On 11 May 2021, the new Indonesia-Singapore tax treaty was finally ratified by Indonesia under Presidential Regulation No. 35 of 2021. The new treaty will replace the previous treaty, which was effective for almost 31 years. In its official statement, the Directorate General of Tax stated that the treaty is meant to strengthen efforts to prevent tax evasion, protect, and increase Indonesia’s tax base, and at the same, encourage increased investment from Singapore.
To sum up, there are three significant changes in the new treaty concerning tax treaty on dividends (branch profit tax) and royalties, all of which now enjoy a lower tariff, and new provision to provide capital gains tax protection. On the other hand, withholding tax on dividends and interests remain unchanged. We will discuss the changes in more details below.
Indeed, many companies in Indonesia have a Singapore holding company, and a common scenario is the sale by that holding company of its shares in the Indonesian subsidiary. Under the old treaty, the Singapore shareholder will face a 5% withholding tax on the gross transfer value of unlisted shares. This 5% rate is the same rate imposed by Indonesia on holding companies from tax haven countries.
Taking the share transfer example above, in the new treaty, capital gains received by a Singapore shareholder in the sale of shares of an Indonesian company will most likely be taxed in Singapore, except if the sale involved shares in an Indonesian company where more than 50% of that company’s value is derived from its immovable property and the selling shareholder owns more than 50% shares in such company and:
Compared to the Malaysia-Indonesia tax treaty, which only requires the Indonesian company to satisfy the more than 50% (principally, to be exact) of the immovable property criteria, the Singapore-Indonesia treaty has a more restrictive requirement.
Meanwhile gains derived from the sales of ships or aircraft or moveable property pertaining to the operation of such ships or aircraft will be taxed to the state where the selling entity resides.
However, it is important to note that the new BPT rate does not apply to companies, other entities, residents of Indonesia or Singapore that are parties to a production sharing contract relating to oil and gas, and contract of works for other mining sectors. Additionally, the new treaty also erases the tax treatment provisions on Most Favoured Nation (MFN) towards Singaporean companies.
However, the new treaty exempts government institutions of both countries and provides that interest received by any government institution in Indonesia or Singapore from government-issued bonds or debentures will enjoy a tax exemption. This exemption also applies to sovereign wealth funds, like GIC Private Limited and the newly established Indonesia Investment Authority, and their subsidiaries.
Additionally, the list for Indonesian government institutions includes the Indonesia Eximbank, Social Security Agency for Health (Badan Penyelenggara Jaminan Sosial Kesehatan) and Social Security Agency for Manpower (Badan Penyelenggara Jaminan Sosial Ketenagakerjaan), local public institutions, and any special-purpose investment entity established by the government (like the abovementioned sovereign wealth funds).
The new treaty also confirms that any penalty charge will not be regarded as interest under the definition of interest.
This is line with the stance adopted by Indonesia under Presidential Regulation No. 77 of 2019 on the Paris Multilateral Convention. The Convention contain similar provisions as the treaty under the principal purposes test, which is the method to assess possibility of treaty abuse, including through treaty shopping.
For now, the treaty has not entered into force as Singapore also needs to ratify it. Afterwards, both countries must exchange the notification of the ratification documents for the treaty to enter into force. Then, the treaty will apply from 1 January of the following year.
We expect the renewed tax treaty to invigorate and deepened the flow of investments between Singapore and Indonesia. Investors are likely to view this new treaty positively. Singapore shareholders of Indonesian private companies will benefit from the capital gain tax protection under the new treaty for the conditions specified above. The reduced rate on BPT and royalties are some of the main attractions, especially for private equity houses and multinational corporations that depend heavily on their intellectual properties. Moreover, the law finally adopts a standalone capital gains tax provision and clarifies other points, including on interest, which will give more certainty in implementation.
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Ahmad Fikri Assegaf
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