2018 Expat Retiree Tax Analysis

[Chiron]

It's that time of year again for taxes, and this time around, I hired an international tax advisor that specialized in Indonesian taxes for a US expat. I believe that the information would be universal to most other countries, but the USA has a few things that might make it a bit unique. Keep in mind that the advisor would only convey what they know regarding the current laws in effect (i.e. they went "by the book"). After all is said and done, the reality may end up being something different once I make the move to Indonesia. I've read in previous threads that the Kantor Pajak may not even require or care whether an expat retiree has an NPWP number or even consider their income taxable. However, that is not the exact law, and things may change at some point - maybe unexpectedly. My purpose was to plan for the possibility of being taxed, and just build it into my budget. I also wanted to explore ways to avoid paying unnecessary taxes if possible.

Here were the rules explained to me:

1. All company pensions are subject to being taxed. This is considered to be income earned "anywhere" in the world, and if you're an Indonesian resident under any circumstance more than 183 days, this needs to be reported to Kantor Pajak.

2. US based Social Security is exempt from Indonesian taxes by treaty. It's still subject to tax in the US, and may be taxed if the adjusted gross income (AGI) includes other sources of income (pension, IRA, etc.).

3. Traditional IRAs (Individual Retirement Accounts), are considered a taxable event upon withdrawal, and subject to US and Indonesian taxes. However, Roth IRAs (over 5 years old since last deposit) are not.

4. Earnings from an interest bearing account in Indonesia (e.g. "Deposito"), are subject to US taxes. The resulting annual amount (after the bank takes out PPH), must be reported to the IRS, and becomes part of the AGI on the US taxes. This is apparently starting to be enforced by the FATCA laws, where Indonesian banks must report all US citizens back to the IRS. I'm not sure how much technical progress has been made here, but this probably will happen when opening a new account (like in my case). Someone with an existing long time account may not be noticed.

5. Tax-free US based municipal bonds are tax free in both the US and Indonesia.

6. US taxes are paid first, and the taxable US amount is a full credit on whatever amount the Indonesian Taxes end up being. If I pay $2000 to the IRS, and Kantor Pajak comes up with $2500, then I pay the difference - $500 (in Rupiah that is).

With all the above said, the most disappointing item is the Traditional IRA withdrawal. My plan was to put as much as possible into IRAs, and just try to live off of Social Security. I would then only withdraw what I needed, and keep the AGI low. I shouldn't complain, as I knew this going into IRAs. However, after my tax simulation, it showed little or no taxes in the US, but a relatively hefty amount would in theory go towards Indonesian taxes. I started to think: "why would they care, and how would they know?" But I guess if you're asked to produce copies of US tax forms, it would show up as income. I'm also interested in the Indonesian Deposito accounts,but with FATCA, PPH, and US taxes, it may be better to buy the tax-free municipal bonds.

I just wanted to check with the forum, to see if things are starting to change in 2018. In other words, is the Kantor Pajak getting more connected to banks, interanational tax authorities, etc.? Have any expat retirees been asked to present or create an NPWP? I know that Indonesia has been focused on taxation in recent times, and once these tax authorities get started, it just becomes more costly to the taxpayer over time.

Thanks.

 

[dafluff]

Item no 1 is consistent with the law. However in practice, many forum members have had problems even getting NPWP if a foreign pension is all they have as income. So there is a bit of a confusion there between what the law says, and what the tax office people in the field think.

Would love to hear any resolution to this issue.

 

[Meik]

You should treat any interest AS IF you have received a 1099-INT for it and enter interest income in box 1. Foreign taxes paid on the interest income, enter them in box 6 of 1099-INT form.

I have always reported interest from a bank account BEFORE Indonesia tax. And use form 1116 for credit. Be sure to show your foreign interest as a line item on 1040 sch. B

Meik

4. Earnings from an interest bearing account in Indonesia (e.g. "Deposito"), are subject to US taxes. The resulting annual amount (after the bank takes out PPH), must be reported to the IRS,

 

[Chiron]

You should treat any interest AS IF you have received a 1099-INT for it and enter interest income in box 1. Foreign taxes paid on the interest income, enter them in box 6 of 1099-INT form.

I have always reported interest from a bank account BEFORE Indonesia tax. And use form 1116 for credit. Be sure to show your foreign interest as a line item on 1040 sch. B

Hi Meik,

Thanks for pointing that out. My tax advisor didn't really go into the detail, but focused on the IRS reporting and FATCA. They also said there wouldn't be double taxation. On my wife's bank account in Indonesia, they take out PPH before she gets her interest payment. So taking these two points together, I took that to mean there would only be reporting on the interest after the PPH was taken out. It would seem that I would need to look at the Indonesian bank statement and combine the PPH and remaining interest and report that on the 1040. Good to know...

 

[IndoTom]

If Indonesia actually enforces the tax laws requiring foreigners to pay taxes on their investment and pension income from their home country then I suspect many expats will not want to live or work in the country. That's one of the BIG reasons pointing me to retire to Malaysia instead of Indonesia is because Malaysia don't doesn't tax foreign income for the MM2H visa program participants.

 

[Chiron]

If Indonesia actually enforces the tax laws requiring foreigners to pay taxes on their investment and pension income from their home country then I suspect many expats will not want to live or work in the country. That's one of the BIG reasons pointing me to retire to Malaysia instead of Indonesia is because Malaysia don't doesn't tax foreign income for the MM2H visa program participants.

Funny that you should mention the Malaysia MM2H program, as I've discussed this with my wife on several occasions. Asking my Indonesian wife to consider Malaysia for retirement was like asking her to move to a penal colony. She wants no part of the idea. Apparently there's a host of language, cultural, and other issues. When I speak Bahasa Indonesia, she'll often comment on my accent, and tell me to stop pronouncing things like a Malaysian. "Okay then, soooorrrryyyy..."

With that said, the MM2H program coupled with the improved healthcare situation in Malaysia makes it an attractive deal. In reading various top ten lists of best places to retire in the world, Malaysia often ends up in the pack. The downside of Malaysia over Indonesia is the cost of living appears to be higher than Indonesia depending where you live. If Indonesia does start fully enforcing taxation of retirees, then that equation changes. However, no matter what, it's not home, family are not there, nobody speaks Javanese, and all the favorite food dishes are just not the same.

 

[IndoTom]

Funny that you should mention the Malaysia MM2H program, as I've discussed this with my wife on several occasions. Asking my Indonesian wife to consider Malaysia for retirement was like asking her to move to a penal colony. She wants no part of the idea. Apparently there's a host of language, cultural, and other issues. When I speak Bahasa Indonesia, she'll often comment on my accent, and tell me to stop pronouncing things like a Malaysian. "Okay then, soooorrrryyyy..."

With that said, the MM2H program coupled with the improved healthcare situation in Malaysia makes it an attractive deal. In reading various top ten lists of best places to retire in the world, Malaysia often ends up in the pack. The downside of Malaysia over Indonesia is the cost of living appears to be higher than Indonesia depending where you live. If Indonesia does start fully enforcing taxation of retirees, then that equation changes. However, no matter what, it's not home, family are not there, nobody speaks Javanese, and all the favorite food dishes are just not the same.

Yes there is some animosity between Indonesians and Malaysians even though the Malay ethnic group are basically Indonesian immigrants. The Malays seem to think they are higher class then Indonesians perhaps because of their better economic prosperity. Anyway the Malays are only 1 of the 4 ethnic groups in Malaysia (Chinese, Indians, Malays, and Caucasians). In some areas of Kuala Lumpur, I see white people everywhere. I think the languages are similar enough, that if you used a formal version of each, then communication is fine. “La”

You could use Malaysia as a sudo-tax haven. Since it’s so close to Indonesia you could come and go between the two countries to escape becoming a tax resident in Indonesia.

 

[Jamu]

Asking my Indonesian wife to consider Malaysia for retirement was like asking her to move to a penal colony. She wants no part of the idea. Apparently there's a host of language, cultural, and other issues. When I speak Bahasa Indonesia, she'll often comment on my accent, and tell me to stop pronouncing things like a Malaysian. "Okay then, soooorrrryyyy..."

Haha, that describes my situation as well... and god forbid bringing up issues like where batik was invented, food comparisons, etc etc.

 

[Davita]

Funny that you should mention the Malaysia MM2H program, as I've discussed this with my wife on several occasions. Asking my Indonesian wife to consider Malaysia for retirement was like asking her to move to a penal colony. She wants no part of the idea. Apparently there's a host of language, cultural, and other issues. When I speak Bahasa Indonesia, she'll often comment on my accent, and tell me to stop pronouncing things like a Malaysian. "Okay then, soooorrrryyyy..."

With that said, the MM2H program coupled with the improved healthcare situation in Malaysia makes it an attractive deal. In reading various top ten lists of best places to retire in the world, Malaysia often ends up in the pack. The downside of Malaysia over Indonesia is the cost of living appears to be higher than Indonesia depending where you live. If Indonesia does start fully enforcing taxation of retirees, then that equation changes. However, no matter what, it's not home, family are not there, nobody speaks Javanese, and all the favorite food dishes are just not the same.

The Malaysian MM2H 10 year visa is no longer as attractive as previously. The Malaysian Gov't has recently (last week) changed the requirements for future applicants. It appears they wish to attract the more wealthy (i.e. Quality v Quantity).

The previous requirement was to show assets of MYR350,000. This has been raised to MYR600,000.
The Fixed Deposit required for seniors (55+) was MYR150,000. This has been raised to MYR500,000.
The requirement to show income has been canceled.

 

[Chiron]

The previous requirement was to show assets of MYR350,000. This has been raised to MYR600,000.
The Fixed Deposit required for seniors (55+) was MYR150,000. This has been raised to MYR500,000.
The requirement to show income has been canceled.

Wow, that is quite an increase - almost double the liquid assets, and 333% increase in the bank deposit. In US dollar terms, you need about $280,000 in cash to even think about this. Interesting that they cancelled the monthly income requirement - which was 10,000 MYR per month. I did notice that most of the Malaysian banks are offering around 3.5% currently - which would generate about 17K-18K MYR per year on the 500K MYR deposit. The same taxation scenario would probably be in effect on that interest - i.e. taxes would be from both US and Malaysia. In the previous requirements, they would let you withdraw 50,000 after the first year - I'm curious if they still let you withdraw a portion after a year. Otherwise, you need a bit more than $280,000 to begin with.

 

[IndoTom]

The Malaysian MM2H 10 year visa is no longer as attractive as previously. The Malaysian Gov't has recently (last week) changed the requirements for future applicants. It appears they wish to attract the more wealthy (i.e. Quality v Quantity).

The previous requirement was to show assets of MYR350,000. This has been raised to MYR600,000.
The Fixed Deposit required for seniors (55+) was MYR150,000. This has been raised to MYR500,000.
The requirement to show income has been canceled.

Hi Davita, I don’t see these new requirements on the official MM2H website. I have heard rumors of a change like this for almost a year. You might have found some fake news. Can you provide your source?

 

[Davita]

Hi Davita, I don’t see these new requirements on the official MM2H website. I have heard rumors of a change like this for almost a year. You might have found some fake news. Can you provide your source?

Copy from a member from a Malaysian forum a few days ago......
"For those who didn't attend the BHCKL/MM2H presentation yesterday, the word is out (official), even backed by tiny fold-out MM2H pamphlets. From the "middle of the year" but excluding applications presently in the pipeline:

1. Proof of liquid assets rises to RM600,000 (presently RM350,000)
2. FD rises to RM500,000 (presently RM150,000)
3. Requirement to show off-shore income of RM10,000/month exempted for over-60s

The deputy/assistant director of MM2H who was one of the speakers unashamedly said (backed by a giant slide) that they were looking for "quality not quantity"."

 

[R Cameron]

Otherwise, you need a bit more than $280,000 to begin with.

I see you're adding the assets and the deposit to get 1,100,000myr or $280,000, but wouldn't the deposited money still be part of your assets? So only 600,000myr ($153k) total needed?

 

[scouser59]

Who do they think they are in malaysia ? , Monaco perhaps , and you still get the pleasure of the "morning chorus" . no thank you . Nowt special about that place just another Muslim majority country.

 

[Jamu]

To be fair, is it too much to ask that a retired person seeking permanent residence in another country have at least USD 150k in liquid assets? Absent family or other strong connections, no EU country would grant a long term residence visa to a retiree from a first world country with only this small amount of liquid assets, and I highly doubt that Australia, New Zealand, the U.S. or Canada would either, so what's the big deal if Malaysia has increased an already low bar?

 

[Davita]

I'm not sure but I believe recently there's been a huge influx of young Chinese applicants for the MM2H. Maybe that's why they increased the financial requirements.

The MM2H used to be the Silver-Hair retirement visa. The original intent was to invite retired people who have had an association with Malaysia and wished to have a holiday home. After the change it included all ages but had a different financial requirement if below or above age 55.

I wish Indonesia had a similar system to the MM2H...that would be much better than this scrappy Retirement Kitas/Kitap/Merp charade.

 

[Jamu]

I wish Indonesia had a similar system to the MM2H...that would be much better than this scrappy Retirement Kitas/Kitap/Merp charade.

Fully agree. More transparency and a longer term stay permit for qualified individuals would be great for all concerned (except the agents, of course)...

 

[scouser59]

Darn site cheaper in the philipines , and who the hell wants to hear the mosque in the morning and all times of the day and night , im bloody sure I dont , They should pay me for the noise and supply me with life time supply of earplugs , but ya thats just my view .

 

[Chiron]

I see you're adding the assets and the deposit to get 1,100,000myr or $280,000, but wouldn't the deposited money still be part of your assets? So only 600,000myr ($153k) total needed?

I stand corrected - and you're right. Total liquid assets could be the 500,000 MYR Malaysian bank deposit, plus a minimum of 100,000 MYR liquid cash equivalents somewhere else. Thanks for pointing that out.

With regards to the original posting on the thread, I'm reading the tea leaves, and they're telling me that retirees (at least here on this forum) may be avoiding taxation on their foreign based pension income. The Kantor Pajak appears to be ambivalent in their interpretation on the letter of the law - and this is consistent with the retiree expats I've talked with in Solo and Bali (at least up until last year).

From the responses here, I'm guessing a number of retirees would consider moving to another Southeast Asian country (Malaysia, Philippines, etc.) rather than deal with taxation in Indonesia. The thought admittedly crossed my mind as well. I personally don't like dealing with ambivalence, multiple interpretations, confusion, etc. On the other hand, I've met several who seem to thrive on the confusion. They smile, tell me not to worry about it, and very indignantly tell me that they've never paid one rupiah on their pensions - and don't ever intend to. I do believe the penalties of not paying Indonesian tax use words like prison time, confiscation of assets, and deportation. Those are pretty heavy items to basically tell myself to "not worry about it". With all this said, the truth for me is probably somewhere between the extremes. I'll likely be upfront about paying taxes. If they tell me I don't owe anything, I'll try to at least get some sort of documentation (if that's possible) to have a defense. Always better to be prepared, and even better if you don't end up needing it.

 

[Jamu]

There are loads of foreigners taking advantage of the current lack of enforcement of tax laws in Indonesia and elsewhere. However, the net is closing in, albeit slowly, and flying under the radar will not be possible forever, so you're wise to want to learn the laws and make an attempt to comply with them.