Tax Information for U.S. Expats Living in Indonesia

Indonesia is the largest archipelago in the world with over 17,000 islands. There are roughly 300 ethnic groups and almost 600 languages and dialects spoken throughout the country. Indonesia boasts the second highest level of bio-diversity in the world. There are large parts of the country that have not been fully explored or mapped.

If you are planning to become a U.S. expat in Indonesia, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.

Photo by: Michael Day

Taxation in the Indonesia

Let’s start by understanding who is required to pay taxes in Indonesia. Residents are taxed on worldwide income, while non-residents on Indonesian-source income only. Foreigners who have lived for more than 183 days within a 12-month period are considered residents.

The tax system in Indonesia is progressive. The income tax rates are as follows:

• Employment Income: Progressive up to 30%;
• Interest Income: Same as employment income;
• Dividend Income: Same as employment income;
• Capital Gains: Same as employment income.

Indonesia and the U.S. have an income tax treaty in-place. International tax treaties clarify tax jurisdiction. These treaties can provide U.S. citizens and residents with reductions in foreign income taxes. However, a reduction in U.S. taxes is generally not available under these treaties as a result of “tax saving” clauses that allow the U.S. government to impose taxes on U.S. expats as if there were no treaty.

Indonesia and the U.S. do not have a social security tax agreement in-place. Therefore, certain U.S. expats will be required to pay into both social security programs.

How Living in Indonesia Impacts U.S. Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Indonesia. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Indonesia with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and Indonesia

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that Indonesia does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.