The government, via the Ministry of Finance, recently issued Ministry of Finance Regulation No. 66 of 2023 ("Regulation"). The Regulation governs the income tax treatment of reimbursement or compensation in connection with employment or services that are given in-kind and/or in the form of enjoyment (typically referred to as “in-kind”) ("benefits-in-kind").
The Regulation is an implementing regulation on the tax treatment of benefits-in-kind as mandated by the Income Tax Law and Government Regulation 55 of 2022. It details the types of benefits-in-kind, situations when employers can consider benefit-in-kind as deductible expenses, situations when employees can exempt benefit-in-kind from taxable income, and how benefits-in-kind are valued and taxed.
What are Benefits-in-kind?
Benefits-in-kind are defined as any reimbursement or compensation in the form of in-kind or enjoyment relating to work or services. There are two types of benefits-in-kind:
Compensation-in-kind or “natura”, which is compensation in the form of goods other than money, which ownership is transferred from the employer to the employee. Some examples are meals, uniforms, and safety equipment.
Compensation in the form of enjoyment or “kenikmatan”, which is compensation in the form of facilities and/or services from the employer and/or third parties. In the latter case, such compensation is typically leased and/or financed by the employer for the employee’s utilisation. Some examples are computers, cars, houses or apartments, and health or medical facilities.
When can Employers consider Benefit-in-kind as Deductible Expenses?
Costs of the benefits-in-kind are deductible from the employer’s taxable income if:
The costs are related to the employment or services provided by the employee or service provider; and
The costs are the amount spent by the employer to earn, collect, and maintain its taxable income.
To consider benefits-in-kind as deductible expenses, the employer must ensure that:
The expenditures for enjoyment costs that have a useful life of more than one year are expensed through depreciation or amortisation;
The expenditures for in-kind expenses or enjoyment that have a useful life of less than or at least a year are expensed in the year the costs are incurred;
The employer reports the costs of the benefit-in-kind in its annual income tax return (SPT Tahunan PPh Badan).
Benefits-in-kind can be deemed as deductible expenses from 1 January 2022 for employers whose 2022 financial year starts before 1 January 2022, or from the beginning of the 2022 fiscal year for employers whose 2022 financial year starts on 1 January 2022 or later.
Benefit-in-kind as Tax Object and Exemptions for Employees
While benefits-in-kind has always been a part of the employee or service provider’s taxable income, the Regulation introduces some exemptions. The table below details situations where a benefit-in-kind is not taxable:
|No||Type of Benefit-in-kind||Requirements|
|2.||Benefit in the form of security, health, and/or safety||
|3.||Facilities and infrastructure provided within a specified area||
|4.||Gifts for religious holidays and other events||
|5.||Working equipment or facilities||
|6.||Healthcare and medical treatment facilities||
|8.||Communal and non-communal living facilities||
|10.||Contribution to pension fund borne by the employer||
*Please note that any benefit-in-kind given after 1 July 2023 and exceeding the above threshold will be taxable for the employees and the employer will be responsible to withhold such tax.
Valuation and Tax Calculation
Benefits-in-kind are valued based on their market value or the expenses incurred or should have been incurred by the employer.
The employer as the provider of the benefits-in-kind must withhold the income tax in accordance with the law. The procedure for withholding, paying, and reporting the income tax is as follows:
|Year Received or Obtained||Employer||Employee (or Service Provider)|
|FY2022||Exempted from income tax withholding||Exempted as an income tax object|
|FY2023 (January to June)||Exempted from income tax withholding||Self-calculated, paid, and reported by the employee (service provider) in their Annual Income Tax Return|
|FY2023 (1 July onwards)||Withheld, paid, and reported by the employer in its Article 21/23/4(2) Monthly Tax Return||Reported by the employee (service provider) in their Annual Income Tax Return|
With the enactment of the Regulation, employers who offer their employees benefits-in-kind such as company cars facilities, living facilities, and other facilities must ensure that they understand the types of benefits-in-kind and how they are calculated. Moreover, both employees and employers are responsible to ensure that they are compliant with the law on benefits-in-kind, including the Regulation. For employees, they must be aware of the benefits that they receive from their employer, and how these may be subject to tax. On the other hand, employers should also keep up to date with the law and ensure that they have appropriately expensed the costs and correctly withheld the tax from the employees’ salaries.
Sukhemadewi also contributed to this alert.