Indonesia Tax: Guidance issued on tax treaty benefits
The Indonesian Directorate General of Taxation (DGT) issued two regulations (No. 61 and 62) on 5 November 2021 that revise or revoke previous guidance on the implementation of Indonesia's tax treaties. The regulations become effective on 1 January 2010.
Regulation 61 (61/PJ./2009), entitled "Procedures for the Application of Double Taxation Agreements," revokes two 1996 circulars (Circulars SE-03/PJ.101/1996 and SE-04/PJ.101/1996) and provides that tax treaty benefits will be granted only if:
(1) the recipient of the income is not a domestic Indonesian tax subject; (2) the administrative requirements to apply the treaty provisions are met; and (3) the foreign recipient has not engaged in any abuse of the treaty as stipulated in Regulation 62 (see below). If any of these requirements are not met, tax must be withheld in accordance with Indonesian domestic tax law.
Regulation 61 also requires that a person wishing to obtain treaty benefits provide a Certificate of Domicile (COD) in a prescribed format. Form DGT 1 (COD of Nonresidents for Indonesian Tax Withholding) is to be used by general foreign taxpayers and Form DGT 2 (COD for Nonresidents for Indonesian Tax Withholding) is to be used by foreign taxpayers that receive or earn income through a custodian in connection with income from a transaction relating to a transfer of shares or bonds traded or reported in a capital market in Indonesia, other than dividends and interest, or where the recipient is a foreign bank.
Salient points of Regulation 61 are as follows:
- In general, the two forms fulfill the requirements for applying treaty benefits as mentioned in Regulation 62. The completed form must be certified by the competent authority of the treaty partner country and the withholding agent must attach photocopies of the COD and evidence that tax has been withheld (i.e. withholding tax slip) when filing its monthly tax returns in each period in which the treaty provisions are applied.
- Regulation 61 specifically states that the COD must be made available or submitted by the foreign taxpayer to the withholding agent before the withholding agent's deadline for filing its monthly tax return. Otherwise, the COD will not be considered as a basis for applying the treaty benefits. The withholding agent is required to prepare a withholding tax slip even if the income is exempt from withholding tax (generally business profits) by virtue of the treaty.
- A properly filed COD Form DGT 2 will be used as the basis for applying treaty provisions as from the date the COD is certified by the competent authority of the treaty partner country and it will be valid for 12 months.
- It appears that foreign taxpayers, other than banks and those that receive income through a custodian (COD Form DGT 1), will need to complete and certify a new COD for each payment or transaction that is subject to withholding tax.
- If the foreign recipient of income is an institution whose name is specifically identified in a tax treaty or that has been jointly agreed upon by the competent authority of Indonesia and the treaty partner country, the withholding agent may apply the treaty provisions without requiring a COD.
- The withholding agent must retain the COD for 10 years in accordance with the provisions of the Indonesian Law on General Provisions and Procedures for Taxation. Regulation 62 (62/PJ./2009), entitled "Circular on the Prevention of Tax Treaty Abuse," revokes a 2005 DGT circular (Circular SE-17/PJ./2005, addressing the income tax treatment of interest in the Indonesia-Netherlands tax treaty) and a 2008 circular (Circular SE-03/PJ./2008, on the determination of beneficial owner status in Indonesia's tax treaties). According to Regulation 62, 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. Abuse of treaty provisions will be deemed to exist in the following cases:
- A transaction that has no economic substance is used for a structure/scheme that is arranged solely to obtain treaty benefits;
- A transaction has a structure/ scheme whose legal form differs from its economic substance, solely for the purpose of obtaining treaty benefits; or
- The recipient of the income is not the actual owner of the economic benefit of the income, i.e. it is not the beneficial owner (with agents, nominees and conduit companies precluded from being considered a beneficial owner).
Regulation 62 adopts a substance-over-form approach by stating that, when there is a difference between the legal form of a structure/scheme and its economic substance, the tax treatment will be based on the economic substance.
The following individuals or entities will not be deemed to be abusing a treaty:
- An individual who does not act as an agent or nominee;
- An institution specifically identified in the treaty or one that has been jointly approved by the competent authorities of Indonesia and the treaty partner country;
- A foreign taxpayer that receives or earns income through a custodian in connection with income from a transaction relating to a transfer of shares or bonds traded or reported in a capital market in Indonesia, provided the foreign taxpayer does not act as an agent or nominee;
- A company whose shares are listed on a capital market and are regularly traded;
- A bank; or
- A company that meets the following requirements:
. The company is established in the treaty partner country or the transaction is not structured solely for the purpose of obtaining treaty benefits;
. The business activities are managed by the company's own management, which has adequate authority to carry out the transaction;
. The company has employees and engages in an active business;
. Indonesian-source income derived by the company is subject to tax in its country of residence; and
. 50% or more of the company's total income is not used to fulfill obligations to other parties (e.g. in the form of interest, royalties or other such payments).
If the Indonesian tax authorities determine that a treaty has been abused, then:
- The withholding agent will not be permitted to apply the benefits in the treaty; instead, it will be required to withhold tax due in accordance with the provisions in the Income Tax Law; and
- The foreign taxpayer abusing the treaty will not be permitted to request a refund of overpaid tax.