Foreign Tax Credit on Offshore Income

Transcription

1 January 2019 Tax Alert Foreign Tax Credit on Offshore Income Summary On 31 December 2018, the Minister of Finance ( MoF ) issued regulation No. 192/ PMK.03/2018 (PMK-192) to regulate the implementation of Foreign Tax Credit ( FTC ) on offshore income received by a resident taxpayer. PMK-192 is the implementing regulation of Article 24(6) of the Income Tax Law and replaced MoF Decree No. 164/ KMK.03/2002 ( PMK-164 ). PMK-192 became effective on the date of issue and is applicable for fiscal year 2018 onwards. One of the main difference between the new PMK-192 and the former PMK-164 is that FTC under PMK-192 is now calculated having regard to both type of income (i.e. basket of income basis) and country by country basis; whereas under the former PMK-164 FTC is calculated only on a country by country basis. 1. Eligible FTC A resident taxpayer is taxed on the worldwide income received or earned in a tax year including income received or earned from offshore. In case the resident taxpayer is taxed on its offshore income, the foreign income tax can be credited to the income tax payable in Indonesia. PMK-192 defines Foreign Income Tax ( FIT ) as income tax payable, paid or withheld offshore. However, FIT that can be credited to the income tax payable in Indonesia (i.e. FTC) does not include tax paid offshore on offshore dividend as stated in Article 18(2) of the Income Tax Law 1. FTC on the said offshore dividend is regulated separately under MoF Regulation No. 107/PMK.03/2017 (i.e. Controlled Foreign Corporation or CFC rule). 1. Article 18(2) of the Income Tax Law: the MoF is authorized to determine as and when dividend is accrued by a resident taxpayer on its ownership of shares in a non-public offshore company, provided that one of the following condition is met: a) the Taxpayer owns at least 50% of the paid in capital of the offshore company; or b) the Taxpayer together with another resident Taxpayer own at least 50% of the paid in capital of the offshore company Tax Alert: Foreign Tax Credit on Offshore Income 1

2 2. How to determine the source of offshore income? PMK-192 determines the source of offshore income by using the following principle: Type of income a. Income from shares and other securities including gain from the transfer of shares and other securities. b. Income from interest, royalty and rental fee from the use of movable assets. Source of Income The country where the company issuing the shares or other securities is established or domiciled. The country where the party that pays or bear the interest, royalty, or rental fee is domiciled or located. c. Income from rental fee from the use of immovable assets. The country where the immovable assets are located. d. Income from fee in relation to service, employment and activities. The country where the party, that pays or bear the fee, is domiciled or located. e. Income from permanent establishment (PE). 2 The country where the PE conducts its business or activities. f. Income from the transfer of part or all of the mining rights or participating interest in the financing or investment in the mining company. The country where the mine is located. g. Income from gain on the transfer of fixed assets. The country where the fixed assets are located. h. Income from gain on the transfer of assets that are part of a PE. The country where the PE is located. i. Income other than income stated in (a) to (h) above. The same principle used for income stated in (a) to (h) above. j. Income derived from an offshore Trust. 3 The country where the Trust is formed or established, where the determination of income shall use the same principle for income stated in (a) to (h) above. 3. How to calculate taxable income for resident taxpayer receiving offshore income? In calculating the Taxable Income, a resident taxpayer must consolidate its income received or earned from offshore (as stated in point 2) with its income received or earned in Indonesia as follows: Determination of Taxable Income Type of offshore income or offshore loss Business income, including income from an offshore branch or and offshore representative Income derived from an offshore Trust Amount of offshore income received or earned to be consolidated with local income Net income Net income or part of net income received or earned by the resident taxpayer Timing of consolidation between offshore income received or earned with local income In the tax year when the income is earned. a. In case the income of an offshore Trust is taxable at the Trust level, is in the tax year when the income is earned; and b. In case the income of an offshore Trust is not taxable at the Trust level, is in the tax year when the income is earned or received, whichever is earlier. 2 PMK-192 defined a PE stated in (e) and (h) above as a branch office, a representative office, and other form of a PE that is used by a resident taxpayer to conduct its business or activities offshore. 3 PMK-192 defines Trust as a scheme, arrangement or relationship based on a written agreement between a person or an entity who act as a founder (i.e. settlor/ grantor) and a person or an entity who act as the owner/ holder of an asset with the obligation to manage the said asset (i.e. trustee) for the benefit of the recipient (i.e. beneficiary). Tax Alert: Foreign Tax Credit on Offshore Income 2

3 Other income Net income In the tax year when the income is received. Business loss, including business loss incurred by an offshore branch or an offshore representative after taking into account loss incurred from assets or activities, which are effectively connected with the resident taxpayer s offshore branch or offshore representative office Other losses incurred offshore Offshore loss cannot be consolidated or offset with local income Offshore loss cannot be consolidated or offset with local income 4. When FIT can be credited and how to calculate the FTC? FIT can be credited in the tax year when the income received or earned from offshore is consolidated with the income received or earned in Indonesia. FTC is calculated based on each type of income on a country by country basis. In calculating the amount of FTC for each type of income on a country by country basis, determination of the source of income is based on the principle as stated in point 2. PMK-192 determine the amount of FTC by using the following principle: Conditions The amount of FTC 1, General rule The least amount between: a. The amount of income tax that should be payable, paid or withheld offshore, noting the tax treaty provisions in case there is an effective tax treaty; b. The amount of FIT; and c. Certain amount that is calculated based on the ratio between income received or earned offshore against the Taxable Income, multiplied by the income tax payable on the Taxable Income, but cannot exceed the amount of the said income tax payable. 2. In case as resident taxpayers, the husband and wife have a written agreement to separate their assets and income, or the wife chooses to perform her own tax rights and obligations based on her own will 3. In case the Taxable Income is smaller than all of the income received or earned from offshore 4. In case the tax treaty provisions regulate that a type of income can only be taxed in Indonesia For each of the husband or the wife, it is the least amount between: a. The amount of income tax that should be payable, paid or withheld offshore on offshore income received or earned by each of the husband or the wife, noting the tax treaty provisions in case there is an effective tax treaty; b. The amount of FIT from offshore income received or earned by each of the husband or the wife; and c. Certain amount that is calculated based on the ratio between income received or earned offshore by each of the husband or the wife against the Taxable Income, multiplied by the income tax payable on the Taxable Income, but cannot exceed the amount of the said income tax payable borne by each of the husband or the wife. The maximum is the amount of income tax payable on the Taxable Income. None Tax Alert: Foreign Tax Credit on Offshore Income 3

4 In case the offshore income is from an offshore Trust, the amount of FIT (as stated in 1.b and 2.b in the table above) is determined as follows: a) The income tax or part of income tax amount on income earned by a resident taxpayer in case the offshore Trust is taxed at the Trust level; and b) The income tax amount on income received by a resident taxpayer in case the offshore Trust is not taxed at the Trust level. Taxable Income (as stated in 1.c, 2.c and 3 in the table above) does not include income subject to: a) Final income tax as stated in Article 4(2) of the Income Tax Law; b) Final income tax based on specific deemed profit as stated in Article 15 of the Income Tax Law; and c) Separate income tax as stated in Article 8(1) of the Income Tax Law. In case the amount of FIT is higher than the FTC (as stated in 1 to 4 in the table above), the excess FIT: a) Cannot be offset against the income tax payable; 5. Evidence of FIT payment Resident taxpayer who wants to credit the FIT on its offshore income must provide evidence of FIT payment in the form of: a) Copy of payment slip or FIT withholding slip; or b) Copy of other evidence that can show there is FIT payment or FIT withholding. In case the resident taxpayer receives offshore business income and/ or income from offshore Trust that is taxable at the Trust level, the evidence of FIT payment in (a) or (b) above can be replaced with: a) Annual income tax return submitted offshore by the resident taxpayer s offshore branch or representative office; and/ or b) Annual income tax return or evidence of FIT payment made by the Trust. The evidence of FIT payment must contain at least the following information: a) Name of the resident taxpayer; and b) The amount of FIT. b) Cannot be deducted as an expense or a deduction of income; and c) Cannot be refunded. In calculating the FTC, the amount of FIT in foreign currency must be converted into IDR by using the MoF exchange rates. In case the resident taxpayer uses USD bookkeeping, the amount of FIT in other foreign currency other than USD must be converted into USD by using: a) Bank Indonesia s middle exchange rate; or b) The relevant currency daily spot rate at international market against USD (in case the BI middle exchange rate is not available). The conversion of FIT into IDR or USD for the FTC shall be conducted at the time FIT is payable, paid or withheld offshore. Tax Alert: Foreign Tax Credit on Offshore Income 4

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