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Tax Treaty Considerations for Expats in Indonesia

Submitted:October 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Indonesia, and intend bring money earned from them into Indonesia during your stay. They also apply if you build up some investments in Indonesia during your stay, and intend to leave them there after you have left Indonesia. Indonesia has a network of tax treaties in force with over 60 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty, and typically will state how various forms of income are taxed. It will state whether the specific income is only taxed in Indonesia, only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax residence in tax law. This definition of residence is known as the treaty tie-breaker. The agreements laid out in the treaty override the domestic laws in both signatory countries. The types of income covered by a treaty may include:

It is important to recognise that a tax treaty operates on money flows both into and out of the treaty countries. Expats should be aware that in order to receive the reduced withholding tax rates available to non-residents on various kinds of income, as specified in tax treaties, it may be necessary to provide the payer of the income a copy of Form DGT-1. This form is a Certificate of Domicile endorsed by your home tax department, and is valid for twelve months.

The withholding tax rate in Indonesia on dividends sent to residents of a country without a tax treaty is 20%. Where lower rates have been negotiated by treaty, they are generally reduced to 15%, and in some cases 10%. Some treaties with lower rates include a further rate reduction to 10%, which applies if the dividend is paid to a foreign company which owns a significant percentage (usually 10% or 25%) of the paying company.

The withholding tax rate in Indonesia on interest sent to residents of a country without a tax treaty is 20%. Where lower rates have been negotiated by treaty, they are generally reduced to 10%. To benefit from lower treaty rates the payee must provide the Director General of Taxes with a certificate of domicile endorsed by their own tax department.

The withholding tax rate in Indonesia on royalties sent to residents of a country without a tax treaty is 20%. Where lower rates have been negotiated by treaty, they are generally reduced to 10%. Sometimes the lower rate will only apply to certain types of royalty, for instance copyright.

Indonesia’s tax treaties with other countries generally restrict the amount withholding tax those countries can charge Indonesian residents. For the complete rules and applicable rates, it is necessary to read the treaty itself. A link to each Indonesia treaty in force can be found here. The sections dealing with dividends, interest and royalties can usually be found half way through the treaty document.

Prior to arriving in Indonesia, you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-Indonesian country to one with a more favourable tax treaty, or even to Indonesia itself, to reduce the tax rate paid.

If your home country has a generally higher rate of tax than Indonesia, you may benefit by becoming tax-resident in Indonesia as early as possible. At the end of your stay in Indonesia, you can also rearrange your affairs to ensure that any on-going income from Indonesian employment or investments is also taxed at the lowest rate possible in the future.

 

 

 




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