TAX UPDATES FEBRUARY SUBMISSIONS of CORPORATE INCOME TAX RETURNS for FISCAL YEAR 2017 is APPROACHING ARE YOU AWARE of THE KEY ISSUES?

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1 FEBRUARY 2018 J A K A R T A O F F I C E M e n a r a I m p e r ium, 27 th F l o o r J l. H R R a s u n a S a id K a v. 1, P h F x c o n ta c t@ p b t a x a n d. c o m S U R A BAYA O F F I C E G r a h a B u ko p i n, 9 th F lo o r J l. Pan g li m a S u d irm a n , P h F x s u r a b a y p b t a x a n d. c o m I N S I D E T H I S I S S U E 1. Submissions of Corporate Income Tax Returns for Fiscal Year 2017 is Approaching Are You Aware of The Key Issues? 2. The Implementation of CbCR in Indonesia 3. Do You Know Starting from the 2017 fiscal year, additional attachments have been included in the waiting list and need to be prepared to avoid being rejected by the Directorate General of Taxes (DGT) as a result of non-compliance to the regulations. SUBMISSIONS of CORPORATE INCOME TAX RETURNS for FISCAL YEAR 2017 is APPROACHING ARE YOU AWARE of THE KEY ISSUES? March and April could be two of the busiest periods for Indonesian Taxpayers; as the end of March marks the deadline for Individual Taxpayers in filing personal tax returns, whilst the end of April, i.e. the 30 th of the month, marks the deadline for Corporate Taxpayers with a January to December bookkeeping period. Unlike the previous annual tax returns, the 2017 tax returns may be considered as out of the ordinary as new attachments were introduced and required to be submitted for the respective year. In the past, entertainment and promotional lists were dealt with, not to mention the related party forms obligatory as attachments to the annual corporate tax return (i.e. Attachments 3A/3B, 3A-1/3B-1, 3A-2/3B-2 along with the summary of their local and master files). Starting from the 2017 fiscal year, additional attachments have been included in the waiting list and need to be prepared to avoid being rejected by the Directorate General of Taxes (DGT) as a result of non-compliance to the regulations. Tax Updates will address some of the vital additional attachments for your reference. Debt to Equity Ratio (DER) Forms Issued in September 2015, the Minister of Finance (MoF) Regulation No. 169 stated that Indonesian corporate taxpayers are required to maintain its DER at 4 : 1 for tax purposes. In November 2017, the ITA issued the implementation of regulation No. 25/PJ/2017 (DGT Regulation No. 25), which introduced the DER forms consisting of 2 main forms, i.e. the DER and foreign private debt forms. read more

2 February 2018 Page 2 Submissions of Corporate Income Tax Returns for Fiscal Year 2017 is Approaching Are you aware of the key issues? (continued from page 1) In terms of the DER provisions, to be able to fully claim the financing costs, the loan amount is limited to four times the equity amount. Furthermore, corporate taxpayers also have to be aware of the arm s length principle if the loan is treated as an inter-company loan. DGT Regulation No. 25 also stipulated that the following financing costs are not deductible: the part of financing costs that exceeds the DER ratio; the part of related party financing costs that fails to conform with the arm s length principle; financing costs to obtain, collect, and maintain nontaxable income; and financing costs to obtain, collect, and maintain income subject to final tax. In spite of the conditions above, the DER form is required to be attached in the 2017 corporate tax returns; along with an additional foreign private debt, for taxpayers with foreign private debts, in order to submit a complete corporate tax return. Controlled Foreign Corporation (CFC) Forms Issued in mid-july 2017, the MoF Regulation No. 107 was effectively implemented in the fiscal year of The MoF Regulation No. 107 provides a deemed dividend procedure to domestic taxpayers who meet the following criteria: the foreign entity is at least 50% owned by an Indonesian taxpayer; or the foreign entity is at least 50% collectively owned by Indonesian taxpayers. Besides directly owned CFCs as mentioned above, the MoF regulation No. 107 also introduced a new CFC approach, i.e. indirectly owned CFC, which covers foreign entities at least 50% collectively owned by parties, as follows: Indonesian taxpayers and directly/indirectly owned foreign entities; or Indonesian taxpayers through directly/indirectly owned foreign entities; or directly/indirectly owned foreign entities. Ownership, through trust or similar arrangements, is viewed as a pass-through and will be considered as an investment conducted by investors in the trust or similar entities. Furthermore, the MoF Regulation No. 107 provides foreign tax credit claims in the Indonesian taxpayer s tax return for the year in which the tax was paid or withheld through the attachment of the following information on the directly owned CFC: Financial statement; Copy of reported annual tax return; Calculation or list of income after tax within the past 5 years; Tax payment or withholding tax slips on the dividend received. Detailed guidelines on the calculation of deemed dividend is available in the attachment of MoF Regulation No Ownership, through trust or similar arrangements, is viewed as a pass-through and will be considered as an investment conducted by investors in the trust or similar entities.

3 February 2018 Page 3 THE IMPLEMENTATION of CbCR in INDONESIA Following the issuance of PMK 213/PMK.03/2016 (PMK213), especially in relation to Country-by-Country reporting, the Directorate General of Taxes (DGT) issued Regulation of the Director General of Taxes No. 29/PJ/2017 PER 29 as a guideline in implementing Country-by-Country Reporting (CbCR) which was put into effect on December 29, PER-29 closely follows the OECD guideline with regards to the implementation of Country-by-Country Reports (CbCR), as part of action 13 of the BEPS action plans. PER-29 provides additional criteria for taxpayers with the obligation to file a CbCR, especially for domestic taxpayers as subsidiaries to parent entities which are foreign taxpayers. The additional criteria help the entities of small to medium MNE groups in reducing compliance burdens in filing CBCRs. The Filing Obligation of a Domestic Taxpayer as a Parent Entity A parent entity domiciled in Indonesia with consolidated group revenue at a minimum of IDR11,000,000,000,000 is required to prepare and file a CbCR. The criteria of the parent entity in this context should be the entity not owned, both directly or indirectly, by another entity within the Group. If this parent entity is owned by other entity, however, the latter entity does not have an obligation to prepare consolidated financial statements, therefore, the parent entity is obligated to prepare and file a CbCR. These criteria essentially mean that the domestic parent entity obligated to prepare the CbCR is the ultimate parent entity which is obligated to prepare consolidated financial statements with consolidated revenue of at least IDR11 trillion. The Filing Obligation of a Domestic Taxpayer as a Multinational Group Member As stated in PMK 213, when a domestic taxpayer is an entity whose parent entity is a foreign taxpayer, it has an obligation to file a CbCR, provided that the country or jurisdiction in which the parent entity domiciles: 1. does not oblige the filing of a CbCR; 2. does not have any agreement with the Indonesian Tax Authority (ITA) on the exchange of taxation information; or 3. has an agreement with the ITA on the exchange of taxation information; however the CbCR cannot be obtained by the ITA from the referred country or jurisdiction. PER-29 added criteria for parent entities as foreign taxpayers, as follows: a) It directly or indirectly owns one or more entities in a Multinational Group; b) It has an obligation to prepare consolidated financial statements; c) It is not directly or indirectly owned by another entity in a Multinational Group Business, or it is directly or indirectly owned by another entity, however the other entity is not required to prepare consolidated financial statements; and d) It has a consolidated gross turnover in the corresponding taxable year of at least: 1. The equivalent of 750,000, in the case of a country or jurisdiction where the domiciled parent entity does not require the preparation of a CbCR; or 2. A specified amount of consolidated gross turnover as the basis for determining the requirement of filing a CbCR according to the regulations in the country or jurisdiction in which the parent entity is domiciled. read more

4 February 2018 Page 4 The Implementation of CbCR in Indonesia (continued from page 3) The additional criteria from PER-29 essentially says that the domestic taxpayer, as a subsidiary, will have an obligation to file a CbCR, if it is part of the MNE group of a parent entity with consolidated revenue of at least 750,000,000 and the parent entity does not have an obligation to file a CbCR or the country/jurisdiction in which the parent entity is domiciled in does not have a CbCR exchange agreement with the ITA or the ITA cannot obtain the CbCR from the country that has a CbCR exchange agreement. If a parent entity that is a foreign taxpayer appoints another group member overseas (Constituent Entity) to replace the parent entity, the domestic entity is not obligated to submit a CbCR. This is under the condition that the country or jurisdiction in which the constituent entity, which was appointed as the parent entity, is domiciled in requires CbCR filing; and has a Qualifying Competent Authority Agreement for the exchange of CbCR with the DGT. The domestic taxpayer should then notify the DGT regarding the appointed group member (constituent) entity. Announcement of a List of Treaty Partner Countries/ Jurisdiction in which CbCR is Unsuccessfully Obtained In order to give assurance to domestic taxpayers of the CbCR filing requirement, the DGT issues a list of treaty partner countries or jurisdictions, which have a CbCR exchange agreement; or treaty partners with CbCR exchange agreements but cannot be obtained by the DGT by the end of the year, through the DGT website. Following the DGT s announcement of a list of treaty partner countries/jurisdictions in which a CbCR cannot be obtained, the domestic taxpayer must then submit a CbCR within 3 months, as a multinational group member. If the Taxpayer has no obligation to prepare a CbCR, the Taxpayer still needs to file a CbCR notification form to the DGT Who should file a notification of CbCR to DGT? All domestic taxpayers who are members of a business group or have related party transactions should submit a CbCR notification to the DGT, consisting of the identity of the domestic taxpayer and statement of the CbCR filing. Taxpayers should notify the DGT within: a. 16 months after the end of the Fiscal Year for Fiscal Year 2016; or b. 12 months after the end of the Fiscal Year for Fiscal Year 2017, and the succeeding years. The CbCR notification can be done online through the DGT site; or manually, if the DGT site does not work. Taxpayers will receive a proof of receipt after filing the notification and/or CbCR. This proof of receipt should be attached to the CITR. If the Taxpayer has no obligation to prepare a CbCR, the taxpayer still needs to file a CbCR notification form to the DGT. Whereas if the Taxpayer is required to file CbCR, then the taxpayers should file a CbCR notification form and CbCR with its respective working papers. The CbCR should be prepared electronically using the Extensible Markup Language (XML) format, which is in line with the OECD s standardized electronic format for the exchange of CbCRs between countries or jurisdictions. The OECD has released a list of countries or jurisdictions that have signed Multilateral Competent Authority Agreements for a CbCR automatic exchange. The list consists of 68 countries as of December 19, The list can be found in the following link:

5 February 2018 Page 5 DO YOU KNOW? 1. Starting from January 26, 2018, taxpayers who are exempted from the obligation to report a Periodic Tax Return, i.e. taxpayers with nil instalment for Article 25 Income Tax, taxpayers with nil payments payable for Article 21/26 Income Tax and VAT collectors who do not have transactions required to collect VAT and/or Sales Tax on Luxury Goods from for the tax period. (Read more from Ministry of Finance Regulation No. 9/PMK.03/2018 dated January 26, 2018). 2. Starting from January 15, 2018, 7 cellular providers have been required to send the personal data of Post-paid Cellular Subscribers to the DGT. Data to be submitted include their Resident ID (NIK), address, other telephone numbers and monthly billings. (Read more from Minister of Finance Regulation No. 228/PMK.03/2017 dated December 29, 2017). 3. Lodging services such as room rentals, dormitories for students, living quarters or workshops, and boarding houses, are businesses no longer subject to 10% Final Income Tax starting January 2, (Government Regulation No. 34 of 2017 dated January 2, 4. New requirements for TIN registration: Taxpayers of Online business owners must attach a written statement from the online application service provider. Not-for-profit entities are not obliged to submit a Deed of Establishment or Letter of Appointment from the Head Office. Taxpaying entities with branch status must attach a stamped letter from the Branch Management. (Director General of Taxes Regulation No. PER-02/PJ./2018). 5. The Directorate General of Taxes may currently request the Directorate General of Customs and Excise to block the access of customs or even revoke the access to customs against a Customs Service User who does not fulfill tax obligations, such as the submission of Annual Income Tax Return for the last 2 years and/or a taxable entrepreneur who did not submit Periodic VAT Returns over the last 3 months. (Director General of Taxes Regulation No. Per-24/PJ./2017 dated 27 November 2017). 6. Starting April 1, 2018, e-invoices must include the Resident ID of the Taxable Goods Buyer/Taxable Service Recipient in case the respective buyer/service recipient does not have a TIN. If not, the e-invoice cannot be issued. If the Taxable Entrepreneur issues a Tax Invoice without including actual information, then the e-invoice issued is also considered to not be based on an actual transaction. However, the imposition of sanctions at 2% of the tax collection basis on the invoice is not clear. (Director General of Taxes Regulation No. PER-31/PJ/2017 dated 29 December 2017).

6 February 2018 Page 6 DISCLAIMER The information contained in this document is intended only to be a guide. It must not be relied on in, or applied to, specific situation without previously seeking proper professional advice. Even if all reasonable care has been taken in its preparation, PB Taxand do not accept any liability for any errors that it may contain or lack of update before being published, whether caused by negligence or otherwise, or for any losses, however caused, or sustained by any person. Description of, or reference or access to, other publication within publication do not imply endorsement of them.