Indonesia And Singapore Double Tax Treaty (Updated)
Singapore and Indonesia
Double Tax Agreement (Updated)
Global trading hub Singapore and Indonesia have a long history of good trade relations. In fact, Indonesia is Singapore’s fourth largest trading partner, with bilateral trade totalling more than $59 billion in 2019.
Several important tax treaties have been signed to promote further trade and investment between the two countries. For example, the Indonesia-Singapore Double Tax Agreement (DTA) was in effect since 1992 to improve the flow of investment and trade between Singapore and Indonesia by reducing or eliminating double taxation.
Recently, the updated Indonesia-Singapore DTA was ratified by both countries and took effect earlier in January this year. This new agreement will replace the existing DTA that will better reflect the current economic relationship between the two countries.
New Changes In the Updated Indonesia And Singapore DTA
Businesses operating in Singapore and Indonesia should review the new agreement closely to ensure that they are aware of the new rules and regulations.
So, what exactly does this updated agreement entail? Here are the three major changes companies need to know about the new Indonesia-Singapore DTA.
At a Glance: Updated Singapore And Indonesia DTA
|New Changes||What Does This Mean|
|1. Lower withholding tax rates for royalties and branch profits||Less withholding tax rates paid for royalty payments and branch profits mean greater income and profits for businesses.|
|2. Tax exemption for certain capital gains||Under Indonesian law, Singapore investors are no longer subjected to the current five percent tax on gross proceeds from the sale of equity investments held by a foreign shareholder. Since there is no capital gains tax in Singapore, there should be no Singapore tax exposure on remittance of capital gains.|
|3. Internationally-agreed standards to counter treaty abuse||A higher requirement to claim treaty benefits. Errant businesses can no longer abuse the system to avoid taxes.|
1. Lower withholding tax rates for royalties and branch profits
Under the updated Indonesia-Singapore DTA, there are reduced withholding tax rates for royalties and branch profits.
For branch profits, the withholding tax rate is lowered from 15 percent to ten percent. However, this rate does not apply to companies or residents of Singapore or Indonesia that are parties to contracts related to oil and gas as well as the mining sectors.
For royalty payments, the withholding tax rate is lowered from the current rate of 15 percent to the following under Article 12:
Eight percent: For the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
Ten percent: For the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process.
What does this mean: Less withholding tax rates paid for royalty payments and branch profits mean greater income and profits for businesses.
2. Tax exemption for certain capital gains
Previously, there were no regulations on capital gains.
Under the updated Indonesia-Singapore DTA, the new Article 13 states that the investor’s country of residence will be allocated the taxing rights on the capital gains from the sales of shares and assets of private Indonesian companies.
This is adopted from the latest approach under the OECD’s Model Tax Convention on Income and on Capital (MTC).
However, the tax exemption does not apply to disposal of shares in a land rich company unless one of the following conditions is met:
- The immovable property is used by the company to carry on its business.
- The alienator owns less than 50% of the issued shares in the land rich company.
- The gains arise from the framework of a reorganization, a merger, a demerger, or similar operation.
Land-rich Company deriving more than 50% of its value directly or indirectly from immovable property and holding at least 50% of the total issued shares of such Company.
What does this mean: Under Indonesian law, Singapore investors are no longer subjected to the current five percent tax on gross proceeds from the sale of equity investments held by a foreign shareholder. Since there is no capital gains tax in Singapore, there should be no Singapore tax exposure on remittance of capital gains.
3. Internationally-agreed standards to counter treaty abuse
Under the new anti-tax avoidance Article 28, businesses that cannot satisfy the Principal Purpose Test (PPT), an anti-abuse rule, may not be entitled to treaty benefits in this updated Indonesia-Singapore DTA.
What does this mean: A higher requirement is needed to claim treaty benefits. Errant businesses can no longer abuse the system to avoid taxes.
Take Advantage of These Latest Tax Developments With APacTrust
The updated Singapore-Indonesia DTA provides greater clarity and certainty in the taxation of cross-border business activities between the two countries. This is good news for both economies as each country can benefit from increased trade and investment opportunities.
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