July 2017 Tax Alert The new Indonesia anti tax treaty abuse rules (DGT Regulation No 10/PJ/2017) On 19 June 2017, the Director General of Tax (DGT) issued regulation No. PER-10/PJ/2017 (PER-10) revising the antitax treaty abuse rules. The regulation is effective 1 August 2017. This regulation revokes the regulations first issued in 2009 and is of importance to any non-indonesian resident receiving income from Indonesia. The new regulation sets out tests and administrative criteria to be fulfilled by the nonresident. Failure to comply with the conditions means that the default statutory rules apply e.g. withholding tax on payment for services, dividends, interest and royalties at the statutory rate of 20%. Significant highlights of the new regulation 1. The new regulation does not include subject to tax test. The previous regulation required the non-resident receiving income from Indonesia (non-resident income recipient) to be subject to tax on that income in its home country. This requirement created some technical uncertainty, particularly in respect of the application of the Indonesia - Hong Kong tax treaty on dividends, interest and royalties income from Indonesia. The removal of this criterion should resolve this issue. 2. Listed entities are now subject to full tax treaty abuse and beneficial owner ( BO ) tests Unlike in the past where a listed entity whose shares are actively traded on a stock exchange was deemed to satisfy the BO tests, the new regulation does NOT provide such an exception. A listed entity is now subject to the full tax treaty abuse and BO tests.
3. Capital gains and business profits are now subject to full tax treaty abuse tests Under the previous regulations, in order to access tax treaty relief on capital gains and business profits, the non-resident was only required to certify that the creation of the foreign entity/ the transaction structure was not motivated to take advantage of tax treaty benefits. In the new regulation, the non-resident is subject to full tax treaty abuse tests which refer to issues of substance around management, assets, personnel and other business activities. There may be significant uncertainty in practice as to what is sufficient for the purposes of Part VI of DGT-1. There remain extra tests (i.e. BO test) for dividends interest and royalties (see part VII of the form), given that relevant tax treaty relief for such income is only available to the BO of that income. 4. Economic substance over form Although the old regulation indicated the requirement of economic substance of the structure or establishment of the offshore entity, the new regulation emphasizes that if the legal form of the structure differs from its economic substance, the economic substance will override the legal form. However, the definitions of legal form and economic form are not provided. 5. Government entity needs to provide certain administrative document The old regulation did not require foreign Government entities, central banks and other entities that are expressly stipulated in the tax treaty to provide certain administrative document to obtain the benefits of the treaty. However, the new regulation requires such an entity to provide a Certificate of Residence (COR) from the competent tax authority or statement letter issued by the competent tax authority stating that such entity is not subject to tax. 6. Refund of tax that should not be payable If the administrative documents are not correctly prepared or provided in a timely manner, the Indonesian withholding (WHT) agent (i.e. the Indonesian party making the payment offshore) is required to withhold tax at the statutory default rate of 20% under the Income Tax Law. However, if such administrative requirements can be completed subsequently, a refund procedure is available through the Indonesian WHT agent. 7. Practical issue of the fiscal period declaration The Form DGT-1 requires the competent authority of the country where the non-resident income recipient resides to state the beginning month and ending month of the fiscal period for which the non-resident income recipient is being confirmed as a tax resident of that country. However, the requirement is different in the COR which can replace Part III of Form DGT-1. The COR needs to state only the fiscal period. We foresee a practical issue if a competent authority cannot issue the COR in advance of the start of the relevant fiscal year. 8. Difference in wording between the regulations and in Form DGT-1 One of the BO tests in the regulation requires that the non-resident income recipient must have no written or unwritten obligations to transfer some or all of the income derived from Indonesia to other party. However, in the Form DGT-1 the restriction is to transfer to resident of third country. 9. The Indonesian WHT agent is required to conduct certain verification procedures The new regulation also requires the Indonesian WHT agent to conduct verification of the Form DGT-1 or DGT-2 in order to apply the treaty benefits to the non-resident receiving income from Indonesia.
Requirements to be eligible for the tax treaty benefits The Indonesian WHT agent is required to withhold tax on the income derived by non-resident based on Indonesian Income Tax law. Such provision can be excluded and the provision under the tax treaty will apply, if: The provisions of the tax treaty differ from those of the Indonesian Income Tax Law The income recipient is not an Indonesian tax resident The non-resident income recipient is an individual or an entity who is a tax resident of the country under the concerned tax treaty The non-resident income recipient submits to the Indonesian WHT agent its certificate of domicile (i.e. Form DGT-1 or DGT-2) that meets the administrative requirements (see section Administrative requirements below) and certain other requirements (see section Other requirements below) There is no tax treaty abuse (see section No tax treaty abuse test below), and If the relevant tax treaty requires the non-resident income recipient to be the BO of the income, the BO requirements must be met (see section Beneficial owner (BO) test below) c. The business activities are managed by its own management and the management has sufficient authority to carry out the transactions d. There are fixed assets and non-fixed assets (other than the assets generating income from Indonesia), which are adequate and sufficient to conduct business activities in that treaty country e. It has sufficient employees with the expertise and certain skills in accordance with its line of business, and f. It has activities or an active business other than receiving income in the form of dividend, interest, royalty from Indonesia. Active business is defined as activities or businesses actively carried out by nonresident income recipient according to the actual circumstances indicated by the cost incurred, efforts made, or sacrifices which relates directly to its business or activity in order to obtain, collect and maintain income, including significant activities undertaken to maintain operations as a going concern In the event that there is a difference between the legal form or a transactional structure/scheme and the economic substance, Indonesian tax is applied in accordance with the applicable provisions based on substance over form as indicated in point (a) above. No tax treaty abuse test Tax treaty abuse takes place when the main purpose or one of the main purposes of the transaction arrangement is to obtain tax treaty benefits and in contradiction with the purposes and intention of the tax treaty. In the view of the DGT, tax treaty abuse does not take place if all of the following conditions are fulfilled: If the non-resident income recipient is an individual, he/she does not act as an agent or nominee, or If the non-resident income recipient is an entity: a. There is economic substance in the establishment of the entity and execution of the transaction b. The legal form is the same as the economic substance in the establishment of the entity or the execution of the transaction
Beneficial owner (BO) test In addition to the requirement the tax treaty abuse is not committed, in the case that the tax treaty requires the non-resident income recipient to be the BO of the income (for example interest, royalty and dividend income), the non-resident income recipient must certify that: If he is an individual, he does not act as an agent or nominee, or If it is an entity, it does not act as an agent, nominee, or conduit, and it must meet the following criteria: a. It has control in using or enjoying funds, assets, or rights that can generate income from Indonesia b. Not more than 50% of the total nonconsolidated income is used to fulfill obligations to other parties (these obligations do not include fair compensation payments to employees in relation to work, other normal business expenditures and profit repatriation in the form of dividend to shareholders) c. It bears the risks of assets, capital, and / or liabilities, and d. It does not have written or unwritten obligation to provide part or all of the income derived from Indonesia to another party Banks and pension funds automatically qualify for treaty relief and are deemed not to participate in treaty abuse. They are not required to fulfill the above tax treaty abuse and BO tests. Listed companies can no longer automatically qualify for tax treaty relief. They must satisfy all the tax treaty abuse and BO tests. The administrative criteria Forms DGT-1 and DGT-2 Administrative criteria to be fulfilled by the nonresident income recipient in order to apply the tax treaty are as follows: Using Form DGT-1 or Form DGT-2 The form must be filled in correctly, completely and clearly by the non-resident income recipient Signed by the non-resident income recipient or equivalent mark/stamp as normally used in its country Signed by the authorized official of the treaty country where the non-resident income recipient resides or equivalent mark/stamp as normally used Used for the period stated in the Form DGT-1 or Form DGT-2 (maximum 12 months), and Submitted by the Indonesian WHT agent in the submission of its monthly tax return (MTR) at the latest by the due date of the submission (i.e. the 20 th of the following month) The signing and marking by the competent officer must be done in the Part III of the Form DGT-1 or Part II of the Form DGT-2. The signing and marking by the competent officer in Part III of the Form DGT-1 or Part III of the Form DGT-2 can be replaced by the COR. Such COR must fulfill the following requirements: The document must use the English language In the form of original document or photocopy, that is legalized by the tax office where the Indonesian tax withholder is registered At least contains the information concerning the name of the non-resident income recipient, issuance date, and the applicable tax year, and Bears the name and signature of the authorized tax officer of the competent tax authority of the treaty country; or sign/stamp that is equal to the signature of the tax officer and the name of the tax officer as commonly used
In the event the non-resident income recipient uses a COR, it must fill in the Form DGT-1/DGT-2 except for Part III of the Form DGT-1 and Part III of the Form DGT-2. Form DGT-2 is used by: Non-resident earning and/or receiving income through custodians in relation to the income from the transfer of shares or bonds transacted through or reported to the exchange in Indonesia, other than in the form of interest or dividend Non-resident banks, or Non-resident pension funds Form DGT-1 is to be used by non-resident income recipients other than those listed above. The administrative criteria Other requirements Form DGT-1: The non-resident must state in the Form DGT-1 that it has fulfilled the tax treaty abuse and BO tests above. Form DGT-2: The non-resident should state that: It is a tax resident in the treaty country according to the tax laws of the country, and It does not act as an agent, nominee or conduit in respect of the income received, if the non-resident is required to be the BO based on the tax treaty Refund mechanism of tax that should not be payable In the event of: misapplication of the tax treaty, or Form DGT-1 or DGT-2 is delivered after the WHT agent has submitted its MTR for the relevant period, the non-resident income recipient may still be granted tax treaty benefits through the mechanism of restitution of overpaid tax that should not be payable. Tax treaty benefits are not granted in the event of tax treaty abuse. The Form DGT-1 or Form DGT-2 submitted must meet the administrative requirements as well as the other prescribed requirements (tax treaty abuse and BO tests). If the non-resident income recipient: does not enjoy tax treaty benefits, and the Indonesian WHT agent does not submit MTR for the relevant tax period, the non-resident income recipient can still be granted tax treaty benefits through Mutual Agreement Procedure (MAP). COR and statement letter for foreign government entities, central banks and other entities expressly stated in the tax treaty In the event that the non-resident income recipient is foreign Government entities, central banks or other entities that are expressly stipulated in the tax treaty or as agreed by the DGT and the treaty country s tax authority, the application of tax treaty may be done by not using Form DGT-1 or Form DGT-2. However, such income recipient must furnish COR issued by the competent tax authority OR a letter issued by the competent tax authority in its home country stating that the income recipient is exempted from tax in its home country pursuant to the tax treaty. Verification by the Indonesian WHT agent The Indonesian WHT agent must verify certain disclosures made by the non-resident income recipient in the Form DGT-1 and Form DGT-2. Based on the verification conducted by the Indonesian WHT agent, the tax treaty benefits may or may not be applied. The tax treaty benefit can only be applied if the nonresident income recipient answers the questions in the Form DGT-1 as follows: No for question 4 Part V and question 5 Part VI; No for questions 5 Part V and 1 Part VII; Yes for questions 7-10 Part VI; Yes for questions 2-4 Part VII; and No for question 5 Part VII.
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