Welcoming the New Age of Dividend Tax

Welcoming the New Age of Dividend Tax

PPh - 27 Feb, 2023 11:02 WIB

Jakarta, Ideatax -- Recently, the Government Regulation or Peraturan Pemerintah (PP) Number 55 of 2022 concerning Adjustment of Income Tax Rules was issued. Among many of the new rules in the regulation—which are derivative rules from the Tax Harmonization (HPP) Law—is the taxation aspect of dividends.

The regulation stipulates that under particular conditions, dividend distribution is excluded as a tax object. In the previous regulations, dividends were considered as income that are subject to Income Tax Articles 23 and 4(2). With this amendment in dividend taxation, a significant impact on the investment climate in Indonesia will certainly happen. Therefore, it is necessary to have a comprehensive understanding regarding the tax aspects of dividends.

In general, dividends are defined as the distribution of profits by a company to its shareholders (Sullivan, Sheffrin, & Steven, 2003). Dividends received by shareholders constitute income for the recipient and may be subject to income tax in accordance with regulations.

Just so you know, the first and longest-running public company that paid dividends regularly to be recorded was Vereenigde Oostindische Compagnie, or better known as VOC (Atkinson, 2014). According to Atkinson, VOC routinely paid a dividend of 18% of the value of its shares to shareholders during 1602 – 1800. In addition, VOC was also listed as the first company to sell its shares on the stock market (Petram, 2014).

In Indonesia itself, the dividend tax has a long and complex history. During the Mataram Islamic era, for instance, it was known that there was an income tax on the distribution of profits and interest from aandeel (shares) in 1853 – 1881 to be exact (DJP, 2017).

After Indonesian independence, the imposition of a dividend tax was regulated in Government Regulation in Lieu of Law (Perpu) No. 12 of 1959 concerning Dividend Tax. Furthermore, the imposition of a dividend tax was emphasized by the presence of Law Number 8 of 1983 concerning Income Tax as amended by Law 16 of 2008. According to Law Number 8 of 1983, a dividend tax is imposed on corporate net profits which are distributed to Corporate Taxpayers with ownership below 25% and to individual taxpayers without a minimum percentage of ownership.

Up to now, the dividend taxation system adopted by Indonesia is commonly referred to as the classical system or the two-tier system. This is because the same source of income is taxed twice; i.e., at the level of corporate net profit and at the level of net income distributed to shareholders as dividends (Cnossen, 1996).

However, the application of the classical system or two-tier system has side implications. Firstly, double taxation in a two-tier system will reduce investment and economic growth as the same profit is taxed twice. This statement is in line with the results of Poterba and Summers’s research in 1984; taxes on dividends reduce investment in corporations and cause distortions in the allocation of capital. Secondly, the application of the classical system to taxes on dividends has the potential to cause tax avoidance in the form of hidden dividends.

Recognizing the weaknesses in the classical system, through the Tax Harmonization Law—which was subsequently derived into PP 55 of 2022—the Government exempts dividends from being a tax object under particular conditions. The goal is clear, to improve the ease of doing business climate, which will increase foreign direct investment eventually.

With the exception of dividends as an object of income tax, the Government has indirectly changed the taxation system on dividends from a two-tier system to a single-tier system. In the IBFD International Tax Glossary, Roger (2015) states that the single tier system or dividend exclusion system is a taxation system that is only imposed on the company's profit level. Thus, profits distributed to shareholders are no longer subject to tax. South-east Asian countries that have applied one-tier system are Malaysia and Singapore (Fitriandi, Setiawan, & Widodo, 2019).

There are several competitive advantages of using a single tier system compared to other systems. First, the application of a single tier system will reduce tax avoidance practices, especially in disguised dividends. Second, the application of a single tier will reduce the administrative costs of the tax authorities. Third, the application of a single tier system is proven to be able to increase the amount of investment in a country.

Even though the single tier system has a number of comparative advantages, the application of the system will raise several implications. Firstly, in the short term there will be a decrease in the payment of Article 21 Income Tax and Article 23 Income Tax. This is mainly due to the non-payment of Article 4 Income Tax (2) and Article 23 Income Tax on dividends.

Secondly, in the long term, the single tier system triggers a change in the pattern of giving dividends to shareholders. Before the HPP Law was implemented, it could be that hidden dividends in the form of facilities and conveniences to shareholders were still rife. This is because the provision of facilities or in kind to shareholders is not a tax object. On the other hand, the distribution of dividends is the object of Income Tax 23 and Income Tax Article 4 (2) with rates of 15% and 10%.

With the application of the HPP Law, this condition seems to have changed. The HPP Law stipulates that the provision of facilities and/ or in kind is an object of income tax. On the other hand, dividends are exempted from tax objects under particular conditions. Thus, in the future there is a possibility of a change in the pattern of dividend distribution.

Thirdly, provisions regarding the exclusion of dividends as tax objects have the potential to increase tax spending or tax expenditure. According to the IMF (2019), tax spending is an alternative policy taken by the government in order to provide financial support to individuals and companies, for example in the form of incentives, tax exemptions and reductions.



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  • Cnossen, S. (1996). Company Taxes in the European Union: Criteria and Options for Reform. Fiscal Studies, 17(4), 67-97.

  • Direktorat Penyuluhan, Pelayanan dan Hubungan Masyarakat. (2017). Jejak Pajak Indonesia: Abad ke-7 sampai Tahun 1966. Jakarta: Direktorat Jenderal Pajak.

  • Fitriandi, P., Setiawan, b., & Widodo, A. (2019). Pajak Berganda Secara Ekonomis atas Penghasilan Dividen di Indonesia dan Alternatif Penyelesaiannya. Jurnal Pajak Indonesia, 2(1), 68-76.

  • IMF (2019). Tax Expenditure Reporting and Its Use in Fiscal Management. Washington DC: IMF.

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  • Sullivan, A., Sheffrin, & Steven. (2003). Economics: Principles in Action. Upper Saddle River. New Jersey: Pearson Prentice Hall.

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