Corporate tax developments in Indonesia


Financier Worldwide Magazine

December 2017 Issue

This article provides an update on corporate tax developments in Indonesia, covering automatic exchange of information, anti-tax treaty abuse, controlled foreign company and the Indonesia-Netherlands double taxation avoidance (DTA) agreement.

Automatic exchange of information

Back in 2011, Indonesia took part in the signing of the Convention on Mutual Administrative Assistance in Tax Matters (MCAA). As a result, Indonesia is expected to implement the first information exchange pursuant to the MCAA in September 2018. In preparation thereof, several domestic regulations have been issued and enacted over the years.

Most recently, the Indonesian government issued Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-undang or Perppu) concerning access to financial information for the interest of taxation, which has now been ratified as a law. The minister of finance also issued a regulation concerning technical guidance on access to financial information for the interest of taxation (Regulation 70).

In general, these regulations authorise the directorate general of tax (DGT) to obtain access to financial information for the interest of taxation from financial services institutions in the banking, capital market and insurance sectors, other financial services institutions (supervised by the Financial Services Authority or ‘OJK’, other than the said institutions), and other entities (such as savings and loans cooperatives and futures brokers) engaging in the following businesses: (i) a custodian institution; (ii) a savings institution; (iii) certain insurance companies; and (iv) an investment entity. The access is granted in the form of: (i) acceptance of reports containing automatic financial information; and (ii) the ability to request information, evidence or description for the implementation of laws in the field of taxation and implementation of international agreements related to tax. The information obtained herein may be exchanged with other competent authorities (CAs) in other countries or jurisdictions based on international agreements related to tax.

The reporting entities are required to report financial accounts owned by both foreign customers and Indonesian customers administered by them, which are qualified as financial accounts that must be reported. The contents of the reports include, among others, the balance or value of the financial account and income related to the financial account. Thus, in order for the reporting entities to be able to generate data for the reports, identification procedures comprising a series of verification processes must first be conducted. The reports must then be submitted periodically online (or offline to the extent that an online mechanism is not yet available) to the DGT. For certain financial services institutions, the reports must be submitted to OJK to be further conveyed to the DGT.

Regulation 70 further explains that the DGT is also authorised to submit a request letter to other entities for information, evidence or description. The said entity must provide the requested information, evidence or description to the DGT within one month of the acceptance thereof.

Any non-compliance with the reporting obligation, identification procedures or provision of requested information, evidence or description will be subject to criminal sanction in the form of a fine up to IDR1bn, while the management or employee of the entity may be imprisoned for up to one year.

The Perppu (which has been ratified as law) is currently under judicial review at the Constitutional Court of Indonesia, based on a claim filed by a lecturer at the University of Indonesia. On 2 November 2017, the Constitutional Court convened the first hearing of the judicial review.

Anti-tax treaty abuse

Transfer pricing: MLI. On 7 June 2017, representatives of 68 jurisdictions including Indonesia signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI) at the OECD headquarters in Paris. The MLI allows signatory jurisdictions to implement modified tax treaties to prevent tax abuse by way of profit shifting simultaneously and efficiently, without having to enter into bilateral agreements. In particular, Indonesia uses the MLI to focus on, among others, modification to taxation regulations on permanent establishment (bentuk usaha tetap or ‘BUT’). There are quite a few cases where foreign entities conduct tax avoidance in Indonesia, e.g., by way of function splits, whereby a representative office (which is categorised as a BUT) is established but only with a marketing function and without generating profits (all payments are made outside of Indonesia). As such, it seems as if there is no income received by the representative office, resulting in no imposition of income tax. There are also cases involving treaty shopping by establishing a head office in countries with low tax rates, without a tax treaty with the origin country or the income country. The MLI is ultimately expected to help signatory jurisdictions to solve these issues and strengthen protections against tax abuse.

Certificate of domicile. In order to further strengthen protection against tax treaty abuse, the DGT issued a regulation concerning procedures to implement approval of double taxation avoidance, which replaced the previous regulations. The new regulation provides new formats for a certificate of domicile (CoD) and introduces new requirements for non-resident taxpayers (foreign taxpayers) who wish to enjoy tax treaty benefits. In principle, a non-resident taxpayer is able to utilise tax treaty relief stipulated under a tax treaty if, among others: (i) there is a discrepancy between the provisions stipulated under the Indonesian Income Tax Law and the tax treaty; and (ii) the non-resident taxpayer submits a CoD form which complies with administrative and other specific qualifications.

CoD forms generally consist of: (i) a DGT-1 Form, which is used by non-resident taxpayers other than those using DGT-2 Form; and (ii) a DGT-2 Form, which is used by banks, pension funds and non-resident taxpayers receiving or obtaining income through custodians. These forms must comply with administrative and other specific qualifications set out in the DGT regulation. They do not require confirmation by the non-resident taxpayer that the earned income is subject to tax in its origin country.

Administrative qualifications of the forms include certification of the DGT-Form by signature or similar of the authorised officer according to custom in the partner country or jurisdiction of the tax treaty. If unable to obtain this certification, the non-resident taxpayer may submit the DGT-Form along with a CoD issued by its origin country, which complies with certain requirements as stipulated under the DGT regulation. For fulfilment of other specific qualifications, the non-resident taxpayer must make certain statements according to the type of DGT-Form used.

The DGT regulation also allows a refund of excess tax withholding or collection in the event of: (i) misapplication of tax treaty; or (ii) delay of submission of the DGT-Form, i.e., submitted after the tax withholder or collector submits a tax return for the tax period of the payable tax. Further, in the event that the non-resident taxpayer receiving income from Indonesia does not receive tax treaty benefit and the tax withholder or collector does not submit a tax return for the tax period of the payable tax of such income, the non-resident taxpayer may still receive a tax treaty benefit by way of a mutual agreement procedure mechanism.

Controlled foreign company

On 27 July 2017, the minister of finance regulation concerning the determination of deemed dividends and its base of calculation by domestic taxpayers for shares participation in an overseas business entity other than a business entity trading its shares on the stock exchange was issued. In general, the controlled foreign company (CFC) rule applies to Indonesian taxpayers owning shares in non-listed foreign companies.

The CFC regulation expands the scope of definition of a CFC to include an indirectly owned CFC. An indirectly owned CFC refers to a foreign entity where 50 percent or more of its shares are collectively owned by: (i) an Indonesian taxpayer and a directly owned CFC or an indirectly owned CFC; (ii) an Indonesian taxpayer and other taxpayer through a directly owned CFC or an indirectly owned CFC; or (iii) a directly owned CFC or an indirectly owned CFC. If the ownership in a CFC is established through capital participation by a trust or other similar entity overseas, such capital participation is deemed to be made by investors of the entity making the capital participation. The CFC regulation also allows actual dividends paid by the CFC to be offset against deemed dividends that were previously reported for the past five consecutive years.

Further, Indonesian taxpayers may credit the income tax paid or withheld over dividends received by a directly owned CFC (foreign tax credits or ‘FTC’), calculating the amount in accordance with the CFC regulation. To claim the FTC, a prescribed format of the FTC calculation must be attached to the relevant Indonesian taxpayer’s annual income tax return, along with specific documents of the directly owned CFC.

Amendment to Indonesia-Netherlands DTA

On 9 March 2017, a presidential regulation was issued to ratify the protocol on amendment to the DTA between Indonesia and Netherlands. This was signed on 30 July 2015 and became effective on 1 October 2017. Key amendments include: (i) revision of the withholding tax (WHT) rate on gross dividend from 10 percent to 5 percent if the beneficial owner is a company (other than a partnership) which directly holds at least 25 percent of capital of the company paying the dividend; and (ii) revision of the WHT rate on interest paid on a loan made for a period of more than two years or paid in relation to the sale of credit of any industrial, commercial or scientific fittings from 0 percent to 5 percent.


Freddy Karyadi is a partner and Nina Cornelia Santoso is an associate at ABNR. Mr Karyadi can be contacted on +62 (21) 250 5125 ext. 366 or by email: Ms Santoso can be contacted on +62 (21) 250 5125 ext. 416 or by email:

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