VAT at 1.1% on Foreclosed Collateral Sold by Creditors (PMK‑41/2023)

Pursuant to Government Regulation No. 44 of 2022, Indonesia’s Ministry of Finance issued Regulation No. 41 of 2023 (“PMK‑41”) concerning VAT on the submission of collateral taken over by creditors to collateral purchasers, effective 1 May 2023, as covered in the Forvis Mazars tax newsletter. [forvismazars.com]

Under the framework, when a taxable good is used as loan collateral it is not itself subject to VAT; but if the debtor defaults and the creditor sells the foreclosed collateral, the transaction becomes taxable using a final VAT mechanism. The applicable rate is 10% of the standard VAT rate—an effective 1.1% given the 11% standard rate—applied to the selling price of the foreclosed asset. [taxathand.com], [muc.co.id]

The creditor collects the VAT by issuing a VAT invoice (or equivalent document containing prescribed details) when the buyer pays, and must settle it to the State Treasury by the end of the month following the transaction, before filing its VAT return. Critically, any input VAT related to the foreclosed collateral is not creditable by the creditor, whereas the VAT invoice issued is creditable by the buyer. Because VAT becomes due only on receipt of payment, the design is intended to protect the financial institution’s cash flow. [taxathand.com]