Several months prior to the publication of Government Regulation Number 58 of 2023 (PP 58/2023), informational materials on the effective tariff, including the logo of the Directorate General of Taxes (DJP), had been circulating among tax practitioners. As known, the main focus of PP 58/2023 is on the withholding rates for Article 21 of Income Tax Law (PPh 21) related to income from work, services, or activities of individual taxpayers (WPOP).
When PP 58/2023 was finally published on December 27, 2023, and became effective on January 1, 2024, we, the tax consultants at PT Pratama Indomitra, promptly compared the regulations in PP 58/2023 with the informational materials that had been circulating.
From the title (titulus est lex), PP 58/2023 appears to emphasize the introduction of a new tariff system, namely the Average Effective Rate (TER) in withholding PPh 21. The TER, as stipulated in PP 58/2023, is divided into monthly and daily rates, both applicable to income disbursed to permanent and non-permanent employees.
In this case, we emphasize the absence of regulations in PP 58/2023 concerning income received or earned by non-employees. This raises significant questions because income earners, as part of their business operations, not only manage the tax aspects of payments to their employees but are also likely responsible for payments to non-employees.
Indeed, according to Article 3 of PP 58/2023, income received or earned by non-employees can be categorized as income related to services, thus subject to deductions under PPh 21 with TER. However, the provisions in Article 3 are not clear-cut, leading to a legal vacuum in PP 58/2023 that has the potential to create uncertainty for taxpayers.
While non-employee income is not covered by the TER scheme, as indicated in the previously distributed socialization material, we believe that specific provisions for non-employee income should also be included in PP 58/2023. For instance, Article 3 of PP 58/2023 could incorporate regulations for non-employees by referencing the tariff outlined in Article 2 paragraph (1) letter a of the regulation, based on a 50% gross basis. This would confirm the existing implementation practice.
Besides the enigma surrounding the withholding of PPh 21 on non-employee income overlooked by PP 58/2023, on Friday, January 5, 2024, we received news of the release of instructions for implementing the withholding of PPh 21. These regulations, effective as of January 1, 2024, are outlined in Minister of Finance Regulation Number 168 of 2023 (PMK 168/2023) regarding Guidelines for Implementing Tax Deductions on Income Related to Work, Services, or Individual Activities.
For us as consultants, particularly at Pratama Indomitra, who have fielded hundreds of inquiries regarding PP 58/2023 over the past week, the release of PMK 168/2023 comes as a welcome relief, offering clear legal guidance.
The withholding rate for income paid to non-employees, as indicated in the socialization material and previous regulations (PMK 252/2008), remains consistent with Article 17 paragraph (1) letter a of the Income Tax Law, with a tax base set at 50% of gross income.
However, the current regulations differ from PMK 252/2008 as withholding PPh 21 in PMK 168/2023 does not account for non-taxable income (PTKP) for WPOP income recipients. This implies that the PTKP component is no longer deducted in calculating PPh 21 owed by non-employees.
This simplifies matters for both income providers and recipients who were previously obligated to declare the number of dependents in their family (as stipulated in Article 22 paragraph (2) of PMK 252/2008). The administrative convenience in PMK 168/2023 is attained by eliminating the distinction between sustainable and non-sustainable work or services.
Additionally, a new provision outlined in PMK 168/2023 is the incorporation of compensation for freelance work within the definition of non-employee (refer to Article 2, point 12). According to Article 1, number 8, freelance work is described as tasks undertaken by individuals possessing specialized skills, aimed at generating income without being bound by an employer-employee relationship.
Moreover, according to Article 3, paragraph (2) of PMK 168/2023, individuals falling under the non-employee category include:
- Experts engaged in freelance work, such as lawyers, accountants, architects, doctors, consultants, notaries, land deed officials, appraisers, and actuaries;
- Entertainers, including musicians, presenters, singers, comedians, film stars, soap opera stars, advertising stars, directors, film crew members, photo models, models, drama actors, dancers, sculptors, painters, content creators or media contributors online (influencers, celebrities on Instagram, bloggers, vloggers, and others), and other artists;
- Athletes;
- Advisors, teachers, trainers, lecturers, instructors, and moderators;
- Authors, researchers, and translators;
- Service providers across all sectors;
- Advertising agencies;
- Project supervisors or managers;
- Commission agents or intermediaries;
- Sales representatives;
- Insurance agents; and
- Distributors of multi-level marketing companies, direct sales, and similar ventures.
The regulations outlined in Article 3, paragraph (2) of PMK 168/2023 are consistent with the provisions of Article 56 of PP 55/2022, which stipulate that services associated with freelance work are not categorized as income from business subject to a final income tax of 0.5%. Consequently, taxpayers who provide income need not hesitate to withhold PPh 21 on payments made to non-employees, including compensation for freelance work.
Now that the puzzle pieces concerning the withholding of PPh 21 on non-employee benefits have been solved, it is anticipated that the implementation of taxpayers’ tax obligations will be clearer. However, if you still have further questions, feel free to contact us at info@pratamaindomitra.co.id
