Differences in Exchange Rates of Apartment Lease Invoices

Question:
Allow me to introduce myself, my name is Theo. I am the accounting staff of a company engaged in the lease of apartments.

Our company leases apartments to expatriates with invoices in United States dollars. Typically, the invoices are generated and mailed at the end of the month with payment due two weeks after the invoice date.

In our bookkeeping, the invoices and their settlement are recorded in rupiah currency. This is because our company does not have a permit to maintain bookkeeping in United States dollars.

My question is, can we recognise the difference in gains/losses from the exchange rate arising from the invoices in our tax report?

Theo, Jakarta.

Answer:
Thank you, Mr. Theo, for your question. In principle, gains/losses from foreign exchange differences are recognised as income or expenses under the Income Tax Law. Following are the provisions on exchange gains as income outlined under Article 4 paragraph (1) subparagraph l of the Income Tax Law

“A taxable object is income, which refers to any increase in economic capacity received by or accrued by a Taxpayer, either from Indonesia or from outside Indonesia, which may be utilized for consumption or increasing the Taxpayer’s wealth, in whatever name and form, including:

...

l.     gains from foreign exchange;”

Next, the following are provisions on the recognition of losses due to differences in foreign currency exchange rates as expenses outlined in Article 6 paragraph (1) subparagraph e of the Income Tax Law:

“The amount of Taxable Income for resident Taxpayers and permanent establishments shall be determined based on gross income deducted by the costs to obtain, collect and maintain income, including:
...

e.     losses due to differences in foreign currency exchange rates;”

The recognition of gains/losses from foreign exchange as income or expenses is also emphasised in Article 9 paragraph (1) of Government Regulation No. 94 of 2010 concerning the Calculation of Taxable Income and Settlement of Income Tax in the Current Year as amended by Government Regulation No. 45 of 2019 (hereinafter referred to as Gov. Reg. 45/2019) as follows:

“Gains or losses due to differences in foreign currency exchange rates are recognised as income or expenses are based on the bookkeeping system adopted and carried out as per the principle of consistency according to the applicable Financial Accounting Standards in Indonesia."

Next, Article 9 paragraph (2) of Gov. Reg. 45/2019 stipulates that:

“Gains or losses from foreign currency exchange differences referred to in paragraph (1) which are directly related to a Taxpayer’s business that is:

1. subject to final Income Tax; or
2. not included as a taxable object,

are not recognizsd as income or expenses.”

Article 9 paragraph (2) of Gov. Reg. 45/2019 outlines that gains/losses from exchange differences are not recognised as income or expenses if they are directly related to the taxpayer’s business that is subject to final Income Tax or not included as a taxable object.

To determine if the lease of an apartment is included as income subject to final Income Tax or not included as a taxable object, we may refer to Article 4 paragraph (2) and paragraph (3) of the Income Tax Law as follows:

"(2) The following income may be subject to final taxes:

1. income in the form of deposit interests and other savings, interests on bonds and government bonds, interests or discounts of short-term securities traded in the money market and deposit interests paid by cooperatives to individual cooperative members;
2. income in the form of lottery prizes;
3. income from share and other securities transactions, derivative transactions traded on the stock exchange and sales of shares transactions or transfers of equity participation in the partner company received by a venture capital company;
4. income from transactions of property in the form of land and/or buildings, the construction service business, real estate businesses and land and/or building leases; and
5. certain other income, including business income received or accrued by Taxpayers with certain gross turnover,

as stipulated by or based on a Government Regulation. 

(3) Excluded from taxable objects are:

1. 1. aids or donations, including zakat, infaq and sadaqah received by amil zakat board or other amil zakat institutions established or approved by the government and received by eligible zakat recipients or compulsory religious donation for the followers of religions acknowledged by the government, received by religious institutions established and approved by the government and received by eligible donees, the provisions thereto are stipulated by or based on a Government Regulation; and
   2. grants received by relatives within one degree of direct lineage and to religious bodies, educational or other social entities including foundations, cooperatives or any individual conducting micro and small business,
   provided that there is no business, employment, ownership nor control relationship between the parties concerned;
2. inheritance;
3. assets, including cash received by an entity as referred to in Article 2 paragraph (1) subparagraph b in exchange for shares or capital contribution;
4. considerations or remunerations in connection with work or services received or accrued in kind and/or fringe benefits from the Taxpayers or the Government, except for those provided by non-Taxpayers, Taxpayers subject to final taxes or Taxpayers using deemed profit as referred to in Article 15;
5. payments by an insurance company to an individual due to accident, illness or death of the insured person and payment of scholarship insurance;
6. dividends or profit share received or accrued by limited liability companies as resident Taxpayers, cooperatives, state-owned enterprises or local-owned enterprises, from equity participation in a business entity established and domiciled in Indonesia with the following requirements:
   1. the dividends are sourced from reserves of retained earnings; And
   2. for limited liability companies, state-owned enterprises and local-owned enterprises receiving the dividends, share ownership in the dividend-distributing entity is a minimum of 25% (twenty-five percent) of the total paid-up capital;
7. contributions received or accrued by a pension fund whose establishment is approved by the Minister of Finance, either paid by an employer or an employee;
8. income from a capital investment of the pension fund as referred to in subparagraph g in certain sectors, in certain sectors stipulated by a Minister of Finance Decree;
9. profit distribution or the distribution of net income received or accrued by members of a cooperative, members of a limited partnership, whose capital does not consist of shares, partnerships, alliances, firms and joint ventures, including unit holders of collective investment contracts;
10. deleted;
11. income received or accrued by a venture capital company in the form of profit distribution of an investee company established and conducting business or engaged in activities in Indonesia, provided that the investee company:
    1. is a micro, small, medium-sized enterprise or engaged in activities in business sectors stipulated by or based on a Minister of Finance Regulation; and
    2. the shares are not traded in the stock exchange in Indonesia;
12. scholarships that fulfill certain requirements, the provisions on which are further regulated by or based on a Minister of Finance Regulation;
13. the surplus received or accrued by an institution or a nonprofit organisation engaged in education and/or research and development listed in corresponding agencies, which is reinvested in the forms of facilities and infrastructure of education and/or research and development, within no more than 4 years since the surplus is accrued, the provisions on which are further regulated by or based on a Minister of Finance Regulation; and
14. aid or donation paid by the Social Security Administrative Body to certain Taxpayers, the provisions on which are further regulated by or based on a Minister of Finance Regulation."

Based on the above provisions, leases of apartments are included in the lease of land and/or buildings whose income is subject to final Income Tax pursuant to Article 4 paragraph (2) subparagraph d of the Income Tax Law. Thus, pursuant to Article 9 paragraph (2) of Gov. Reg. 45/2019, gains/losses from differences in foreign exchange rates arising from invoices for the lease of apartments cannot be recognised as income or expenses.

We hope our answer satisfies your inquiries.*