Extended list of withholding tax on Services

To expedite tax revenue stream from Income Tax, Minister of Finance (MoF)  has issued MoF Regulation number 141/PMK.03/2015 (“PMK-141”) to be effective on 26 August 2015. The MoF has added some types of services that are categorized as “Other Services” referred to in Article 23 of the Income Tax Law (ITA 23).

Article 23 Paragraph (1) Letter (c.2) of Income Tax Law provided that compensation in connection with technical, management, construction, consultation and other services, except those that have been withheld under Article 21 are subject to withholding at 2% of the gross amount.

Under PMK-141, the MoF has added more than 35 types of services provided by service providers that are subject to ITA 23. Previously ITA 23 on services as regulated in MoF Regulation No.244/PMK.03/2008 only covered 27 other services and 19 support services for geothermal, oil and gas.

LIST OF SERVICES

Below is the list of other services that is subject to ITA 23 under PMK-141. The new items are in bold. 

·         Appraisal
·         Actuary
·         Accounting, bookkeeping and attestation
·         Design
·         Drilling for oil and gas mining except for those performed by a Permanent Establishment
·         Support for geothermal, oil and gas mining
·         Support for general mining (i.e, other than geothermal, oil and gas)
·         Flight and airport support
·         Forest felling
·         Waste processing
·         Labour Supply/outsourcing
·         Intermediary/agency
·         Security trading, except for those performed by stock exchange, KSEI and KPEI
·         Sound dubbing
·         Film mixing
·         Computer-related (i.e, software, hardware or system)
·         Installation (e.g, electricity, machinery, or telephone equipment) except for those rendered by licensed construction companies
·         Toll manufacturing (maklon)
·         Investigation and security
·         Event organization
·         Provision of space and/or time in mass media, outdoor media and other media for the dissemination of information, and/or advertising
·         Pest eradication
·         Cleaning
·         Cateringh
·         Packaging
·         Legal
·         Architecture
·         City planning and landscape architecture
·         Creation of film promotion tools, advertisements, posters, photos, sliders, banners, pamphlets, and billboards
·         Website development
·         Internet
·         Storage, processing, and/or distribution of data, information, and/or programs
·         Maintenance of vehicle and/or land, marine, and air transportation means
·         Suction of septic tank
·         Pool maintenance
·         Freight forwarding
·         Logistics
·         Document handling
·         Loading and unloading
·         Laboratory and/or testing, except for those performed by educational institutions in academic research
·         Parking management
·         Soil test for construction
·         Land preparation and/or cultivation
·         Seeding and/or seeds planting
·         Plant maintenance
·         Harvesting
·         Processing of agricultural, plantation, fishery, livestock, and/or forestry products
·         Decoration
·         Printing/publishing
·         Translation
·         Freight/expedition, except for those subject to Article 15 Income tax
·         Port-related matters
·         Transport via pipelines
·         Child care
·         Training and/or course
·         Delivery and loading money to ATM
·         Certification
·         Survey
·         Tester
·         Services other than those mentioned above which payment is charged to central or regional government budget

PMK 141 also extents the list of  support services in geothermal and oil & gas  industry from 19 to 43 types of services.  Below is the complete list and items added or changed are in bold:

Ø  Primary cementing

Ø  Remedial cementing

Ø  Sand control

Ø  Matrix acidizing

Ø  Hydraulic

Ø  Nitrogen and coil tubing

Ø  Drill steam testing

Ø  Reda repair

Ø  Installation and maintenance

Ø  Equipment/material replacement

Ø  Mud logging

Ø  Mud engineering

Ø  Well logging and perforating

Ø  Stimulation and secondary discovery

Ø  Well testing and wire line services

Ø  Offshore navigation control related with drilling

Ø  Drilling maintenance

Ø  Drilling mobilization and demobilization

Ø  Directional drilling and surveys

Ø  Exploratory drilling

Ø  Location stacking/positioning

Ø  Preliminary study

Ø  Land acquisition

Ø  Preparation of drilling field

Ø  Installation of rig equipment

Ø  Primary hole manufacture and opening of rig hole

Ø  Primary hole drilling with little drill machine

Ø  Secondary hole digging

Ø  Wells placement management and transportation access

Ø  Service line and communication

Ø  Water system

Ø  Rigging up and/or rigging down management

Ø  Man labor, tools, equipment  and other support supply

Ø  Diving and/or welding

Ø  Completion process

Ø  Pump fees

Ø  Drill equipment lifting

Ø  Oil content testing

Ø  Business legality management

Ø  Auction

Ø  Seismic reflection studies

Ø  Geomagnetic survey, gravity, and other survey

Ø  Other services related with drilling, production and/or closing of oil and gas field

TAX BASE

      PMK-141 defining gross income as the basis for withholding ITA 23 as follow:

a.   Gross income for catering services is the entire income  with any name and  form  which is paid or provided to be paid or due to payment.

b.   Gross income for non-catering services is the entire income with any name or form of payment which is paid or provided to be paid or due to payment, exclude:

1.   Salary, wage, honorarium, allowance and other payments as compensation in connection with the work that paid by a manpower supply company to the man power who provide services, according to the contract services;

2.   Any payment related with goods or material purchase to the service provider;

3.   Payment to the third party that paid by service provider;

4.   Reimbursement cost to the third party that paid by service provider.

Exclusion from gross income for items above should be supported by:

1.   Contract and salary payment list, wage, honorarium, allowance and other payment related with the work ;

2.   Invoice of material purchase 

3.   Invoice from third party vendor attached with contract ,

4.   Invoice or payment receipt for the amount  paid by service provider to the third party vendor .

Failing to provide those supporting documents, ITA 23 will be withheld from the gross amount.

PMK-141 also defines some type as service i.e. toll manufacturing, event organizer, and freight forwarding service and gives examples of computation in its attachment. 

Comments

Referred to DGT Annual Report 2012, the revenue from withholding ITA 23 is not significant compared with other withholding tax. Extending the list of withholding tax will expedite the tax revenue since it is prepaid tax, but it will not increase tax revenue as  a whole.  Probably the government intend to secure that all companies providing service to other companies are registered as taxpayers. It is based on assumption that a company who paid for a service should withhold ITA 23  at 4% withholding rate  (100% penalty from original rate 2%) for vendors who are not registered as taxpayers.  From this mechanism, DGT will ensure that taxpayers under withholding mechanism are registered in the system and DGT can cross check the amount withheld by withholding agent to the amount reported in the tax return by the service providers.