A. Legal Basis

The legal sources underlying these tax guidelines are as follows:

(i)

Law Number 7 of 1983 concerning Income Tax as amended several times, last amended by Law Number 7 of 2021 concerning the Harmonisation of Tax Regulations (Law 7/1983 as last amended by Law 7/2021, hereinafter referred to as the ITL);

(ii)

Law Number 8 of 1983 concerning Value Added Tax on Goods and Services and Sales Tax on Luxury Goods as amended several times, last amended with Law Number 7 of 2021 concerning the Harmonisation of Tax Regulations (Law 7/1983 as last amended by Law 7/2021, hereinafter referred to as the VAT Law);

(iii)

Law Number 8 of 1995 concerning the Capital Market (Capital Market Law);

(iv)

Government Regulation Number 41 of 1994 concerning Income Tax on Income from Transactions of Sale of Shares on the Stock Exchange (Gov. Reg. 41/1994);

(v)

Government Regulation Number 14 of 1997 concerning the Amendment to Government Regulation Number 41 of 1994 concerning Income Tax on Income from Sales of Share Transactions on the Stock Exchange (Gov. Reg. 14/1997);

(vi)

Government Regulation Number 131 of 2000 concerning Income Tax on Interest on Deposits and Savings Accounts and Discounts on Bank Indonesia Certificates (Gov. Reg. 131/2000);

(vii)

Government Regulation Number 123 of 2015 concerning the Amendment to Government Regulation Number 131 of 2000 concerning Income Tax on Interest on Deposits and Savings Accounts and Discounts on Bank Indonesia Certificates (Gov. Reg. 123/2015);

(viii)

Government Regulation Number 91 of 2021 concerning Income Tax on Income in the Form of Bond Interest Received or Accrued by Resident Taxpayers and Permanent Establishments (Gov. Reg. 91/2021);

(ix)

Director General of Taxes Circular Letter Number SE-18/PJ.42/1996 concerning Income Tax on Mutual Fund Businesses (General Income Tax Series Number 30) (SE 18/1996).

B. Background

Basically, the capital market plays strategic roles in national economic development, among others by providing sources of financing for the business world and public investment vehicles. Currently, the entire community is invited to be more familiar with the world of investment by participating in investments through digital platforms. The rise of digital platforms has rendered investment one of the easiest and most practical activities.

One of the most well-known forms of investment is mutual funds. There are several types of mutual funds, including share mutual funds, mixed mutual funds, money market mutual funds and many more. Based on data from the Financial Services Authority (Otoritas Jasa Keuangan/OJK in Indonesian), the total Net Asset Value (NAV or Nilai Aktiva Bersih/NAB in Indonesian) of mutual funds as of July 2023 reached IDR530 trillion and this was the highest value compared to the monthly period in 2023. The increase in the number of mutual funds indicates that public confidence in the mutual fund investment and public understanding of investment has greatly increased.

Due to the increase in public interest in mutual fund investments, let us review the tax treatment of mutual funds.

C. Definitions

Pursuant to the Capital Market Law, mutual fund is defined as a vehicle used to raise funds from the investor community to be subsequently invested in the securities portfolio by an investment manager. In this case, mutual funds may be in the form of companies and Collective Investment Contracts (CICs or Kontrak Investasi Kolektif/CIC in Indonesian).

In this discussion, we focus more on CIC mutual funds. CIC itself is a contract between an investment manager and the custodian bank that binds the holders of participation units wherein the investment manager is authorised to manage the collective investment portfolio and the custodian bank is authorised to implement collective custody.

D. Tax Treatment

When discussing mutual funds, we need to first understand how the investment mechanism of collective investment contract mutual funds (CIC) occurs. Here are the stages of mutual fund investment.

(i)

The investment manager and custodian bank enter into a CIC agreement.

(ii)

Mutual funds in the form of CIC are offered to investors.

(iii)

The investment manager distributes funds derived from the investors into financial instruments.

(iv)

The investment manager realises profits or losses from the deposit of funds under his/her management to be maintained in bookkeeping in the NAV.

(v)

Investors redeem their mutual fund participation units.

We shall attempt to review the tax treatment of mutual funds based on each stage in investing in CIC mutual funds.

D.1

Entering into a CIC Agreement

The establishment of the CIC mutual funds starts with the establishment of a CIC agreement by the investment manager and the custodian bank. This agreement generally stipulates the duties and obligations of each party. The duty of an investment manager is to manage funds to be invested in capital market products. In contrast, the duty of the custodian bank is to deposit securities, settle transactions and calculate NAV.

At this stage, there are actually no specific tax implications. However, the establishment of this CIC fulfils the criteria as a tax subject. The elucidation of Article 2 paragraph (1) subparagraph b of the ITL outlines that a Collective Investment Contract or CIC fulfils the criteria as an income tax subject. As we know, a tax resident, in this case, the CIC, constitutes a taxpayer starting from the time the CIC is established. Thus, CIC is required to comply with tax provisions similar to other corporate taxpayers. The tax provisions include having a Taxpayer Identification Number (TIN), collecting and withholding taxes as well as filing taxes.

D.2

Offering to Investors

Further, the mutual funds will be offered to investors. An investor wishing to invest in CIC mutual funds may do so by transferring money to a mutual fund account registered with the custodian bank. After transferring the money, the investor will have a participation unit as a unit of mutual fund ownership.

At the stage of offering CIC mutual funds to investors, there are no tax implications.

D.3

Distributing Funds to Financial Instruments

The investment manager manages and distributes funds into financial instruments, such as bonds, shares, sukuk and others. There are tax implications based on the type of instrument chosen by the investment manager. In terms of description, it is as follows:

(i)

Interest on Bonds

Pursuant to Gov. Reg. 91/2021, income in the form of interest on bonds received by CIC mutual funds is subject to a final income tax rate of 10% of the income tax base. Final withholding tax is performed by the mutual fund as the intermediary trader and/or buyer on the interest and discount received by the bond seller at the time of the transaction.

(ii)

Interest on Deposits/Savings Accounts

To determine income tax on interest on deposits or savings accounts, we refer to Gov. Reg. 131/2000 as amended by Gov. Reg. 123/2015. In this case, the imposition of income tax on interest from deposits and savings accounts is divided into 3 (three) forms which are explained in the table below.

Table 1. Table of Types of Interest on Deposits and Income Tax Rates

Tabel Perlakuan Pajak Reksa Dana Kontrak Investasi Kolektif

(iii)

Capital gains on shares on the exchange

Gov. Reg. 41/1994 as amended by Gov. Reg. 14/1997 elucidates that income received or accrued by individuals or entities from sales of shares transactions on the stock exchange is subject to final income tax. The final income tax rates applicable to income received from the purchase and sales of shares on the exchange are as follows:

a)

Subject to a final income tax of 0.1% of the gross amount of the sales transaction value;

b)

For holders of founders stock, an additional income tax of 0.5% is imposed on:

1.

The value of the company’s shares at the close of the stock exchange at the end of 1996 if the company’s shares had been traded before the issuance of Gov. Reg. 14/1997; and

2.

The price of the shares at the time of offering if the company’s shares are traded on the stock exchange after 1 January 1997.

(iv)

Commercial paper and other securities

SE-18/PJ.42/1996 elucidates that mutual fund income derived from commercial paper and other securities will be subject to income tax at the statutory rates. This is as stipulated under Article 4 paragraph (1) of the ITL.

D.4

When Profits/Losses Are Realised

This stage is generally conducted by the Investment manager if an investor wishes to redeem. SE-18/1996 elucidates that the profit from the redemption transaction is not included in income tax objects.

E. Case Illustration

Case 1

Dina is a private sector employee who tries to invest through an online application. Dina has entrusted her investment funds to the Harapan Bond Mutual Fund since 2022. The mutual funds provide interest on bonds of 12%/year of the investment amount and are given at the end of the accounting year, namely December. From January 2023 to December 2023, Dina’s investment in the Harapan Bond Mutual Fund stagnates at a nominal IDR100,000,000. Calculate the amount of final income tax imposed on the income received by Dina in the form of interest on bonds!

Answer

Dina’s Investment in 2023	:	IDR100,000,000
Interest on Bonds	:	12% x IDR100,000,000
	:	IDR12,000,000
Final Income Tax Payable	:	10% x IDR12,000,000

Tax Treatment of Collective Investment Contract Mutual Funds