Indonesia Tax: DGT revises rules for obtaining tax treaty benefits
Indonesia's Director General of Taxation (DGT) issued new regulations on 30 April 2022 (Regulations 24 and 25) that amend and clarify previous guidance for obtaining benefits under Indonesia's tax treaties. The new rules were issued in response to taxpayer concerns about the practical consequences of Regulations 61 and 62 issued in November 2009. In particular, Regulation 62 contains unclear language that could make it difficult for nonresident recipients of Indonesian source income to qualify for treaty benefits.
Regulation 62 provides that treaty benefits will be denied in cases of tax treaty abuse, even if the entity or individual is a resident of the treaty partner country. Specifically, Regulation 62 states that treaty abuse would be deemed to exist when the recipient of income is not the actual owner of the economic benefit of the income, i.e. if it is not the beneficial owner (with agents, nominees and conduit companies precluded from being considered a beneficial owner). Regulation 61 contains stringent procedural rules for obtaining treaty benefits, including that a Certificate of Domicile (COD) in a prescribed format be signed and certified by the competent authority of the treaty partner country and be provided to the tax withholding agent before the withholding agent's deadline for filing its monthly tax return in order to apply any reduced rate of withholding.Regulation 25
The new guidance in Regulation 25 provides that the beneficial owner criteria will be applied only in respect of income for which the relevant treaty article contains a beneficial owner requirement. When a company receives income for which the treaty article does not stipulate a beneficial owner requirement, the company will not be deemed to abuse the treaty if the establishment of the company or the arrangement of the transaction structure/scheme is not aimed solely at benefiting from the treaty.
Regulation 25 also defines the following terms in relation to beneficial ownership:
- "Active business or activities" is interpreted based on the foreign taxpayer's actual situation, with the following taken into account: costs incurred, and business efforts and significant activities undertaken by the foreign taxpayer to continue as a going concern.
- "Income derived from Indonesia is subject to tax in the country of the recipient" is the requirement that the foreign recipient of Indonesian-source income be subject to tax in its country of residence and that the income derived from abroad be an object of tax in that country, even if ultimately the nonresident is not subject to tax (e.g. because the relevant income is assessed tax at a rate of 0%, the nonresident is exempt from tax by complying with certain requirements or is economically not subject to tax, including because the tax payable is borne by a foreign government, is deferred or is not collected).
- "Does not use more than 50% of its total income to fulfill obligations to other parties" means that not more than 50% of the foreign taxpayer's entire income of any type or from any source, as disclosed in its financial statements, is used to fulfill obligations to other parties. This does not include compensation paid to employees that is provided reasonably in connection with the employment, other costs normally incurred by the foreign taxpayer in carrying out its business and the distribution of profits in the form of dividends paid to its shareholders.
Regulation 25 also specifically stipulates that, if a foreign taxpayer does not abuse a treaty, it will be entitled to treaty benefits.Regulation 24
Regulation 24 provides that if a nonresident is unable to obtain the required signature or its equivalent on the COD from the relevant foreign competent authorities, the nonresident may use a COD that is commonly verified or issued by the tax authorities of the treaty partner country provided the COD meets the following requirements:
- Is in English;
- Is issued on or after 1 January 2010;
- Is an original or photocopied document verified by the Indonesian tax office where the withholding tax agent is registered as a taxpayer;
- Includes the name of the foreign taxpayer; and
- Is signed by an authorized official (or his/her representative) in the treaty partner country or contains a mark equivalent to a signature in accordance with normal practice in that country, and includes the name of the official. Such a COD will be valid for 12 months.
Regulation 24 also provides that Form DGT-2 may be used for foreign pension funds established under the laws of the treaty partner country and subject to tax in that country.
A COD is not required when the recipient of the income is the government of the treaty partner country, its central bank or certain institutions that are exempt from tax.
Both regulations are effective retroactively as from 1 January 2010.