Update on Singapore-Indonesia Tax Treaty

Article 9 on Associated Enterprise

The new tax treaty contains provisions for corresponding adjustments to be applied in consistency with the OECD Model Tax Convention. In determining such adjustments, the competent authorities shall consult each other.

Article 10 on Dividends

Withholding Tax rates on Dividend remains unchanged at 10 percent (for a minimum of 25 percent shareholding) and 15 percent in other cases. The Branch Profit Tax rate for permanent establishments is reduced from 15 percent to 10 percent. Paragraph 7 of Article 10 concerning Dividends further mentions that the reduced Branch Profit Tax rate shall not affect agreed clauses in the production sharing contracts or other mining sector contracts.  

Article 11 on Interest

The Withholding Tax rate icontinues to be 10 percent. The new tax treaty no longer provides exemption on interest payment on Government Bonds. Furthermore, tax exemption is available on interest payments made to government bodies. The new tax treaty provides a list of within-scope government bodies in this regard.       

Article 12 on Royalties

The new tax treaty reduces the Royalty Withholding Tax rates to 10 percent and 8 percent, depending on the type of royalty definition. Those rates are reduced from the previous 15 percent. Alienation of certain types of intangible assets is removed from the royalty article.

Article 13 on Capital Gains

This is a new Article introduced in this updated Tax Treaty. Gains on the disposal of shares of an Indonesia listed company is taxable in Indonesia.  The disposal of shares in a company deriving more than 50 percent of their value directly or indirectly from immovable property may be exempt from tax in the source country if one of the following conditions is met:

• The alienator owns less than 50 percent of the issued total of shares being alienated;
• The immovable property is used by the company to carry on its business;
• The gains arise from the framework of a reorganization, a merger, a demerger or similar operation.
  
  

Article 28 Entitlement to benefits

An interesting aspect is that an anti-abuse provision is included in Article 28 based on the principal purpose test. This is consistent with the recent OECD’s initiative regarding the prevention of base erosion and profit shifting.

The results of the updated tax treaty should benefit both, Singapore and Indonesia businesses and promote bilateral trade and investment between the two countries.