Welcome, the Talented Foreign Workers Tax Regime

THE competition among countries in increasing competitiveness is becoming more intensive. Amidst the sluggish world economy that has not yet fully returned to its original circumstances, the competition has only intensified.

Competitiveness in fighting over superior human resources (HR) is one example. This competition is triggered by two conditions. First, the minimal and scarce availability of superior human resources in developed countries. This is because most developed countries are entering an aging population phase, thereby, the working-age population is decreasing.

Second, the number of superior human resources in developing countries is not maximised. Even though they are in the demographic bonus phase, developing countries have not been able to establish many quality human resources (Kristaji, 2019).

The increasingly fierce competition between countries in fighting for superior human resources has resulted in many countries vying to establish various policies to attract highly talented individuals, ranging from policies in the field of employment, permits, to tax policies.

The use of tax policies to support competitiveness for superior human resources is not new. This is evident in the widespread application of the special tax treatment for foreign workers who work in a country or known (and hereinafter referred to) as the expatriate tax regime.

In practice, the expatriate tax regime is a special regime given to expatriates with the status of residents to be taxed with the status of non-residents. This regime provides tax relief for expatriates in a number of ways. First, limiting the jurisdiction to tax on income received or accrued by expatriates, namely by implementing the territorial system for expatriates.

Second, the provision of tax administrative facilities. Third, the implementation of special concessions for qualified expatriates. Typically, the expatriate tax regime is aimed at attracting wealthy, high-income or high-skilled individuals to migrate to a country.

Undeniably, the application of expatriate tax regimes has expanded in various parts of the world. Based on processed data from the IBFD Country Survey (2018), of the 150 countries surveyed, 50 of them have already established an expatriate tax regime.

For instance, Spain with the implementation of its popular expatriate tax regime in 2005 or known as the Beckham Law. In this regime, HR with special skills may enjoy flat individual Income Tax rates and tax exemptions on income accrued outside Spain.

The consequence of the implementation of the Beckham Law is, of course, predictable, namely the migration phenomenon of world-class soccer players to Spain at that time (Kleven, Landais, and Saez, 2012). Beckham Law in Spain also proves that tax policies effectively affect the competition for talented human resources.

Other than Spain, Australia is among the countries that implement an expatriate tax regime. Under this regime, individuals classified as temporary residents receive an exemption from all income received or accrued from outside Australia, except for income in the form of employee remuneration (salary, bonus, director’s salary and so forth).

There are two qualifications for individuals classified as temporary residents. First, foreign individuals who work as professionals or business owners in Australia during the period in which the individuals are categorised as residents. Second, individuals who intend to move to Australia to establish a business using a temporary visa.

On the other hand, the expatriate tax regime in Italy targets employees, self-employed workers or entrepreneurs who have recently moved to Italy provided that they fulfil three requirements. First, the individual lived outside of Italy for two years prior to their arrival in Italy. Second, committed to living in Italy for a minimum of two years. Third, the work of the individual is mainly carried out in Italy (Allevato, 2019).

In this regime, individuals who fulfil the above requirements will receive an exemption from individual Income Tax in Italy of 70% of the income they receive. This regime is believed to provide benefits for workers in the sports, arts, clothing and high-income sectors (Beretta, 2017).

Unlike Spain, Australia, Italy and the Netherlands offer additional tax deductions as a form of special concessions for expatriates in these countries. The goal, of course, is to attract skilled human resources and encourage foreign investments in these countries (Parling, 2018).

As such, what about Indonesia?

Indonesian Perspective

If the Draft Omnibus Law on Taxation is enacted, Indonesia will have an expatriate tax regime similar to what has been implemented in other countries. The application of this special regime complies with the formulation of Article 8 paragraph (1) and Article 8 paragraph (2) of the Draft Omnibus Law on Taxation.

Under the currently applicable Income Tax provisions, foreigners with resident status are subject to taxes on income sourced from Indonesia or outside Indonesia (worldwide). Based on the expatriate tax regime stipulated in the Draft Omnibus Law on Taxation, these foreigners are only subject to taxes on income received or accrued from Indonesia insofar as they fulfil two conditions.

First, the foreigners have certain expertise. Second, this treatment is only valid for four tax years calculated from the time the foreigners constitute residents.

Simply put, based on the Indonesian expatriate tax regime, foreigners with certain skills with resident status may enjoy tax exemptions on income received by these foreigners from outside Indonesia. In other words, the worldwide tax system no longer applies to the foreigners, but the territorial tax system.

The plan to implement the expatriate tax regime included in the Draft Omnibus Law on Taxation is integral to Indonesia’s efforts to obtain superior quality human resources. Moreover, President Joko Widodo has proclaimed that superior human resources are Indonesia’s future needs, specifically, in the face of rapid changes and intense competition among countries (Al Rahab, 2020).

Through the expatriate tax regime, the number of expatriates with certain skills interested in working in Indonesia is expected to increase. Further, this increase is expected to be directly proportional to the increase in investments as well as the transfer of technology and the transfer of knowledge to domestic human resources. This will ultimately impact Indonesia’s ability to produce superior and competitive domestic human resources.

Considering the goal of this regime, which is to attract talented expatriates, it is not an overstatement that we say: welcome the special expatriate tax regime in Indonesia. May this regime be effective.