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Proposed amendments to certain rules regarding international taxation
The Indonesian Government has submitted to parliament a draft amendment of the Indonesian Income Tax Law (thus far, the draft has been debated on a considerable number of occasions).
Taxpayers have, through a number of organizations such as the Indonesian Chamber of Commerce or the Indonesian Tax Consultants Association, complained that the amendment is detrimental to the foreign investment climate in Indonesia. It is not known whether, in the face of such opposition, parliament will finish complete its scrutiny of the draft legislation before the end of this year.
If the proposed amendments are accepted this year, they would enter into force in January 2007.
The following are examples of the proposed amendments:
a) Proposed amendment to the definition of a PE:
The definition of "permanent establishment" would now include a dedicated server owned or rented by a nonresident for doing business in Indonesia.
Normally, a server is used by internet users who pay the server's owner directly, as well as other internet users who pay other ISPs. The question is how could the taxable income of the nonresident be calculated? Moreover, we consider that this proposed amendment would not be applicable to residents of countries with which Indonesia has a tax treaty, because the proposed amendment is not reflected in the Article on permanent establishments.
b) Proposed amendment to the definition of "royalty":
Payment for the use of Internet bandwidth would be defined as a royalty.
Nonresidents would not bear Indonesian withholding tax in this connection. The withholding tax would, instead, have to be borne by Indonesian ISPs. To offset this additional cost, Indonesian ISP providers would certainly raise their prices. Consequently, the cost of using the Internet could rise by at least 25%. In addition, this would create an issue with treaty countries.
c) Proposed amendment to anti-avoidance rules (1):
The Director General of Taxation would be authorized to determine "the actual taxpayer" that buys or sells shares or other assets through an SPV with a special relationship, or where there is an unrealistic transaction.
If the SPV were established in a tax haven, how would the Indonesian tax authorities know who is the beneficial owner of the SPV? Furthermore, how could they determine "the actual taxpayer"?
d) Proposed amendment to anti-avoidance rules (2):
The Director General of Taxation would be entitled to determine that a transfer of shares between a dummy corporation domiciled in a tax haven and having a special relationship with a company domiciled in Indonesia or a PE situated there, was actually a transfer of shares of a company domiciled in Indonesia.
If the buyer and seller were SPVs established in tax havens, how would the Indonesian tax authorities know who are the beneficial owners of the SPVs? Furthermore, how could they determine the "actual buyer and seller"? What would be the basis for determining that the transaction was "a transfer of shares of a company domiciled in Indonesia"? As in the case of the preceding anti-avoidance rule, this amendment would create uncertainty.