Member Contribution to Joint Operations as Taxable Events under the New PMK 79/2024: Risk for Double Taxation?

Joint Operations in a Glance

Joint Operations (JO) is a contractual arrangement where two or more entities combine their resources for a specific project or business activity without forming a separate legal entity. Joint Operations are particularly prevalent in capital-intensive sectors such as construction, oil and gas, and infrastructure development. They enable participants to share risk, cost, and technical expertise in order to pursue projects that might be beyond the capacity of only single entity.

What’s New?

The Indonesian Minister of Finance recently issued PMK 79/2024 as the primary guideline and reference for the tax treatment of Joint Operations. Prior to this regulation, the provisions governing joint operations were fragmented, and this new regulation aims to unify and streamline them. For tax purposes, this new regulation classified Joint Operations into two categories:

(i) JO required to obtained Tax Identification Number, and

(ii) JO not required to obtained Tax Identification Number.

Criteria for JO Required to Obtain Tax Identification Number (TIN)

A JO is required to register TIN as Corporate Taxpayer if its agreement or activities involve:

i.   Delivering goods or services;

ii.     Receiving income; and/or

iii.    Incurring expenses or paying income, in the name of the JO.

The TIN should be registered at the Tax Office where one of its members is domiciled in Indonesia. Furthermore, the member should be designated as the JO’s representative in an agreement or in an appointment letter. Registration must be completed within one month after the JO is established (if the agreement meets the registration criteria) or within one month after the JO begins its qualifying activities.

PKP Registrations Requirements for Joint Operations

A Joint Operations must be registered as a Taxable Entrepreneur (PKP) if its gross turnover exceeds Rp4.8 billion or if any member of the JO has already been registered as PKP.

Transition Rule

A JO that was already tax-registered (TIN & PKP) prior to the enactment of PMK 79/2024 but does not meet the criteria outlined above may submit a request for the revocation of its TIN and/or PKP status.

Corporate Income Tax (CIT) Treatment

Both JO and JO members are obligated to file a CIT Return.

Summary	JO	JO Members
Income	Income received by the JO from its customer is recognized as the JO’s income For construction services: The highest applicable final income tax rate amongst JO’s member shall apply.	Income received by the JO from its customer is recognized as the JO’s income For construction services: The highest applicable final income tax rate amongst JO’s member shall apply.
Cost	Business expenses are based on the contributions of each member as outlined in the JO agreement. Expenses related to income subject to non-final taxation are deductible. Expenses related to income subject to final taxation are non-deductible.	Business expenses are based on the contributions of each member as outlined in the JO agreement. Expenses related to income subject to non-final taxation are deductible. Expenses related to income subject to final taxation are non-deductible.
Losses Compensation	Tax losses incurred solely belong to the JO and cannot be transferred to the members, even if the JO is dissolved	Tax losses incurred solely belong to the JO and cannot be transferred to the members, even if the JO is dissolved
Withholding Tax (WHT)	A JO with TIN is required to withhold WHT on payments made to other parties.  JO’s Customers withhold and issue WHT slips to the JO.	A JO with TIN is required to withhold WHT on payments made to other parties. JO’s Customers withhold and issue WHT slips to the JO.
After-tax profit distribution	Profit after tax distributed by the JO to its member are treated as follow: If the recipient is Domestic Taxpayer or Permanent Establishment (PE): i.     Not subject to Corporate Tax and Withholding Tax; ii.    Reported in the member’s CITR as non-taxable income; iii.  After-tax profit distributed to a PE that is not reinvested in Indonesia is subject to Branch Profit Tax. If the recipient is Foreign Taxpayer: i.     The distributed profit is subject to Withholding Tax.

DSH’s Brief: Risk for Double Taxation

The recognition of member’s contributions to a Joint Operation as taxable income under PMK 79/2024 causing conceptual tension and double taxation risk in Indonesia’s tax framework. In conventional business arrangements, such “investor-to-investee” relationship is generally viewed as capital participation and not as income.

Where the JO operates under normal tax regimes, the income recognized by the member may be offset by a deductible expenses claimed by the JO, hence maintaining tax symmetry. However, in sectors subject to final income tax regimes (e.g., construction services), JO would not be able to claim deductible expenses, including from its member contributions. In this situation, this asymmetry will result to an economically duplicative tax burden borne by the member of the JO and the JO itself.

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