Indonesia: Trade Representative Office – Risk to be deemed as Permanent Establishment

​Foreigners operating Trade Representative Offices (TRO) in Indonesia are often not aware of tax risks in connection with such entities.
 

The Indonesian Tax Law stipulates that a permanent establishment (PE) is considered as a tax resident who is liable for tax, if it generates earnings in Indonesia. PE is basically a foreign person or company that has not established a subsidiary but engages in earning-generating activities in Indonesia. Taxation of a PE has been widely implemented by various countries. The Organization for Economic Co-operation and Development (OECD) as a forum where governments cooperate in addressing the economic, social and environmental challenges has been issuing several directives dealing with taxation of a PE to provide guidance for both taxing authorities and corporations.
 

• Trade Representative Office and
• Foreign Representative Office. Both, under the prevailing regulations, are prohibited to conduct earning-generating business activities in Indonesia. Based on this limitation, it is generally acknowledged that a Representative Office shall not be considered as a PE. Indonesia has entered into various bilateral agreements for avoidance of double taxation that are used as a reference to assess whether or not a representative office established by investors from respective treaty countries is considered as a PE in Indonesia. Article 5 concerning Permanent Establishment in most of the Tax Treaties (e.g. Double Taxation Avoidance Agreement between Indonesia and Germany of 30 October 1990) lays down activities of foreign natural or legal persons which should not be construed as a PE. A conclusion can generally be drawn from all of the available tax treaties, that a Representative Office which does not conduct business activities, - under certain circumstances - shall not be considered as a PE in Indonesia.
   

The Indonesian tax authority (DGT) in 2001 issued DGT Decree No.667/2001 which allows DGT to deem a Representative Office as a PE as it is directly or indirectly involved in earning-generating activities of its Principal or Head Quarter in trading (delivering) products to Indonesian customers. This regulation further stipulates that a Representative Office, which is deemed to be a PE, is considered to earn “net-taxable income” of 1% of the value of goods directly sent by Principal to its Indonesian customers (Import Value). Furthermore, an outdated corporate tax rate of 30% plus branch profit tax of 20% on profit-after-tax are then imposed to the deemed “net-taxable income”, resulting in a net-tax of 0.44% of the Import Value. As for the Import Value, the DGT relies on the data provided by the Customs Office.
 

Implementation of the Decree 667 has been initiated by DGT by sending inquiries to a Representative Office to assess whether the Representative Office conducts activities that directly or indirectly involve in sales of its Principal. If this initial inquiry process does not satisfy DGT (or if there is disagreement), the DGT may escalate the process into a tax audit and issue an assessment letter to collect the afore-mentioned tax from a Representative Office.
 

Based on the above, a Representative Office shall take precautions on its activities in Indonesia. Any inquiries from DGT with regard to the issue above shall be carefully taken care of. Tax dispute resolution processes in Indonesia are cumbersome and may take 3-4 years to be concluded, up to the appeal process with the Tax Court. An appropriate handling of tax dispute cases as well as providing proper explanations during tax office inquiry shall avoid prolonged dispute resolution processes.