrepreneur, Article 4 paragraph (2) Income Tax on construction services applies, not Article 23 Income Tax.

To simplify matters, the Directorate General of Taxes (DGT), through its outreach material entitled ‘Aspek Perpajakan Usaha Jasa Konstruksi’, provides a flowchart that may be used as a guide for identifying the withholding tax objects on construction services, as follows: