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New Procedures for implementation of Mutual Agreement in Indonesia
Mutual Agreement Procedure (MAP) has been acknowledged as a procedure provided by the tax treaty to settle tax disputes which may arise due to misappropriate application and interpretation of the tax treaty. Recently, MAP has been widely used to settle issues that arise in transfer pricing cases. MAP is expected to ensure that the purpose of the tax treaty can be achieved effectively i.e. to avoid double taxation. For that purpose, in November 2010 the Indonesian tax authority issued a Director General of Taxes (DGT) regulation. Taxand Indonesia analyses the procedures for domestic taxpayers to submit a MAP application and the measures DGT will take to follow-up a MAP request from treaty partners.
Coverage of this regulation
Domestic taxpayers may request a DGT to conduct consultation with the other competent authority in cases of:
- a DGT making transfer pricing adjustments for domestic taxpayers which may cause double taxation, unless such adjustment is followed by corresponding adjustment abroad
- other competent authorities imposing taxes in relation to the presence of, or income derived by, a permanent establishment of an Indonesian resident taxpayer in another country
- tax on a foreign source income derived by a domestic taxpayer being withheld not in accordance with the tax treaty
- a resident taxpayer being taxed as a resident taxpayer by another authority which can lead to a dual resident case
The regulation also covers procedures taken by a DGT to process MAP requested by other regulatory authorities in cases of:
- DGT imposing taxes, including tax arising from a transfer pricing adjustment, to a non-resident taxpayer, who conducts business or activities in Indonesia through a permanent establishment, which is considered by such taxpayers not in accordance with the tax treaty
- other regulatory authorities requesting a DGT to make a corresponding adjustment
- tax withheld by a domestic withholding tax agent on income derived by a non-resident taxpayer which is considered not in accordance with the tax treaty
- a dual resident
The connection between MAP and domestic tax dispute settlements
A MAP request made by domestic taxpayers will be declined by the DGT if the requesting taxpayer files the case using the domestic tax dispute settlement, i.e. tax objections and appeals. This limitation may presumably reduce the effectiveness of MAP as it will force the taxpayer to choose the best route in settling their tax disputes. The DGT regulation has no legal authority to revise or to revoke the decision of tax objections, and, in case of appeals, the DGT is obliged by law to execute the decision of the tax court.
In a case where a MAP is requested by another regulatory authority, DGT can also decline such a request whenever the related domestic taxpayer applies a tax objection or appeals.
Other factors that may trigger the DGT declining a MAP request are:
- a request being made by a domestic taxpayer or other regulatory authorities after the time limit provided in the relevant tax treaties
- the case submitted in a MAP request is not covered by the relevant tax treaties
- the other competent authority who requests MAP from DGT revokes the request
- MAP is requested by another competent authority regarding corresponding adjustment and the related domestic taxpayer has not requested a MAP from the DGT for the same case
- the related domestic taxpayer is not providing all relevant documents to DGT
- the DGT is not able to collect documents to conduct consultation due to the length of time that has lapsed since the issuance of a tax assessment letter
- DGT assumes that MAP will not result in a mutual agreement
This guideline may be considered in relation to the previous guideline concerning the application of arm's length principle.
As a result the extensive practice of transfer pricing by multinational enterprises, DGT, like other tax authorities, is currently intensifying transfer pricing audit to evaluate the application of the arm's length principle by domestic taxpayers. This situation may cause taxpayers and competent authorities of other countries to request MAP from the DGT. Therefore, it is essential for multinational companies to apprehend the procedures to submit a MAP request, including factors that may trigger DGT declining such request.
On the other hand, this regulation will provide taxpayers with clearer guidance that will be beneficial in avoiding double taxation. This is particularly relevant as the Indonesian tax system allows the withholding tax agents to apply tax treaties and such applications may be inappropriate. Without submitting the MAP request, it is very likely that the double taxation will still be unavoidable.