The Singapore-Indonesia Double Tax Treaty

The country emerged largely unscathed by the global economic crisis that left a dent in several regional economies. Indonesia’s rich natural resources have remained the key traction for international conglomerates; however, the situation is gradually changing with the focus shifting to the Indonesian consumers. Reportedly, in the first quarter of 2013, the foreign direct investment rose 27% to a record 65.5 trillion rupiah, or nearly S$7 billion. The large population, young labour force and the growing middle class are attracting the investments into Indonesia. The Boston Consulting Group recently projected that middle-class and affluent consumers in Indonesia would double to 141 million by 2020. Most importantly the unit labour cost of the country is far lesser than the conventional destinations such as China, India or Vietnam, this along with the recent easing of the licensing process and government efforts to reduce red tape, is set to improve the manufacturing competitiveness of the country. Indonesia is evolving into a key investment destination in the region.

Singapore-Indonesia Bilateral Relationship

Singapore, a world-class city-state with its unchallenged position as a regional hub and international financial center, is strategically located to tap on the economic potential of Indonesia. Singapore and Indonesia have a strong bilateral relationship that is underpinned by economic cooperation. Singapore is a key foreign investor for Indonesia, and with Indonesia’s investment climate improving, the proximity of the city-state to the resource-rich country has made it a key channel for international investors seeking opportunities in Indonesia. Singapore has been the top foreign investor into Indonesia for three consecutive years, with investments amounting to US$5.1 billion in 2011. Singapore and Indonesia are close working partners in achieving ASEAN’s goal of establishing an ASEAN Community by 2015 that will pave way for faster expansion of the ASEAN economies. Singapore is constantly honing its edge among the regional business hubs by developing a comprehensive network of treaty arrangements to ensure its distinction as the destination for regional holding companies. The Singapore-Indonesia Double Tax Agreement (DTA) is one such treaty arrangements that assures attractive tax proposition to the investors operating across borders of both the countries. The following is an overview of the key provisions of the DTA.

Singapore-Indonesia DTA

The Government of the Republic of Singapore and the Government of the Republic of Indonesia concluded the Agreement for Avoidance of Double Taxation on 8 May 1990, which came into force on 25 January 1991.

Scope of DTA

The provisions of the DTA apply to persons who are residents of one or both of the Contracting States. “Person” includes an individual, a company and any other body of persons, which is treated as an entity for tax purposes. The provisions of the DTA shall be applicable to all taxes imposed on income on behalf of a Contracting State. In the case of Indonesia the provisions shall apply to the income tax (pajak penghasilan), and, to the extent provided in such income tax, the company tax (pajak perseroan) and the tax on interest, dividends and royalties (pajak atas bunga, dividen dan royalty). In the case of Singapore the agreement covers income tax.

Residency

The term “a resident of a Contracting State” means any person who is resident in a Contracting State for tax purposes of that Contracting State. This term shall not include a permanent establishment of a foreign enterprise, which is treated as a resident for tax purposes. In case of an individual, who is a resident of both countries, his tax residency shall be determined by the location of his permanent home, but if permanent home is in both countries or in neither of them, then the center of vital interest shall be taken into account. When both permanent home or vital interest factors fail to determine the residency, then habitual abode will be considered; and if the individual does not have habitual abode in both the countries, then the nationality will be taken into consideration; and where the individual is a national of both countries or neither of them, then the contracting states shall determine the residency through mutual agreement. If the person, other than an individual, is a resident of both the contracting states, then the residency shall be determined by the state in which its place of effective management is situated. In cases of doubt, the competent authorities of the contracting States shall determine the residency through mutual agreement by taking into consideration all relevant factors.

Permanent Establishment

“Permanent establishment” (PE) means a fixed place of business through which the business of an enterprise is wholly or partly carried out. PE includes office, factory, workshop, installations such as drilling rig, places of extraction of natural resource such as mines, quarry, oil wells, etc. Building site or construction, assembly or installation project constitutes a permanent establishment only if it lasts more than 183 days. The furnishing of services or consulting services through employees or other persons engaged by the enterprise for an aggregate period of more than 90 days within a twelve-month period shall also encompass a PE. Storage facilities held for certain purposes, such as storage of goods for the purpose of display, delivery, processing etc., would not amount to a PE. Likewise, maintenance of a fixed place solely for the purpose of carrying on activities that are of a preparatory or auxiliary in character will also not amount to a PE. An enterprise of a contracting state carrying on supervisory activities in that other State for more than 6 months in connection with a construction, installation or assembly project which is being undertaken in that other State shall be deemed to have a PE in the other state. Engagement of a broker, general commission agent or any other agent of an independent status for carrying out business in one of the contracting state will not amount to PE. If the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise is acting on behalf of an enterprise and habitually exercises an authority to conclude contracts on behalf of the enterprise in a contracting state then the agent is deemed to be a PE. However if the activities carried out by the agent is auxiliary in nature it will not amount to a PE. A resident company of a contracting state controlled or being controlled by a resident company of other contracting state shall not by itself amount either company a PE of the other.

Important Provisions

Tax on Dividends

Dividends paid by a resident company of a Contracting State to a resident of the other Contracting State may be taxed in that other State. However it may be subjected to tax in the Contracting State of which the company paying the dividends is a resident. But where the recipient of the dividend is the beneficial owner and resident of the other contracting state the tax so charged shall not exceed

• 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.

This provision shall not apply if the recipient has a PE in the contracting state of which the company paying the dividends is a resident and such dividend received is effectively connected to that PE. Such income from dividends connected to a PE will be treated as a Business Profit and subjected to tax treatment accordingly.

Tax on Interest

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may also be taxed in the Contracting State in which it arises; if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount. The Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived from that other State. Interest arising in one contracting state shall be taxable only in the other contracting state in the following circumstances:

• If the interest is paid in respect of a bond, debenture or other similar obligation of the government, political subdivision, local authority of contracting country, or
• If the interest is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Monetary Authority of Singapore, or the “Bank Indonesia” (The Central Bank of Indonesia), or any other lending institution, as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States.

The above provisions shall not be applicable if the beneficial owner of the interest, has a PE or fixed base in the contracting state in which the payer is resident and the interest paid is effectively connected with such PE or fixed base. If, due to the special relationship existing between the payer and the recipient, the interest paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of interest paid will be taxable according to the laws of each Contracting State.

Tax on Royalties

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15% of the gross amount of the royalties. Royalties encompass payments of any kind received as a consideration for the use of, or the right to use, any copyright patent, trademark, design or model, plan etc. If, due to the special relationship existing between the payer and the recipient, the royalties paid is in excess of the amount that would have otherwise been paid, then the provision of the treaty shall apply only to that amount and any excess amount of royalty will be taxable according to the laws of each Contracting State.

Tax on Capital Gains

The treaty does not discuss capital gains. The tax treatment on capital gains would then be subject to the domestic tax laws of each state, as governed by Article 21 (i.e., income not expressly mentioned). Where capital gains are sourced in Indonesia, Indonesia will have the right to tax. Singapore does not charge tax on capital gains.

Treatment of Business Profits

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. But only that portion of the profit that can be effectively attributable to the PE can be taxed in the other Contracting State. For the purpose of determining the profits of the PE it shall be allowed all expenses and deductions that could be reasonably attributable to the PE and deductible if the PE were an independent enterprise and profits of the PE shall be determined as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. A PE’s mere purchase of goods or merchandise for the enterprise shall not render profits attributable to that PE. Profit attribution to the PE must be made by the same method every year unless there is a valid reason for the contrary. Where information available to the competent authority is inadequate the provisions of the agreement shall not impede the laws of the contracting state or the discretion of the competent authority.

Treatment of Income from Property

Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. Income from immovable property of an enterprise and income from immovable property used for the performance of independent personal services shall also be covered by this provision. Income from direct use, letting or use in any other form of immovable property shall be covered by the agreement. The term “immovable property” shall comprise of properties as defined by the law of the contracting state in which the property is located. It shall include accessories, equipment, livestock, rights and usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. However, ships and aircraft shall not be regarded as immovable property.

Treatment of Income from Shipping & Air Transport

Income derived by an enterprise of a Contracting State from the operation of aircraft in international traffic shall be taxable only in that Contracting State. In which case, where such income is subjected to tax in the other Contracting State, the tax imposed in that other Contracting State shall be reduced by an amount equal to 50%. The provisions applies to the share of the income from the operation of ships or aircraft derived by an enterprise of a Contracting State through participation in a pool, a joint business or an international operating agency.

Treatment of Associated Enterprises

If an enterprise or persons involved in an enterprise of a Contracting State participate directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, the enterprises involved are said to be associated enterprises. The terms and conditions of operations and transactions between the associated enterprises will differ from those made between independent enterprises, thus affecting the profitability and income of the enterprises. In the case of associate enterprises the DTA provides that the contracting states may deem a taxable income that would have otherwise accrued if the parties were independent and tax the enterprises accordingly.

Treatment of Individual Income

Independent Personal service

Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he is present in the other Contracting State for a period or periods exceeding in the aggregate 90 days in any twelve-month period. Only that portion of the income attributable to his stay and activities performed in the other state may be taxed. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

Dependent Personal Service

Salaries, wages and other similar remuneration derived by a resident of a State for employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration may be taxed in that other State. However even if the employment is exercised in the other Contracting State the recipient shall only be subjected to tax in the first mentioned state in the following circumstances:

• the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and
• the remuneration is paid by, or on behalf of, an employer who is a resident of the first-mentioned State; and
• the remuneration is not borne by a PE which the employer has in the other State.

Director’s Fees

Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Entertainers, Artists & Athletes

Income derived by a resident of a State as an entertainer, such as a theatre, motion picture, radio or television artiste, a musician, or an athlete, from his personal activities as such exercised in the other State, may be taxed in that other State. However, such incomes shall be exempt from tax if they are accrued for such activities exercised in one of the contracting state under some mutually agreed exchange programs or substantially supported by public funds of the Government, a political subdivision, a local authority or a statutory body of the other Contracting State.

Pensions

Pensions and other similar remuneration arising in a Contracting State and paid to a resident of the other Contracting State in consideration of past employment may be taxed in the first-mentioned State.

Persons on Government Service

Salaries, wages and other similar remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority or a statutory body thereof to an individual in respect of services rendered to that State, subdivision, authority or body would be taxed by that State. However, such remunerations will be taxable only in the other contracting state if the services are rendered in that state and the resident recipient is a national of the state and his residency is not solely for the purpose of rendering the service.

Students and Trainees

Students and trainees who were a resident of a contracting state immediately before visiting the other contracting state, where he receives training or education and is temporarily present in the other contracting state solely for the purpose of education or training, shall be exempt from tax in the other state. Taxation in the other state shall be exempted on all remittances and grants received from abroad and any remuneration not exceeding US$2,200 per annum in respect of services in that other State provided the services are performed in connection with his study, research or training or are necessary for the purposes of his maintenance.

Elimination of Double Taxation

The DTA provides relief from double taxation where income is subject to tax in both Contracting States. In the case of Indonesia, Singapore tax payable in respect of income derived from Singapore shall be allowed as a credit against the Indonesia tax payable in respect of that income. The Indonesia tax payable in respect of income derived from Indonesia shall be allowed as a credit against Singapore tax payable in respect of that income. The credit thus provided shall not exceed the respective country’s tax as computed before the credit is given.

Conclusion

Singapore’s domestic tax system is by itself a very attractive feature for international investors. With its tax friendly policies such as the exemption of foreign dividends, exemption of certain foreign income, no withholding tax on dividends paid to non-residents and no capital gains tax, Singapore is undoubtedly the most attractive global business center and coveted jurisdiction for holding companies. These aspects in combination with its DTA with Indonesia makes an interesting proposition for business structuring that is most efficient from an international tax planning perspective.

For more details on the specific provisions covered under the tax treaty between Singapore and Indonesia, please refer to IRAS Website.

For general information on Singapore DTAs, refer to Singapore Double Taxation Agreements (DTA) Guide.