Tax Alert. The New Indonesia s Controlled Foreign Corporations Rule

Transcription

1 September 2017 Tax Alert The New Indonesia s Controlled Foreign Corporations Rule The Indonesian Minister of Finance has issued regulation No. 107/PMK.03/2017 (PMK-107) on Controlled Foreign Corporations (CFC) which is effective from fiscal year 2017 onwards. This regulation sets out major changes to the Indonesian CFC regime and will be relevant to any groups in which Indonesian entities hold interests in foreign companies. The CFC regime will now capture more such direct and indirect foreign shareholdings, and is more likely to bring foreign earnings to tax in Indonesia, prior to declaration of an actual dividend. PMK-107 revokes the previous regulation issued in Key aspects of the new CFC regime 1. The definition of CFC CFC is a non-listed foreign entity PMK-107 retains the existing rule that the CFC regime only applies to non-listed foreign entities. Companies listed on a foreign stock exchange remain outside the CFC rules. CFC regime now captures s The previous regulation was silent on whether the CFC rules applied to indirect share ownership. PMK-107 now makes it clear that the CFC rules can apply to both direct and indirect share ownership. is defined where an Indonesian taxpayer has direct capital investment of 50% or more of the paid-up capital of the foreign entity, or collectively with other Indonesian taxpayer have investments of 50% or more of the paid-up capital of the respective foreign entity. is defined to include non-listed foreign entities where at least 50% of the paid-up capital is owned collectively by:

2 a. An Indonesian taxpayer and:, and/or b. Indonesian taxpayer and other Indonesian taxpayer(s) through and/or c. and/or is NOT interpreted as effective ownership of the Indonesian taxpayer in the indirect subsidiary, but rather can occur when other Direct or s hold shares in the of at least 50%. For example, consider an Indonesian company holding 60% of Foreign Company A which will be a Direct CFC. If Foreign Company A holds 70% of Foreign Company B, the economic interest of the Indonesian parent is only 42%. However, Foreign Company B is still an given the ownership at each layer is 50% or more. Calculating percentage ownership The paid-up-capital threshold is defined as a) paid-up capital, or b) voting rights issued by the CFC. Non-voting shares are included when determining the ownership percentage for CFC purposes. The ownership percentage in the foreign entity is determined at the end of fiscal year of the Indonesian taxpayer. 2. Introduction of the Deemed Dividend concept PMK-107 also introduces the term Deemed Dividend which is the mechanism under which the profits of the CFC are attributed to the Indonesian shareholder. A dividend is deemed to be received by an Indonesian taxpayer from its share investment in a Direct or. The timing of the Deemed Dividend income for Indonesian tax purposes will generally be four months after the due date for the Corporate Income Tax (CIT) filing of the CFC in the foreign jurisdiction. The timing will be seven months after the end of fiscal year in the case where the Direct CFC is not required to file CIT return. There may be practical issues if the and have different fiscal period. 3. Calculating the taxable Deemed Dividend The regulation provides rules, and examples in an attachment, explaining how to calculate the Deemed Dividend amount in various scenarios. Deemed Dividends are based on the accounting profit after tax of the CFC, then multiplied by the shareholding interest. Based on one of the examples, the share of an s accounting profit is to be flowed up and included within the Deemed Dividend calculation for a higher level subsidiary (e.g. the ). 4. The CFC income exemption in the previous regulation is now revoked The previous regulation stated that CFC rule did not apply if the CFC has distributed a dividend (although it did not further explain the minimum amount of the dividend payment required) but this exemption is not reinstated and will no longer apply. 5. Carried-forward Deemed Dividend Deemed Dividends can be carried forward for five years, to reduce the amounts included in taxable income for the Indonesian taxpayer when the actually declares and pays a dividend. For example, if the Indonesian tax resident receives a dividend in 2022, any Deemed Dividends from year 2018 to 2021 can offset the dividend received in 2022 and only the shortfall will be taxable. That is, given the declared dividend may be paid out of profits already subjected to Indonesian tax in the preceding five years, the income is not taxed again. The above example seems to limit the credit until four years back instead. 6. A CFC s loss is not accounted As with the previous regulations, the loss of a CFC is not considered in calculating income of a CFC. That is, there is no mechanism to use a CFC s loss to reduce Indonesian taxable income. 7. No distinction between active and passive incomes of the CFC While many jurisdictions would not generally seek to apply their CFC regimes to active trading businesses, PMK-107 does not make this distinction. 8. Foreign Tax Credit (FTC)

3 Consistent with the previous regulation, an FTC is only available on dividends actually paid and not on underlying income or the Deemed Dividends. The regulations set out rules on FTCs claimable. Where the dividend received is covered by previous Deemed Dividends, the limit is the lowest of: a. Income tax that should be payable or paid in the foreign country on dividends paid by the, based on the applicable tax treaty (i.e. treaty dividend withholding tax [WHT] rate), or b. Income tax that is payable or paid in the foreign country on dividends paid by the (presumably this would usually be the statutory dividend WHT rate in that jurisdiction), or c. An amount calculated based on divided received from divided by Eligible Deemed Dividend multiplied by Income Tax on the Eligible Deemed Dividend (this appears to cap the FTC claim based on the Indonesian CIT payable) The regulation is silent on FTCs on Deemed Dividends from s. An issue arises when the FTC on the actual dividend distribution in the future cannot be utilized since the Indonesian taxpayer is in a loss or overpayment position, whilst the Deemed Dividend has been taxed in the past. This means that the Deemed Dividend has been taxed without proper corresponding FTC to be claimed when the dividend is actually distributed. 9. Trust or similar entities as look-through entities If the share ownership in the CFC is held through a trust or other similar entities, the trust or similar entities will be looked-through as if the CFC was held directly by the Indonesian taxpayer. The regulation does not provide further details on the implementation of this concept. 10. A disadvantage of CFC treatment vis-à-vis an Indonesian subsidiary CFC income is defined as current profit for the year, without considering negative retained earnings. On the other hands, an Indonesian subsidiary will not be allowed to distribute a dividend unless it has sufficient retained earnings. 11. Other issues - unclear guidance in the regulations It is not clear in the regulation the impact if the incurs loss and the derives profit, whether the profit is absorbed by the loss or the loss is disregarded. Summary of the new CFC rules Definition A CFC is defined as a non-listed foreign company, which is directly or indirectly controlled by an Indonesian taxpayer or collectively with other Indonesian taxpayers, have investments of 50% or more of the paid-up capital of the respective foreign entity. The 50% threshold is calculated by the end of fiscal year. The definition of direct and indirect control is further discussed below, but not limited to: 1. Direct control Indonesian taxpayers are considered to have a direct control over a non-listed foreign company if: The Indonesian taxpayers own at least 50% direct paid-up capital in a non-listed foreign company PT ABC 60% XYZ Ltd.

4 or Collectively with other Indonesian taxpayers own at least 50% direct paid-up capital in a non-listed foreign company A (XYZ Co) and another (PQR Ltd), collectively own at least 50% of paid-up capital in a foreign entity PT ABC PT DEF PT GHI 25% 25% 25% PT JKL 25% PT ABC XYZ Co. (Country Y) PT DEF 65% 80% PQR Ltd. (Country Y) XYZ Ltd. 60% 10% 2. Indirect control is defined as a non-listed foreign entity in which its paid-up capital is 50% or more controlled by an Indonesian taxpayer through: a, or a and an We illustrate below the examples on how to determine : An Indonesian taxpayer owns at least 50% of the paid-up capital in a foreign entity at each level PT GHI 60% PQR Ltd. STU Co. (Country E) An Indonesian taxpayer and a (XYZ Ltd), collectively own at least 50% of the paidup capital in a foreign entity PT GHI 90% 80% The calculation of the Deemed Dividend Indonesian taxpayers that are considered to have the Direct and/or, are deemed to derive Deemed Dividend from its. 1. The timing of Deemed Dividend If the is required to file CIT returns in the country where it resides, the timing of Deemed Dividend will be in the fourth month following the deadline to file CIT return. For example, if the deadline to file the FY17 CITR in Country A is May 31, 2018, the Deemed Dividend is considered to be derived by the Indonesian taxpayer on September 30, If the is not required to file CIT Return in the country where it resides, the timing of Deemed Dividend will be in the seventh month following the end of such CFC s fiscal year. MNOL td. (Country X) For example, if the end of fiscal year 2017 in Country B is December 31, 2017, the Deemed Dividend is considered to be derived by the XYZ Ltd. 10% 40% STU Co.

5 Indonesian taxpayer on July 31, Calculation of the quantum of Deemed Dividend The quantum of the Deemed Dividend is derived from the % of ownership of the Indonesian taxpayer in the multiplied by accounting net profit after tax of the Direct CFC. The accounting net profit of the includes its own net profit after tax and its % entitlement of accounting net profit after tax in the. Deemed Dividends can be carried forward for five years, to reduce the amounts included in taxable income for the Indonesian taxpayer when the actually declares and pays a dividend. That is, given the declared dividend may be paid out of profits already subjected to Indonesian tax in the preceding five years, the income is not taxed again. If actual dividend distribution exceeds the Deemed Dividend, the difference is taxable and is to be reported in the CIT return in that fiscal year. Foreign Tax Credit (FTC) An FTC is only available on dividends actually paid and not on underlying income or Deemed Dividends. The regulations set out rules on FTCs claimable. Where the dividend received is covered by previous Deemed Dividends, the limit is the lowest of: Income tax that should be payable or paid in the foreign country on dividends paid by the, based on the applicable tax treaty (i.e. treaty dividend WHT rate), or Income tax that is payable or paid in the foreign country on dividends paid by the (presumably this would usually be the statutory dividend WHT rate in that jurisdiction), or An amount calculated based on divided received from divided by Eligible Deemed Dividend multiplied by Income Tax on the Eligible Deemed Dividend (this appears to cap the FTC claim based on Indonesian CIT paid) Note: Per country limitation applies in the case where the dividend income is derived from more than one jurisdiction. To be eligible for claiming the FTC, Indonesian Example 1 taxpayer must attach these documents along with its CIT Return: Calculation of FTC that has been paid or withheld on the dividend received from the Financial Statement of the Copy of CIT return of the Calculation or details of net profit after tax for the past five years of the, and Receipt of income tax payment or proof of the tax withheld on the dividend received from the PT ABC has a direct investment of 50% in a non-listed foreign company (i.e. Forco Ltd), a resident of Country X. The following Deemed Dividend is extracted from PT ABC s CITR: Fiscal Year Deemed Dividend (IDR million) In 2021 and 2022, PT ABC receives actual dividend distribution from Forco Ltd. in the amount of IDR200 million and IDR2 billion, respectively. Country X has withheld the respective tax on dividend distribution at statutory rate of 20% and no tax treaty between Indonesia and Country X. PT ABC, would like to utilize the FTC to be claimed against the CIT payable for both 2021 and 2022.

6 1. The quantum of Deemed Dividend to reduce the amount of actual dividend income which is taxable in Indonesia Actual dividend distribution Deemed Dividend claimed Taxable dividend income Deemed Dividend balance Year IDR million Year IDR million IDR million IDR million (200) i) , (200) (700) (500) (400) (100) 100 ii) - Note: i. The Deemed Dividend balance of IDR 400 million from 2017 cannot be claimed against the actual dividend distribution in ii. The taxable dividend income of IDR 100 million is subject to CIT at 25% in the hands of PT ABC and reported in its CIT return in Determination of the allowable FTC The table below represents the capped CIT associated with the Deemed Dividend that can be claimed. Fiscal Year Deemed Dividend Domestic net profit Total taxable income CIT at 25% Capped CIT on the Deemed Dividend IDR million IDR million IDR million IDR million IDR million A B C D=B+C E=D x 25% F=B/D*E , (200) , ,000 1, (100) The below table shows the mechanism of FTC claim which is the lowest of three quantum. Fiscal Year Actual dividend Treaty dividend WHT Statutory dividend WHT (20%) Capped CIT on the Deemed Dividend* FTC allowed (the lowest) IDR million IDR million IDR million IDR million IDR million N/A 40 50** ,900 N/A *** N/A 20 N/A 20 Note: *(Actual dividend/ Deemed Dividend claimed)* ([Deemed Dividend claimed/ total Deemed Dividend]* Capped CIT on the Deemed Dividend) **(200/200)*(200/600*150) ***(1,900/1,900)*(1,900/1,900*400)

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