Indonesia. Income tax. Newly-implemented regulations for the Income Tax Law

Transcription

1 Indonesia Income tax Newly-implemented regulations for the Income Tax Law Subsequent to the commencement of the new Income Tax Law on 1 January 2009, the government released an implementing regulation in December 2010 which provides clearer guidance on the following matters: Bonus shares may not be taxable Under the following conditions, bonus shares distributed without payment are not regarded as a taxable dividend: The bonus shares come from the capitalisation of the share premium account, provided that the total nominal value of the shares owned by the recipient of the bonus shares after distribution does not exceed the total capital payment, and In 2010, all previously announced tax reforms covering the General Tax Provisions Law, Income Tax Law and the Value Added Tax Law came into force. In relation to income tax, several regulations have been released providing further guidance and clarification on the Income Tax Law. Several regulations also have been issued in regards to newly-regulated provisions of the Value Added Tax Law. Transfer pricing was still the main focus of the Indonesian Tax Office (ITO) for 2010, which also saw the issuance of significant regulations. These key issues and other significant developments of Indonesian taxation during the past 12 months are summarised below. The bonus shares come from the capitalisation of gains on the revaluation of fixed assets. Income derived from investments in collective investment contracts is not taxable From a tax perspective, investments in mutual funds are still attractive following confirmation that profit portions obtained by the holders of a participation unit of a collective investment contract (CIC), including profits originating from a unit repayment, are non-taxable. Other than mutual funds, asset-backed securities (ABS) are also managed in the form of a CIC, and therefore this rule is also applicable to ABS. However, further regulations are still needed to be implemented by the Director General of Taxes (DGT) to confirm whether the income tax treatment is applicable for both fixed cash flow ABS and fluctuating cash flow ABS. 28 Asia Pacific Tax Notes

2 Non-interest-bearing loans Non-interest-bearing loans from shareholders to company taxpayers are permitted if the following conditions are met: The loan is from the shareholder s own funds and not from other parties, The subscribed capital of that shareholder lender has been entirely paid-up, The shareholder lender is not suffering losses, and The limited liability company that receives the loan is having financial difficulties in relation to business continuity. If a non-interest-bearing shareholder loan does not meet the above conditions, the loan may be deemed as interest-bearing at an arm s-length interest rate which will be subject to WHT. Timing of WHT Tax disputes often arise on the timing of income tax withholding by other parties (payers) based on Article 23 and Article 26 of the Income Tax Law. It is now clarified that based on Article 23 and Article 26, income tax withholding shall be made at the end of the month in which: (1) the income is paid; (2) the income is provided to be paid; or (3) the income payment maturity date falls, whichever is earlier. The term provided to be paid is explained further; for example, in the case of dividends from non-listed companies, the time of tax withholding is when a dividend payable is recorded upon a dividend declaration at the annual shareholders general meeting. When a non-listed company declares an interim dividend at a board of directors or shareholders meeting, the WHT obligation also arises. For listed companies, the time for WHT on dividends is the recording date of share ownership, i.e. when the shareholders entitled to receive the dividend are known, although the dividend has not yet been paid. Exemption from withholding Taxpayers who can demonstrate that income tax will not be payable in the current year due to: (1) fiscal losses; (2) being entitled to compensate for prior year fiscal losses; or (3) income tax which has been paid being greater than the income tax that will be payable, may apply to the DGT for exemption from the withholding and/or collection of income tax by other parties. Other than the above, taxpayers whose income is only subject to final tax may also apply to the DGT for an exemption from the withholding and/or collection of income tax that can be credited. An example of this situation is a construction company subject to a final tax which wants to import machinery and is therefore applying for exemption from income tax on imports under Article 22 of the Income Tax Law. New tax facilities The government has previously provided income tax facilities for companies operating in particular sectors and/or particular regions. In early 2011, the government announced income tax exemptions or reductions for companies in pioneer industries which have the following characteristics: (1) with a wide range of connections, (2) provide additional value and high externalities, (3) introduce new technologies and (4) provide strategic value for the national economy. More detailed guidance still needs to be issued for these tax facilities to take effect. Deductible donations Pursuant to the Income Tax Law, the type of donations that are deductible for tax calculation purposes include only: (1) donations to overcome national disaster, (2) donations for research and development held in Indonesia, (3) donations for social infrastructure development, (4) donations for education facilities, and (5) donations for sports development. Further to these categories, the government of Indonesia released an implementing regulation regarding deductible donations in December 2010, applicable from tax year Based on this regulation, donations in a far broader range of categories are deductible, subject to a number of detailed requirements. Treaty relief from WHT Certificate of domicile (CoD) In April 2010, the DGT issued a regulation permitting foreign taxpayers to use a CoD in the form of the treaty partner country where the tax authority in that country refuses to certify the Indonesian format CoD for all of its taxpayers. In August 2010, the DGT issued a regulation that sets out the tax refund mechanism for claiming back overwithheld tax. The refund application must be submitted through the relevant tax withholder resident in Indonesia. Beneficial ownership anti-tax treaty abuse In April 2010, the DGT also amended a regulation regarding prevention of tax treaty abuse. The new regulation stipulates that the beneficial ownership requirement is only applied to foreign taxpayers income if the relevant tax treaty refers to beneficial ownership. The regulation also provides clarification on several terms relating to the beneficial ownership criterion that are required to be answered in the Indonesian format of CoD. The phrase active business or activities is to be interpreted according to the foreign taxpayers situation and can also be interpreted as activities which are actively carried out by the foreign taxpayer as evidenced by expenses incurred, efforts that have been expended, or sacrifices that have been made which directly relate to efforts or activities to obtain, collect, and maintain income, including where the foreign taxpayer carries out significant activities to maintain the sustainability of the entity. Asia Pacific Tax Notes 29

3 The requirement that the income earned in Indonesia is taxable in the recipient s country is still met if the recipient is not taxed on receipt of that income; for example, because the income is subject to a specific exemption, or the tax payable is borne by a foreign government, deferred, or not collected. This requirement is therefore only intended to apply in jurisdictions where tax is not levied at all. The phrase does not use more than 50% of total income to fulfill its obligations to other parties is interpreted to mean that not more than 50% of the foreign taxpayer s total income in any forms or any sources, as stated in its non-consolidated financial statement, is used to pay liabilities to other parties, apart from salaries and wages and other expenses normally incurred by the foreign taxpayer in running the business and profit distribution in the form of dividend to shareholders. The exclusion of dividends paid by the foreign taxpayer is a very positive development and means there is no need for profits to be effectively trapped in the recipient to satisfy the new treaty rules. Value-added tax (VAT) During the past 12 months, the DGT has issued regulations in relation to VAT refund repayments for certain pre-production taxpayers, VAT on export of services and VAT treatment on banking activities. VAT refund repayments for certain pre-production taxpayers The new VAT Law stipulates that taxable companies which incur input VAT during the pre-production stage of a project may still apply for VAT refunds in respect of capital goods on a monthly basis. However, if they fail to reach the production stage within three years from the date they have credited the input tax, they must repay the refunds. Input tax for non-capital expenditures cannot be claimed as a tax credit. The procedures for determining the production stage and the refund payment are governed by a Minister of Finance (MoF) regulation issued in April VAT on export of services The new VAT Law provides that the export of services is subject to 0% VAT subject to an implementing MoF regulation. In this regard, the MoF has issued a regulation that provides that the zero-rated VAT is only applicable to the following services: Toll manufacturing services, with certain conditions, among others, that the manufactured goods should be exported, Repair and maintenance services which are attached to services or movable goods utilised outside the customs area, and Construction services, i.e. consultation on construction planning, construction work performance, construction work supervision, which are attached to services or immovable goods located outside the customs area. VAT treatment on banking activities The new VAT Law mandates certain services are not subject to VAT and among them are financial services. Under the Law and its elucidation, the definition of financial services is quite detailed but it does not cover the whole range of banking services. There remain uncertainties surrounding the VAT treatment for several banking services. In this regard, the DGT issued a Circular Letter that provides a detailed list of VAT-able and non VAT-able financial services. The Circular concludes that non-vat-able financial services performed by general banks have the following main characteristics: The financial service is in the form of providing financing, which obtains income in the form of interest or, If it is not provision of financing, the financial service should be directly rendered to the bank s customers. Transfer pricing (TP) The focus on transactions between related parties has intensified over the past year following the introduction of three DGT regulations relating to TP compliance, mutual agreement procedures and advance pricing agreements. TP compliance The TP regulation applies to transactions between related parties which have an impact on the reporting of income or expenses for corporate tax purposes, including: Sale, transfer, purchase or acquisition of tangible goods and/or intangible goods, Payment of rental fees, royalties, or other payments arising from the provision of or use of tangible or intangible property, 30 Asia Pacific Tax Notes

4 Income received or costs incurred for provision of or utilisation of services, Cost allocation, and Transfer or acquisition of property in the form of a financial instrument, as well as income or costs from the transfer or acquisition of the financial instrument. An important feature of the compulsory TP documentation requirement in Indonesia is that a taxpayer s documentation must demonstrate that its transactions with related parties are consistent with the arm s length principle and with ordinary business practice. The minimum requirements of TP documentation are listed in the regulation. High-level procedures in implementing the arm s length principle, comparability analysis and pricing methods are also stipulated. Significant portions of the regulation are based on the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The regulation clearly states that the DGT has the authority to re-determine the amount of related-party income and expenses in calculating the taxable income of a taxpayer. The DGT s adjustments may be based on the taxpayer s own transfer pricing method and documentation. Where the taxpayer s documentation is insufficient, the DGT will conduct its own analysis to re-determine the related party income and/or expense amounts. Furthermore, the DGT also has the authority to make correlative adjustments to a taxpayer s income as a follow-up to a primary transfer pricing adjustment made by the DGT or an overseas tax authority to the income of one of the taxpayer s related parties. Mutual agreement procedures (MAP) In 2010, a DGT regulation regarding the MAP was introduced in Indonesia. MAP is intended to resolve international tax disputes. These disputes involve cases of double taxation as well as inconsistencies in the interpretation and application of a treaty. According to the prevailing regulation, an MAP is conducted as a result of: A request proposed by an Indonesian resident taxpayer, A request proposed by an Indonesian citizen who has become a resident taxpayer of a tax treaty partner country as a result of non-discrimination provision in the applicable treaty, A request proposed by a treaty partner country, or Matters considered important by and based on the initiatives of the DGT. The interaction of MAP and domestic procedures is different in each country. It is common practice in other jurisdictions for the tax authorities to allow domestic procedures to be suspended until MAP discussions have been completed. The DGT has not discussed this option in the relevant regulation. Should the Indonesian taxpayer have filed an objection or an appeal on matters relevant to MAP and the objection or appeal has not been withdrawn, the DGT may reject the request to conduct a MAP or decide to end the MAP process. The position taken by the DGT means that, in practice, most Indonesian taxpayers will need to choose either MAP or the domestic objection and appeal process (due to the time limitations for the filing of MAP requests, objection requests, and appeal requests). The regulation does mention that the DGT may hold consultation meetings with other tax authorities to discuss the MAP requests. After the negotiations are completed, the tax authorities will prepare a draft mutual agreement which will be presented to the taxpayers. The mutual agreement will only be binding if the taxpayers accept the draft. This is consistent with common practice in MAP cases in other countries. Advance pricing agreements (APA) Following the issuance of the regulation regarding MAP, the DGT also introduced a new regulation regarding APA in An APA is an agreement between the DGT and taxpayers and/or another country s tax authority on the future application of the arm s length principle to transactions between related parties. An APA is a cooperative compliance tool intended to provide certainty on transfer pricing issues to taxpayers and the tax authorities. An APA can be unilateral (i.e. between the DGT and an Indonesian taxpayer only), bilateral (i.e. also involving a taxpayer and a tax authority in one other country) or multilateral (involving three or more countries). The current regulation focuses primarily on the procedures for obtaining a unilateral APA. The APA is valid for a maximum of three tax years after the tax year in which the APA was agreed. On certain conditions, the APA can also be applied to tax years before it was agreed. The DGT has the authority to reconsider or even cancel the APA, subject to certain circumstances. Furthermore, the existence of an APA will not prevent the DGT from conducting a tax audit. Asia Pacific Tax Notes 31

5 Increase in TP-focused investigations The number of tax audits with TP as the key focus area has significantly increased following the issuance of new regulations relating to TP. Transactions under particularly close scrutiny include payments of royalties and technical or management services fees, inter-company services, royalties and financing transactions, and exports to related parties. Where a taxpayer has no documentation available to substantiate these transactions, there is a high risk that deductions for the payments will be denied in full. In this regard, the 30-day time limit within which a taxpayer must produce any documentation requested by the ITO during an audit is being strictly enforced. Any documentation provided after the 30-day time limit is disregarded by the ITO in its decisionmaking process. Several TP-specific audits were conducted by the ITO in the past year. The ITO will identify high-priority targets for TP-specific audits based on: Industry-based profitability benchmarking As at December 2010, the DGT has issued regulations which contain profitability benchmarks for a combined total of 115 industries. The benchmarking is based on analysis conducted internally by the DGT and is intended to be used in assessing the risk profile of Indonesian corporate taxpayers as a tool in its audit selection process. Taxpayers with profitability that falls below the ITO s benchmarks for their industry may be asked for further information, asked to amend a tax return, or possibly be subject to an audit. The benchmarking contains a range of profitability ratios for the industries examined, including gross profit margin, operating profit margin and corporate tax to turnover for 2005, 2006 and Further benchmarking regulations are likely to be issued in the future covering additional industries. Profit performance of the company: companies that have incurred consistent losses will be the highest priority but there is also a risk of being selected for companies with profits below industry norms, and Materiality of the company s related-party transactions. In addition to TP audit activities, the ITO has also issued questionnaires that focus primarily on TP issues to several taxpayers who are not under an audit. It is possible that the information gathered by the ITO from these questionnaires will lead to follow-up investigation or audit in some cases. 32 Asia Pacific Tax Notes

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