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Anti-Treaty Shopping Provisions in Indonesia
In a global economy, multinational corporations run the risk of being subjected to double taxation on their income derived from foreign investments. Double taxation is an impediment to attracting foreign investment. To alleviate double taxation, most nations have entered into double-taxation agreements (tax treaties) with other nations. Like most other tax treaties around the world, Indonesia's tax treaties state that the recipient of income sourced in Indonesia must be the "beneficial owner" of that income. Taxand Indonesia identifies the criteria for "beneficial ownership" and describes what non-resident taxpayers need to do in order to comply with the criteria to avoid double taxation.
Based on its tax treaties with other nations, the Indonesian tax authorities collect income tax at a lower rate than the prevailing domestic rate of 20%. To curb perceived abuse and ensure that benefits under its tax treaties are available only to non-resident taxpayers who are the beneficial owners, the Director General of Taxes has issued Regulation No-62/PJ/2009, which has since been amended by:
The criteria for beneficial ownership are as follows:
a. As stipulated in standard tax treaties, a beneficial owner is a recipient of income other than a party acting as agent, nominee or conduit company;
b. An individual or corporation that is:
a. a domestic tax subject in a tax-treaty partner nation;
b. an institution whose name is specifically referred to in a tax treaty;
c. a non-resident taxpayer which is paid income through a custodian arising out of the transfer of shares or bonds that are traded on the Indonesian stock exchange;
d. a bank
e. A corporation that fulfills the following requirements:
i. It is established and registered in the tax-treaty partner nation and its transaction scheme is not arranged solely to avail of the tax treaty provisions;
ii. It is managed by its own management, which has full authority to undertake transactions;
iii. It is a corporation that has employees and actively carries on business;
iv. The income that arises in Indonesia is taxable in the partner country;
v. Does not use more than 50% of its income to fulfil obligations to third parties, such as the payment of interest, royalties or other emoluments, except for payments to employees. Compliance with the above criteria must be disclosed in the non-consolidated financial statements of the non-resident taxpayer that are used as the basis for fulfilling obligations to third parties.
Corporations and individuals that engage in (a) transactions that lack a reasonable economic basis and which employ a structure or scheme designed solely to avail of a tax treaty, or (b) transactions whose substantive legal and economic structure or scheme are designed solely to avail of a tax treaty, or (c) transactions in which the recipient of income is not the true owner in respect of the economic benefit arising from the income (beneficial owner); are deemed to be engaged in treaty shopping, and are not permitted to avail of the provisions of the relevant tax treaty. Accordingly, they will be charged income tax at a rate of 20% in respect of all income that arises in Indonesia.
Errors in Collection of Taxes
If an error clearly has occurred in the collection of such taxes, the non-resident taxpayer may seek a refund from tax authorities using two methods:
a. by submitting an application through the tax collector
b. through the procedures set out in the Mutual Agreement (MAP) between the Indonesian revenue authorities and those of the partner country.
However, a request for tax refund is not easy to implement.
Certificate of Domicile
The tax on a non-resident taxpayer's income is collected by a domestic taxpayer or permanent establishment. Accordingly, to benefit from a tax treaty, a non-resident individual or multinational corporate taxpayer must possess a Certificate of Domicile that complies with the format required by the Indonesian tax authorities and which has been approved by the competent authority in the tax-treaty partner nation. For the United States and Thailand a Certificate of Domicile has been issued and signed by the local revenue authorities and will be acceptable provided that it is in English and in the name of the non-resident taxpayer.
The regulations, as amended, clarify the beneficial ownership criteria and increase certainty for non-resident multinationals structuring transactions with companies in Indonesia.
Your Taxand contacts for further queries are:
T. +62 21 8399 919
T. +62 21 8399 919
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