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Indonesia Clamps Down on Tax Avoidance
The Indonesian Tax Authority (ITA) has increased its efforts to counter tax avoidance, tax evasion and tax treaty abuses by issuing regulations addressing these issues. International tax avoidance can arise when multinational corporations shift their profits in low-tax foreign subsidiaries to maximise global profits. To minimise tax burdens, multinationals can also take advantage of loopholes in the tax laws. Taxand Indonesia investigates the impact that these new measures will have on multinationals.
The ITA has taken the following measures to counter unacceptable tax avoidance and abuse of tax treaties:
- Entering into tax treaties with other countries
- Providing tax provisions regarding transfer pricing policies, anti-shopping rules, thin capitalisation and controlled foreign corporations
- Increasing and intensifying tax audits on certain taxpayers with cross-border transactions.
To date, Indonesia has negotiated and ratified tax treaties with 65 countries. One of the most important provisions in a tax treaty is Article 26, regarding the exchange of information between contracting states. Article 26 provides the possibility of the exchange of information concerning assessment, including judicial determination, or collection of taxes which are the subject of the agreement (income tax).
Exchange of Information with Tax Authority from Treaty Partner Countries
To implement the tax treaty measures to counter tax evasion, tax avoidance and tax treaty abuse, the Director General of Taxes (DGT) issued two regulations at the beginning of the year: DGT Regulation No. PER-41/PJ/2011 concerning the 'Tax Audit Procedures in relation to Exchange of Information based on a Tax Treaty that Involves the Tax Authority from Tax Treaty Partner Countries' and DGT Regulation PER 42/PJ/2011 regarding the 'Procedures for Tax Collection Assistance based on a Tax Treaty'.
DGT Regulation No. PER-41/PJ./2011 sets out the procedures for tax audits conducted in a tax treaty partner country as requested by the ITA based on the exchange of information provision in the tax treaty. This type of audit can be conducted when a tax resident of the treaty partner country derives income from Indonesia or has a transaction with an Indonesian tax resident, which is being audited because there is an indication of unacceptable tax avoidance, tax evasion or tax treaty abuse. The audit in the treaty partner country can be performed when the ITA's audit plan has already been approved by the competent authority of the treaty partner country. The audit will be carried out by the tax officials of the treaty partner country while being accompanied by the ITA's officials. For the same purpose, the tax officials of the treaty partner country will be accompanied by the ITA's tax officials in an audit against an Indonesian taxpayer. The audit shall be carried out based on the ITA's audit procedures.
DGT Regulation No.PER-42/PJ./2011 provides guidance on the exchange of information for tax collection assistance purposes. Based on the request of ITA officials, the competent authority of the treaty partner country shall provide tax collection assistance in relation to collecting taxes from Indonesian taxpayers who refuse to pay taxes, failed to pay taxes due, or are assumed to be hiding their assets in the treaty partner country. Vice versa, the ITA shall also provide tax collection assistance upon request by the treaty partner country.
Taxpayers typically try to maximise their profits from global business operations by minimising their tax liabilities through acceptable tax avoidance efforts. As such, multinationals should understand that the tax measures in the countries where they operate are different, particularly the taxation regulations relating to transfer pricing. Multinationals operating in Indonesia should take into consideration these two regulations relating to exchange of information based on the tax treaty. This measure is designed to anticipate the possibility of a tax audit on subsidiaries located in Indonesia's treaty partner countries of which have transactions with Indonesian resident taxpayers that are currently undergoing tax audit. Multinationals that are trying to avoid paying taxes in Indonesia should take note that in accordance with the exchange of information provision in the relevant tax treaty, the Indonesian Tax Authority may avail of tax collection assistance from the tax authority of the treaty partner country in order to collect a tax claim.
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