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As the most populated and biggest economy of South East Asia, Indonesia is attracting flocks of international investors in search of the next growth market. With an estimated 251 million population and an annual growth rate that has averaged around 6% in the recent three years, the foreign investment into the economy is pouring in steadily.
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.
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
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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 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.
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 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.
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.
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.
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