International Contract Manufacturing Tax on the Production of Children’s Toys

The diversity of industries and business sectors in Indonesia poses its own challenges in tax calculations. This is due to differences in how these sectors form profits. One industry or business sector that is unique in its tax calculations is contract manufacturing. Referring to Article 2 paragraph (4) of Minister of Finance Regulation Number 141/PMK.03/2015, contract manufacturing are the provision of services in the framework of the process of completing a certain item whose work is carried out by the service provider (subcontracted), whose specifications, raw materials, half-finished goods, and/or supporting/auxiliary materials to be processed partially or wholly are provided by the service user, and the ownership of the finished goods rests with the service user. To simplify tax calculations for the contract manufacturing business sector, the government issued Article 15 of the Income Tax Law which regulates the type of income tax using special calculation norms. The types of business sectors that refer to the Article 15 Income Tax Law  in tax calculations are domestic flight charters, domestic shipping, overseas shipping and/or flights, foreign trade representative offices in Indonesia, and international contract manufacturing in the production of children’s toys.

The tax subjects referred to in the Article 15 Income Tax Law relating to international contract manufacturing in the production of children’s toys are taxpayers who carry out business activities for international contract manufacturing who are domestic taxpayers who carry out services for making or assembling goods in the form of children’s toys, with materials, specifications, technical instructions and determination of fees for services from the ordering party who is domiciled abroad and has a special relationship with the Taxpayer. While the tax object is the total cost of making or assembling goods, excluding the cost of using the raw materials. It is explained again that costs including the manufacture or assembly of goods include all expenses which are direct manufacturing costs other than principal and indirect raw materials as well as general and administrative costs in accordance with the Taxpayer’s commercial bookkeeping.

Referring to Article 2 paragraph (1) and (2) of Minister of Finance Decree No. 543/KMK.03/2002, the special calculation norm for calculating net income in the form of international contract manufacturing received/obtained by taxpayers who carry out these business activities is 7% of the total cost of manufacturing or assembling goods excluding costs for using raw materials. This net income is subject to the highest tax rate in Article 17 paragraph (1) letter b of the Income Tax Law. These provisions can only be enforced as long as the Taxpayer does not enter into a Transfer Pricing Agreement with the Director General of Taxes regarding international contract manufacturing. These Minister of Finance Decree also stipulates that income tax other than international contract manufacturing fee is subject to income tax in accordance with general provisions that apply. The income tax imposed on the contract manufacturing fee must be paid monthly which is calculated based on the total realization of all costs for making or assembling goods every month excluding costs for using raw materials.

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Tax payments and reporting use the general mechanism set out in the Tax General Provisions and Procedures Law so that monthly tax payments must be made no later than the 15th of the following month and reporting must be made no later than the 20th of the following month. Apart from the Minister of Finance Decree No. 543/KMK.03/2002, there is a Director General of Taxes Circular Letter No. SE-02/PJ.31/2003 which serves as an introduction to those Minister of Finance Decree.

Written by Alya Ashila Ananda, Tax Compliance & Audit, TaxPrime.