Indonesia and Singapore Sign Updated Double Taxation Avoidance Agreement

• On February 4, 2020, Indonesia and Singapore signed the updated agreement on the elimination of double tax avoidance and prevention of tax evasion.
• The agreement also lowers the withholding tax rates on royalties and branch office profits.
• The most favored nation clause has been removed allowing both countries to negotiate new product sharing contracts.

On February 4, 2020, Indonesia and Singapore signed the updated agreement on the elimination of double tax (DTA) and prevention of tax evasion in a meeting held in Jakarta.

Through the updated agreement, the withholding tax for royalties and branch profits will be lowered. There is now a regulation on profit tax on investments (capital gains) in addition to incorporating internationally agreed standards to solve cases of treaty abuse.

Indonesia and Singapore signed their first DTA agreement in 1992 and negotiations to amend its contents began in mid-July 2015. Both governments hope the latest changes can boost bilateral trade – which was worth more than US$40 billion in 2019 – as well as investment flows between the two countries.

Foreign investors are advised to use the services of registered local tax consultants to better understand how they can benefit from these latest amendments.

Lower tax rates on royalties and branch profits

The upgraded DTA agreement allows Singapore and Indonesian companies to enjoy lower withholding tax rates on royalties.

The previous single tariff of 15 percent has been reduced to 10 percent for copyrighted works of literature, arts and film, and eight percent for the use of industrial, scientific, or commercial equipment. Additionally, the tax rate on branch profits has also been reduced from 15 percent to 10 percent.

New standards for capital gains

Capital gains were not regulated in the previous DTA agreement. It has now been amended in accordance with the Organization for Economic Cooperation and Development (OECD) model. The OECD model is an accord developed by OECD states to primarily serve as a guideline for tax issues during bilateral treaty negotiations.

Indonesia can now also tax profits from the transfer of shares traded on the Indonesian Stock Exchange, and there is a capital gains tax on the indirect transfer of assets.

Removal of most favored nation clause

The new DTA will remove the ‘most favored nation’ (MFN) clause. The MFN prevented the two countries from freely changing product sharing contracts (PSC) as the clause requires a country to provide all WTO countries with the same privileges, concessions, and immunities.

PSCs are one of the most significant forms of legal agreements found in the minerals and energy industries. The PSC sets out the rights of investors to be granted permission to explore and extract hydrocarbon resources from the host government, in addition to determining profit sharing.

Through the amendments, the two countries will be able to negotiate customized terms of the PSC, thereby making the process more flexible overall.

Tax exemptions for government institutions

There will be tax exemptions on any interest obtained from sovereign wealth funds and their subsidiaries.

Tax avoidance and information exchange

There is now more explicit regulation on preventing tax evasion, which was not implemented previously as well as the exchange of tax information.

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