Land for National Strategic Project: Is the Compensation Taxable?
Question:
ALLOW me to introduce myself. My name is Asri, and I am a housewife. My land must be transferred for a national strategic project (proyek strategis nasional/PSN in Indonesian). I have agreed on a compensation value with the government as consideration for the transfer of the land.
As far as I am aware, there are tax implications relating to the transfer of the right to land. Does this imply that the compensation I receive for the transfer of land for the national strategic project is subject to tax? Thank you.
Asri, West Java.
Answer:
THANK you for your question, Ms Asri. In general, it is correct that a transfer of land is a legal event that is subject to tax. There are 3 types of tax associated with such an event, namely income tax, acquisition duty on the right to land and//or building (bea perolehan hak atas tanah dan/atau bangunan/BPHTB) and value added tax (VAT).
However, not all three of these tax aspects are necessarily relevant in your particular circumstances, Ms Asri. This is because the application of tax provisions often depends on the context of each case.
As such, what is the tax treatment of a transfer of land driven by the interests of a national strategic project?
Before addressing the subject, it is first necessary to understand the tax aspects of a transfer of land in simple terms:
Income received from the transfer of land is subject to final income tax at a rate of up to 2.5%. "Final" means that the income does not need to be taken into account again when calculating annual tax.
Liable party: the individual or entity receiving the income must self-remit income tax payable.
The acquisition value of land is subject to BPHTB at a rate of up to 5%, depending on local regulations.
Liable party: the individual or entity acquiring the land must pay BPHTB.
The supply of land is subject to VAT at an effective rate of 11%, where the supply is conducted by a taxable person (pengusaha kena pajak/PKP in Indonesian), i.e., an entrepreneur whose turnover exceeds IDR4.8 billion in one accounting year.
Liable party: the buyer of the land bears the VAT collected by the taxable person.
Based on the above, the income tax aspect is the most relevant to consider. This is because income tax is imposed on the party receiving income from the transfer of the right to land (in this case, Ms Asri, as the party receiving the compensation payment).
Meanwhile, the BPHTB aspect is not relevant as it is the concern of the party acquiring the land (in this case, the relevant authority). The VAT aspect is also not relevant, on the assumption that Ms Asri is not a taxable person.
Thus, what is the tax treatment in the context of Ms Asri's case?
Legally Guaranteed: Income Tax Rate of 0%
The income tax provisions relating to the transfer of land were first stipulated under Law No. 7 of 1983 on Income Tax, as last amended by Law No. 6 of 2023 (the ITL). Referring to Article 4 paragraph (2) subparagraph d of the ITL, income from transactions involving the transfer of land is indeed subject to final income tax.
However, there is derivative regulation that must be taken into account, namely Government Regulation No. 34 of 2016 on Income Tax on Income from the Transfer of the Right to Land and/or Building and the Land and/or Building Sale and Purchase Agreements and the Amendments Thereto (Gov. Reg. 34/2016).
Pursuant to Article 2 paragraph (1) of Gov. Reg. 34/2016, the income tax rates applicable to the transfer of the right to land vary depending on the context of the transfer, as follows:
Referring to the table above, the context set out in the third row most closely corresponds to Ms Asri's situation. In that context, it is stipulated that the transfer of the right to land to the government, a state-owned enterprise or a local-owned enterprise that has received a special mandate is subject to final income tax at a rate of 0%, meaning there is no income tax payable on the compensation you receive.
However, even where the transfer of land is conducted to the government, it must be confirmed that the transfer is indeed connected with construction for public interest purposes. The question then arises: does the transfer of land in your case relate to that?
To confirm this, we must refer to Law No. 2 of 2012 concerning Land Acquisition for Construction in the Public Interest, as last amended by Law No. 6 of 2023 (Law 2/2012), which also serves as one of the legal bases for the implementation of national strategic projects.
Referring to the Law, land for public interest purposes includes land used for the construction of public roads, toll roads, dams, irrigation systems, seaports, airports, train stations, bus terminals, public markets, public safety facilities and government hospitals. It is therefore necessary to confirm that the land being transferred is indeed intended for public interest purposes.
Conclusion
In conclusion, to confirm that you are entitled to the 0% income tax rate and that no party will withhold tax from the compensation you receive, there are several matters that must be confirmed from the outset, including:
- Confirming that the process underway is being implemented by a government agency or a state-owned/local-owned enterprise and does not constitute an ordinary sale and purchase transaction with a private party.
- Confirming that there is a mandate letter serving as the basis for the land acquisition process.
- Confirming that the land being transferred is intended for construction for public interest purposes.
If the transfer of land is conducted outside the land acquisition mechanism for public interest purposes, the 0% rate will not apply, and an income tax payment obligation will arise.
That concludes our answer. We hope this is beneficial.
For your information, the Tax Consultation article is published every week to answer selected questions from loyal DDTCNews readers. If you would like to submit a question, please send it to the following email address: [email protected]. (dik)
