Using Foreign Insurance for Business? Here’s the Tax Breakdown

In running a business, an entrepreneur must not only consider potential profits but also be skilled at assessing risks. This is especially true when business transactions involve companies abroad, which often require the shipment of goods across countries or even continents.

Moreover, in today’s uncertain global economic climate, risks can come from anywhere. For example, goods may be damaged during transit, lost, or financing decisions, such as loans, can suddenly create complications if shipments are held at a port due to the import policies of the destination country.

One crucial way to protect a business from potential losses is by using insurance. When engaging in business with companies in different countries, it’s possible that protection services from foreign insurance providers may be used.

Before being swayed by the offers from a foreign insurance company, it’s important to carefully calculate the potential pros and cons, including the tax implications.

Types of Business Protection Insurance

Referring to the Financial Services Authority Regulation (POJK) Number 8 of 2024, there are various insurance products commonly used:

1. Property/Casualty Insurance

This insurance protects against risks such as loss, damage, arising costs, loss of profit, or legal liability to third parties.

2. Life Insurance

This insurance provides coverage against the risk of death.

3. Health Insurance

This insurance offers protection against risks related to a person’s physical health or deterioration of their health condition.

4. Accident Insurance

This insurance protects the policyholder, insured, or participant in the event of an accident.

5. Financing/Loan Insurance

This insurance covers the risk of default or failure to fulfill financial obligations by a debtor to a creditor, according to the agreed terms.

6. Guarantee Insurance

This insurance provides coverage or guarantees against the inability of an individual (principal) to fulfill an agreement as agreed with the obligee.

Definition of Insurance Policy and Premium

The proof that an individual or a company has insurance coverage is having a policy. However, to receive the benefits of the insurance protection, the policyholder is obligated to pay a premium.

A premium is the amount of money set by an insurance or reinsurance company, agreed upon, and must be paid by the policyholder.

In the context of taxation, when a domestic company pays premiums to a foreign insurance company, it is subject to Income Tax.

Income Tax Rates on Insurance Premiums

According to Article 241 of the Minister of Finance Regulation (PMK) Number 81 of 2024, payments of insurance and reinsurance premiums to foreign insurance companies are subject to Income Tax Article (ITA) 26.

The ITA 26 rate on these premium payments is set at 20% of the estimated net income. The calculation of net income differs depending on the party paying the premium:

If the premium is paid by the insured party to a foreign insurance company, either directly or through a broker, the tax is 50% of the premium paid.

If the premium is paid by an Indonesian insurance company to a foreign insurance company, either directly or through a broker, the tax is 10% of the premium paid.

If the premium is paid by an Indonesian reinsurance company to a foreign insurance company, either directly or through a broker, the tax is 5% of the premium paid.

Insurance Premium Tax Withholding

In addition to knowing how to calculate the Income Tax Article (ITA) 26 owed, it is also important to understand who is responsible for withholding it. Article 242 of the Minister of Finance Regulation (PMK) Number 81 of 2024 outlines the parties required to withhold tax on insurance premiums.

• For insurance premium payments made by the insured to a foreign insurance company, ITA 26 is withheld by the insured.
• If the premium payment is made by a domestic insurance company to a foreign insurance company, ITA 26 is withheld by the domestic insurance company.
• If the premium payment is made by a reinsurance company for premiums paid to a foreign insurance company, ITA 26 is withheld by the reinsurance company.

Administrative Obligations for Withholding ITA 26 on Insurance Premiums

Besides calculating and withholding the tax, it is also important to understand the administrative requirements, as outlined in Article 243 of PMK Number 81 of 2024:

Time of Tax Liability

ITA 26 on insurance premium payments is payable at the end of the month the premium is paid or at the end of the month the insurance premium becomes due.

Issuance of Tax Withholding Slip

The withholding party is required to prepare and provide evidence of ITA 26 withholding on the insurance premium to the party whose tax is withheld.

Payment of ITA 26

After withholding, ITA 26 on insurance premiums must be deposited to the DGT no later than 15 days from the tax due date.

The payment of ITA 26 can be made using a Tax Payment Slip (SSP) or administrative channels equivalent to an SSP.

Reporting the Withholding of ITA 26

The withholding party is also required to report the ITA 26 withholding to the DGT no later than 20 days from the tax due date, using the Unified Income Tax Periodic Return (SPT Masa PPh Unifikasi).

Conclusion

Using foreign insurance can be a strategic step for business owners to protect their operations from various cross-border risks, such as damage, loss, or payment defaults. However, every premium payment to a foreign insurance company carries tax implications that must be considered.

According to PMK Number 81 of 2024, premium payments to foreign insurance companies are subject to Income Tax Article (ITA) 26, with effective rates varying depending on the paying party. In addition, the party making the payment is obliged to withhold, deposit, and report the tax in accordance with the applicable tax administration regulations.

By understanding these provisions, business owners are expected to manage their business protection effectively while ensuring tax compliance, so that the benefits of using foreign insurance remain optimal without creating fiscal risks in the future. (NZR/ASP)