On or about 23 Jul 2021, the updated Indonesia-Singapore double taxation agreement (DTA) entered into force, strengthening efforts to prevent tax evasion, increase the tax base, and increase investments between the two countries.
There were 3 significant changes to the tax treaty, namely, the introduction of an article that provides capital gains tax protection, the reduction of withholding tax (WHT) on royalties and branch profit tax (BPT).
It also incorporates internationally agreed standards to counter tax treaty abuse.
Introduction of an article that provides capital gains tax protection
Under the new DTA, the investor’s country of residence will be allocated the taxing rights on the capital gains from the sales of shares and assets of Indonesian companies.
This does not apply to the sale of immovable properties, the sale of movable property that forms part of the business property of a permanent establishment, or the sale of immovable properties or shares of private companies that derive more than 50 percent of their value from immovable properties. Meanwhile, gains derived from the sale of aircraft or ships pertaining to the operations of the aircraft will be taxed to the country where the selling entity resides.
Singapore investors will thus be no longer subject to the current 5% tax on gross proceeds from the sale of equity investments held by a foreign shareholder, under Indonesian law.
It also incorporates internationally agreed standards to counter tax treaty abuse.
Reduction of withholding tax rates for royalties
- 10% for the right to use, or use of any copyright of scientific, artistic, or literary work, which includes cinematograph films, or tapes used for radio or television, as well as any patent, trademark, plan, design, or secret formula; and
- 8% for the right to use, or use of any commercial, industrial, or scientific equipment or knowledge.
Reduction of withholding tax rates for branch profit tax (BPT)
- 10%. However, the rate does not apply to companies or residents of Indonesia or Singapore that are parties to contracts related to oil and gas as well as the mining sectors.
Exemption on interests for sovereign wealth funds and government-issued bonds
- 10%. Amendments to existing for the following:
- Government-issued bonds or debentures;
- Institutions that constitute the ‘government’;
- Sovereign wealth funds and their subsidiaries; and
- Any penalty charge will not be regarded as interest under the
- definition of interest.
Dividends
- 10% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the capital of the company paying the dividends;
- 15% of the gross amount of the dividends in all other cases.
Since Singapore’s domestic withholding rate for dividends is nil, dividends will be exempted from withholding tax under domestic law in Singapore.
Removal of limitation of relief to treaty benefits
The limitation of relief has now been removed from the Indonesia-Singapore DTA. Under Article 22 of the previous DTA, Singapore tax residents could only benefit from the provisions of the treaty if income is remitted to Singapore.
With the removal of this article, Singapore and Indonesian tax residents would no longer be required to remit the income into Singapore to benefit from the DTA, although this is subject to the principal purpose test (PPT) (an anti-abuse rule).
New provisions on anti-tax avoidance (Entitlement to Benefits)
The treaty issues a new anti-tax avoidance article (Article 28, Entitlement to Benefits), which means businesses that are unable to satisfy the PPT may not be entitled to treaty benefits under this updated DTA.
Source: The Electronic Gazette, 26 July 2021