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Indonesia: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2017
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International Tax Reform in Indonesia1

International tax systems have become increasingly vulnerable to mobile capital, which seeks the highest after-tax rate of return and deploys tax planning techniques. Like many other countries, Indonesia has to protect itself against tax base erosion and profit shifting, and needs to strike a balance between offering a tax system that is attractive to investment and raises revenues to support priority spending in infrastructure and social sectors.

A. Introduction

1. The review of international aspects of taxation in Indonesia is timely for a number of reasons. Indonesia is conducting a major tax amnesty aimed particularly at registering and repatriating offshore assets, and improving relations between the tax office and taxpayers. As a G-20 country and ASEAN member, Indonesia is involved in multiple international tax initiatives, most notably the Organization for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) project. Finally, Indonesia is planning a general reform of its principal tax laws, the income and value added taxes (VAT). Indonesia’s international tax reform is therefore approached in the context of its general tax reform and international commitments.

2. Indonesia raises less tax revenue in terms of GDP than average for the Asia/Pacific region (Figure 1): 12 percent vs. a regional average of 15.4 percent. Though comparison of Indonesia’s revenue structure and performance to those of other developing economies in the region is not prescriptive, it may nonetheless help inform the goals and potentials of its reform efforts. The general tax reform should thus aim to enhance revenues, as intended. Like many developing countries, Indonesia relies heavily on corporate income tax (CIT) and VAT revenues, each of which accounts for more than one third of tax revenues. Nonetheless, because Indonesia’s tax revenue/GDP ratio is below average, its CIT revenues are slightly below the regional average in terms of GDP: 4.1 percent vs. 4.4 percent, respectively. Thus, CIT revenues still have room for development.

Figure 1.Level and Composition of Tax Revenues

3. The following section will evaluate the structure of Indonesia’s foreign direct investment (FDI) to gauge its implications for international tax reform. Section C on the domestic tax law will then discuss CIT reform in greater detail, while Section D will discuss the current structure and reform of Indonesia’s network of tax treaties. Section E will evaluate priority action items for the OECD BEPS project. Finally, Section F focuses on exchange of information commitments and challenges.

B. FDI Structure

4. Since the international tax regime applies to cross-border investments, its reform should consider their structure. This section analyzes the current structure of Indonesia’s cross-border FDI to highlight issues that the ongoing reform should consider. The first issue is that Indonesia is by a large margin a net capital importer (Figure 2). Its inbound FDI stock is roughly five times as large as its outbound stock. The international tax regime should therefore seek to protect source-based tax revenues. The second issue of note is that, although the majority of inbound investment is financed with equity, a growing share is financed with debt. The tax regime should therefore also seek to curb excessive interest deductions as a means of base erosion.

Figure 2.Total Inbound and Outbound FDI Stocks

(In billions of U.S. dollar)

Source: IMF, Coordinated Direct Investment Survey.

5. Another salient feature of Indonesia’s FDI structure is that a large share of both its inbound and outbound stocks is associated with low-tax jurisdictions with large treaty networks such as Singapore, Mauritius, and the Netherlands. The IMF CDIS data in Figures 3 and 4 reflect only the immediate country of origin or destination. Regarding inbound investment, it is thus likely that some of the investment flowing from low-tax jurisdictions in fact originated elsewhere. Regarding outbound investment, it is likely that some of the FDI flowing to these jurisdictions may ultimately be invested elsewhere. In particular, anecdotal evidence suggest that outbound capital located in Singapore is reinvested in Indonesia through a practice known as “round-tripping.”

Figure 3.Inbound FDI Stock, 2014

Source: IMF, Coordinated Direct investment Survey.

Figure 4.Outward FDI Stock, 2014

Source: IMF, Coordinated Direct Investment Survey.

6. There are numerous reasons why a cross-border investor might channel inbound or outbound investment through a third jurisdiction, including legal and financial amenities and risks, but a major motive for such practices worldwide is tax avoidance. This is frequently facilitated by making use of “conduit” countries’ large tax treaty networks, which often feature zero or very low cross-border withholding tax rates. The prominence of low-tax jurisdictions in Indonesia’s FDI structure thus has several policy implications. Going forward, caution is advisable in concluding tax treaties with low-tax jurisdictions as such treaties facilitate shifting of a country’s tax base. In some cases, renegotiations could be tried, as Indonesia did with the Mauritius treaty in 2014. Also, Indonesia’s basic model tax treaty might include provisions that would limit treaty benefits to third countries. Finally, Indonesia is building the legal and administrative infrastructure to facilitate cross-border exchange of taxpayer information—a positive approach. These matters will be discussed in greater detail in the following sections.

C. Domestic Law

7. Corporate tax rates across the globe have been under downward pressure in recent decades due to fierce competition for foreign investment. Indonesia’s 25 percent CIT rate is currently marginally above the regional average of 22.8 percent (Figure 5). Consideration is being given to cutting its CIT rate, which could further weaken revenues with uncertain benefits. Indonesia is a country with strong fundamentals—macro stability, large young labor force and consumer market, abundant natural resources—which will tend to attract FDI even without a below-average tax rate.

Figure 5.Regional CIT Rates and Efficiency Ratios

Sources:

8. Lowering the CIT rate without sacrificing revenues would be possible by broadening the CIT base. Indonesia’s CIT efficiency, as measured by the ratio of CIT revenues to the product of GDP and the corporate tax rate, is below average for the region (Figure 5), indicating that its corporate tax base is relatively narrow. Indonesia offers several types of tax incentives and allowances, including:

  • Tax holidays for pioneer industries;

  • Investment allowance;

  • Special economic zones and integrated economic development zones;

  • Reduced CIT rates for publicly listed companies and medium-sized companies; and

  • Final gross receipts taxes for certain sectors, e.g., construction and real estate.

9. Tax incentives are of uncertain value since there is no data available on cost-benefit analyses nor estimates of tax expenditures. As part of the tax reform planned for 2017, the government may consider systematically reviewing existing tax incentives to determine which of them provide a net benefit to the economy. Good international practice includes evaluations of revenue cost of any remaining tax incentives, with the estimates published as part of the annual budget. This improves the transparency of the tax code.

10. Indonesia operates a “worldwide” tax system, in which its resident taxpayers are subject to income tax on both domestic and foreign-source income. For the latter, they receive a foreign tax credit (FTC) for income taxes paid abroad. However, in line with the recent trend among developed countries, the government is considering switching to a “territorial” system that would exempt foreign earnings from domestic taxation. Several considerations apply to this decision.

11. One argument often given for territoriality is that it simplifies administration. Best practice is that territoriality exempts only participating dividends received by resident corporations. Portfolio dividends and all foreign income received by individuals normally continue to be taxed on a worldwide basis in order to discourage buildup of passive investment offshore and to ensure fairness and progressivity. Also, income other than dividends, including interest and royalties, which are deductible in the source jurisdiction, should always be taxed on a worldwide basis. This does limit the simplification benefits from adopting territoriality, since FTCs must still be tracked for income other than participating dividends.

12. Another argument frequently given for territoriality is that, unlike worldwide systems, it creates no disincentive to repatriate foreign earnings and thus reduces incentives for avoidance, for example, by holding assets offshore. U.S. MNEs’ large buildup of more than US$2 trillion in un-repatriated earnings exemplifies this potential shortcoming of worldwide systems. However, the disincentive for repatriation depends critically on the domestic/foreign CIT rate differential. The U.S. system discourages earnings repatriation not simply because it is worldwide but also because the U.S. CIT rate is among the world’s highest (Figure 6). Therefore, FTCs do not fully shelter foreign earnings from U.S. tax upon repatriation. It is noteworthy that Ireland—which is considered by some to be a “low tax jurisdiction”—also has a worldwide system, but because its tax rate is so low (12.5 percent), it effectively functions as a territorial regime. Indonesia’s CIT rate, at 25 percent, should not produce excessive distortions such as in the U.S. system, even in its current form.

Figure 6.Worldwide System—CIT Rates

Sources: PricewaterhouseCoopers, Global Tax Policy and Controversy Briefing, Issues 16, June 2015.

13. Territoriality is likely to reduce revenues, and relative to a worldwide system, it can also encourage outbound investment. Any increase in tax rate differentials due to the repeal of repatriation taxes can also exacerbate incentives to shift income from high-tax to low-tax jurisdictions. Moreover, controlled foreign corporation (CFC) rules need to be strengthened under territoriality in order to distinguish active from passive foreign income (the former being exempt while the latter is taxed). On the whole, there does not thus appear to be a strong case for Indonesia to switch from a worldwide to a territorial system.

D. Tax Treaties

14. Bilateral tax treaties, which were developed among industrialized countries, generally aim at alleviating double-taxation and favor the principle of residence over source taxation. The main trade-off countries make in entering treaties is reducing their domestic tax base, mainly by cutting cross-border withholding tax (WHT) rates, in hopes of attracting greater foreign investment. Empirical studies show some evidence that tax treaties stimulate FDI, particularly in middle-income countries, but results vary widely.2 Net capital importers such as Indonesia may wish to carefully preserve their domestic tax base when negotiating their tax treaties. Thus far, Indonesia has been fairly successful at this: Few of its tax treaties reduce its cross-border WHT rates, set by domestic law at 20 percent, to less than 10 percent.

15. The total number of Indonesia’s tax treaties is large by international standards. Indonesia has 66 bilateral treaty partners, with many of which it has little or no bilateral investment (Figure 7). With more than half of its treaty partners, Indonesia has less than US$100 million in FDI (inbound or outbound). Going forward, treaty partners could be selected on the basis of a cost-benefit analysis incorporating data on capital flows and knowledge of the potential partner’s tax system. Where mutual economic relations don’t appear to merit or demand a bilateral double tax agreement, it may still be advisable to have tax information exchange agreements (TIEAs).

Figure 7.Distribution of Treaty Partners by FDI Slock

Sources: International Bureau for Fiscal Documentation; and IMF, Coordinated Direct Investment Survey.

16. It is important for countries to adopt a strategic approach to tax treaties. Some elements of a strategy could include: (i) Setting reasonable parameters for cross-border investment in domestic law, so that countries without a tax treaty would not be discouraged from investing in Indonesia. Definitions of source, residence, and permanent establishments should accord with international norms to minimize the likelihood of double taxation. It may also be advisable to consider offering a participation exemption or reduced WHT rate for cross-border participating dividends, as it has for domestic corporations; (ii) Using one model treaty to negotiate with all countries. The model treaty parameters should reflect domestic law, which is the starting point for all treaty negotiations. The government could consider setting minimum reserve values, for example for WHT rates, below which it will not negotiate. The final terms of each tax treaty will then depend on the treaty partner’s model treaty parameters and the expected benefits of negotiating the treaty. All treaties should include provisions for exchange of information (EoI), which for non-treaty countries will be provided by the OECD/G-20 Convention on Mutual Administrative Assistance in Tax Matters.

E. Base Erosion and Profit Shifting (BEPS) Action Plan

17. As a G-20 country, Indonesia has endorsed the BEPS Action Plan agreements, as reflected in BEPS 2015 Final Reports (OECD, 2015). These Reports reflect a consensus between OECD and a number of non-OECD countries on the current weaknesses of the international tax architecture and suggest measures aimed at addressing current architectural flaws, thereby limiting cross-border base erosion and profit shifting opportunities.

18. Indonesia already has several good measures in its legislation to address base erosion and profit shifting. Provisions include CFC rules, regulations on the application of the “arm’s length principle” for transfer pricing purposes, requirements to submit documentation for transactions with related parties, and anti-avoidance measures (against thin capitalization, for example). As further discussed below, these instruments could simply be reinforced.

19. Implementation of the agreements and recommendations of the BEPS project needs to be prioritized and adapted to Indonesia’s context. In this respect, three related questions should be considered: (i) which BEPS recommendations are relevant and represent the best option for net capital-importing countries?; (ii) is there sufficient institutional capacity to implement them?; and (iii) if not, what capacity-strengthening measures should be taken? Additionally, countries may wish to implement certain anti-avoidance measures that are not covered by the BEPS project but are nonetheless important, such as capital gains taxation of indirect offshore asset sales.

20. Several BEPS action items take priority based on each country’s specific international tax policy concerns as well as its international commitments. The BEPS actions most relevant to Indonesia’s specific policy concerns could include strengthening CFC rules (Action 3), limiting base erosion via interest deductions (Action 4), and addressing artificial avoidance of permanent establishment (PE) status, especially in the context of a digital economy (Action 7). As a G-20 country, Indonesia has also committed to implementing the four BEPS action items classified as “minimum standards,” which include countering harmful tax practices (Action 5), preventing “treaty-shopping” (Action 6), implementation of country-by-country (CbC) reporting (Action 13); and improving the effectiveness of dispute resolution mechanisms (Action 14).

21. With a worldwide income tax system, Indonesia needs strong CFC rules to ensure that residents’ outbound investment is appropriately taxed. CFC rules combat the risk of shifting a resident corporation’s profit, often indefinitely, into lower-taxed foreign affiliates to defer taxation. CFC rules allow the resident country jurisdiction to, in effect, tax the income earned by foreign subsidiaries once certain conditions are met by attributing the income to the resident shareholders.3 To be effective, the rules must clearly define what constitutes a CFC (CFC control tests), how to determine its attributable income and how to tax its attributable income. Indonesia’s current CFC rules are limited to corporate shareholdings.4 They can therefore be avoided with interposed foreign trusts and foreign partnerships. Further, without strong anti-fragmentation rules, ownership can be fragmented among members of group or affiliated companies, each of which falls below the CFC control tests for domestic ownership, below which a foreign entity is not considered a CFC.

22. Indonesia’s CFC rules could therefore be broadened in line with BEPS Action 3, widening their scope to capture indirect ownership and tightening the anti-fragmentation rule. Three tests could be used to determine if a company is “controlled.” The first test would capture situations where five or fewer Indonesian residents have at least 50 percent associate-inclusive control interests in a foreign company (as suggested above, the control interests would include indirect ownership). The second test would capture individuals with at least 40 percent associate-inclusive control interests (direct and indirect), unless there is another person with a higher interest (assumed controller). Finally, if five or fewer Indonesian residents either alone or together with associates control the foreign company—de facto controllers—it will be classified as a CFC.5

23. Excess debt and interest deductions are among the most common base eroding and profit shifting techniques available in international tax planning. Under the standard CIT, interest is deductible while the return to equity (dividends) is not. Multinational groups have the capacity to reduce their overall tax liabilities by allocating debt to affiliates in high-tax countries and equity to affiliates in low-tax countries. This issue is clearly important to Indonesia, as in 2014 more than one-third of all inward direct investment in the country was financed by debt (Table 1). In an effort to limit excessive interest deductions, in September 2015 Indonesia introduced a “thin capitalization” rule,6 restricting interest deductibility for companies with more than a 4:1 debt-to-equity ratio.7 This regulation became effective in 2016, so it is too early to assess its impact. However, based on the simulations discussed below, the ratio may be too generous to significantly restrict interest deductions.

Table 1Inward Direct Investment Positions
200920102011201220132014
Equity position (net)68.2%09.0%71.2%65.6%07.0%63.1%
Debt instruments31.8%31.0%28.8%34.4%32.4%30.9%
Source: IMF staff estimates based on IMF, Coordinated Direct Investment Survey (CDIS).
Source: IMF staff estimates based on IMF, Coordinated Direct Investment Survey (CDIS).

24. Augmenting the current thin capitalization rule with an “earnings stripping” rule, consistent with BEPS Action 4, would help address excessive interest deductibility. Earnings stripping rules deny deductibility of interest expense in excess of a certain percentage of earnings before interest, taxes, depreciation and amortization (EBITDA). BEPS Action 4 proposes a range of 10 to 30 percent as a benchmark net interest-to-EBITDA ratio. Analysis of MNEs investing in Indonesia included in the Bureau van Dijk ORBIS database shows that the current debt-to-equity ratio of 4:1 affects only 3.8 percent of MNEs (Figure 8). Even halving this ratio to 2:1 would constrain only 10.1 percent of the MNEs. By contrast, restricting net interest deductibility to 30 percent, 20 percent, and 10 percent of EBITDA would affect 39.7 percent, 50.7 percent, and 64.3 percent of firms, respectively.8 Thus, Indonesia should consider supplementing the existing debt-to-equity ratio with an earnings stripping rule restricting net interest deductibility to at most 30 percent of EBITDA, since the latter would be more effective at constraining excessive interest deductions.

Figure 8.Share of Companies Affected by Various Thin Capitalization Rules, 2015

Sources: Orbis database; and IMF staff estimates.

25. The rapid growth of the digital economy presents challenges to tax systems designed to function in a “brick-and-mortar” environment-an issue of significance for many countries, including Indonesia. In June 2016, Indonesia’s Ministry of Finance announced that it had formed a team to focus on taxation of e-commerce (Ernst and Young, 2016), and government investigations of four internet-based companies have received a great deal of press attention (Reuters, 2016). According to these reports, Indonesia has asserted its intention to tax the advertising income of internet enterprises. Digital economy issues are addressed in BEPS Action 1, which refers to BEPS Action 7 on avoidance of PE status.

26. Indonesia should consider modifying the definition of a PE in both its domestic law and tax treaties to address techniques that firms use to inappropriately avoid PE status. To this end, Indonesia could consider adopting an expanded PE definition that lowers the PE threshold to address “commissionaire arrangements”, as well as anti-fragmentation measures, consistent with BEPS Action 7. Anti-fragmentation measures prevent taxpayers from avoiding PE status by fragmenting a business process either functionally or temporally into several activities, each of which falls short of qualifying as a PE. The new PE definition in BEPS Action 7 should be incorporated in future tax treaties as well as the revised income tax law. If Indonesia decides to join the Multilateral Instrument (MLI), consideration should be given to implementing BEPS Action 7 in the existing treaties through the MLI.

27. Indonesia is strengthening its legal framework for transfer pricing adjustments and building capacity to implement new transfer pricing guidance. To strengthen the legal basis of transfer pricing adjustments, current DGT regulation PER-32/PJ/2011 is being upgraded into a Ministry of Finance regulation (PMK). As developed by BEPS Actions 8–10, the new transfer pricing guidance focuses, among other things, on the valuation of intangible assets and transfer pricing risk analysis.

28. To more effectively administer Indonesia’s transfer pricing rules, the DGT should consider establishing a specialized transfer pricing unit. Currently, most transfer pricing queries arise during regular tax audits and are addressed by the regular audit teams. However, transfer pricing analysis is a highly specialized activity requiring in-depth knowledge and training. Specialist transfer pricing auditors would be better placed to analyze related-party documents and select taxpayers for audit. Creation of a specialized unit that could work with and train regular audit teams would more effectively build capacity and make better use of DGT resources.

29. BEPS Action 5, a minimum standard, deals with countering harmful tax practices. Specifically, it requires that countries committed to BEPS, including Indonesia, eliminate certain preferential regimes and make any regime granted via individual resolutions transparent. This will be achieved through sharing information, including on unilateral advance pricing agreements (APAs) and private PE rulings. Special attention is given to the preferential tax regimes designed to attract intellectual property (IP) registrations, such as “IP boxes,” BEPS Action 5 is of greatest significance to advanced economies, where research and development (R&D) expenses are concentrated, but less so to developing countries. Indonesia does not offer preferential IP regimes. However, in compliance with the BEPS minimum standard, it has joined the Forum on Harmful Tax Practices. Where necessary, existing IP regimes will need to be amended. Transparency of preferential regimes will be achieved through compulsory spontaneous exchanges of information (EoI). Section F discusses EoI issues pertinent to Indonesia.

30. BEPS Action 6 addresses “treaty shopping,” in which a corporation resident in one country invests in a second country through an entity established in a third country to take advantage of the third country’s treaty benefits with the second country. In a hypothetical treaty shopping structure (Figure 9), there is no tax treaty between Countries A and B. So if a company from Country A invests directly in Country B, any dividends remitted from Country B are subject to a domestic WHT, say 20 percent. Instead, the company from Country A can route its investment through a conduit in Country C to take advantage of the tax treaty between Country C and Country B that reduces the dividend WHT in source country B, say to 5 percent.

Figure 9.Treaty Shopping Structures

31. Indonesia’s tax treaties generally provide weak protections against treaty shopping, with a few exceptions including the treaties with India, Hong Kong SAR, and the United States. To address treaty shopping, Indonesia currently uses a “beneficiary ownership” (BO) test to confirm that the transaction has economic substance and is not solely designed to take advantage of tax treaty benefits. The BO tests in Articles 10–12 of Indonesia’s tax treaties are limited in effect, as they only apply to conduits and nominees. An interposed entity structure may satisfy the beneficial owner test, where it would not satisfy a principal or specific purpose test. Consideration should be given to implementing BEPS Action 6 by including a principle or specific purpose test in all future treaties and treaty revisions. In an effort to prevent treaty shopping, Indonesia has resorted to requiring that a certification of domicile (Form DG-1 or DG-2) be submitted for each cross-border transaction. This imposes a significant compliance burden, and where an existing tax treaty does not authorize this requirement it may also strain treaty relationships. The Form DG-1/2 should therefore be required only once a year. If a decision is made to join the MLI, BEPS Action 6 could be implemented for existing treaties through the instrument as well.

32. One of the most significant BEPS Project measures has been adoption of CbC reporting under Action 13. CbC requires MNE parent companies to submit detailed documentation on their global operations broken down by country. This information should help tax administrations improve the efficiency and effectiveness of assessing transfer pricing and other BEPS-related risks. Legislative provisions governing the three-tier CbC process—the Master File, the Local File and the CbC report9—have been drafted by the Ministry of Finance and are expected to be finalized by the end of 2016. CbC reporting requirements are limited to companies with annual turnover of at least Rp 11 trillion (about US$824 million).

33. A dispute resolution team was created in 2016 to deal with mutual agreement procedures (MAP) and APAs. This enables the Indonesian competent authorities10 and their staff to specialize in tax treaty dispute resolution. MAP provides opportunities to settle disputes where tax treaties are not effective. The authorities usually engage in a MAP when there is a case of genuine double taxation that needs to be resolved. Seeking to resolve MAP cases provides businesses with confidence that double taxation can be avoided.

F. Exchange of Information

34. With the shift towards a more integrated and interdependent world economy, the exchange of information for tax administration purposes comes into prominence. Tax administrations, including that of Indonesia, are increasingly in need of information from foreign jurisdictions, to effectively combat international tax evasion and promote compliance, requiring taxpayers to report their income from all sources, including foreign sources of income.

Indonesia is well-advanced in building the necessary architecture for exchange of information. Global Forum on Transparency and Exchange of Information for Tax Purposes11—an international body ensuring the implementation of exchange of information standards—evaluates jurisdictions’ compliance with the standards of transparency and exchange of information on request through a peer review process. The Global Forum’s peer review of Indonesia (Global Forum, 2014) found that domestic legislative provisions are largely in place.12 Nonetheless, it pointed to certain limitations. In particular, the Phase 2 peer Review suggested bringing Indonesian laws to access bank information and information on securities accounts held by custodians into line with international standards. Currently, Indonesian competent authorities can only obtain information directly where the information is available from the tax administration database. Where information needs to be collected from a bank or about securities account, additional approval is necessary from Bank Indonesia or the Financial Services Authority. To obtain such approval, the name of the taxpayer holding the bank or securities account, or in the case of securities account, the account number must be provided. This is not in accordance with international standards, which only require that the taxpayer be “identified” (Global Forum, 2014).

35. Indonesia has taken an important step towards enhanced transparency by committing to implement the common reporting standard (CRS) for Automatic Exchange of Information (AEOI). Indonesia signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention) in November 2011,13 thereby securing a legal basis for the exchange of information. As of June 2015, Indonesia is a signatory of the Multilateral Competent Authority Agreement (MCAA)—an administrative agreement between competent authorities that provides the modalities for AEOI.14 Another key pillar of AEOI is the domestic legislation that effectively translates the reporting and due diligence requirements into domestic law provisions. The Global Forum monitors the CRS implementation of all committed jurisdictions.15 As of December 2016, Indonesia’s primary legislation is considered to be in place to enable submission of first CRS reports on September 2018. Other requirements, such as secondary legislation, will need to be addressed.

References

    Ernst and Young2016Global Tax Alert, The Latest on BEPS,EY Global Tax Alert LibraryJuly. Available via the Internet: http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-5_July_2016/$FILE/2016G_01922-161Gbl_The%20Latest%20on%20BEPS%20-%205%20July%202016.pdf.

    Global Forum2014Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Indonesia 2014 (Paris). Available via the Internet: http://www.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer-reviews-indonesia-2014_9789264217737-en;jsessionid_=_3wdcpr0usoh4.x-oecd-live-03

    Organization for Economic Co-operation and Development2015BEPS 2015 Final Reports (Paris). Available via the Internet: http://www.oecd.org/tax/beps-2015-final-reports.htm.

    Reuters2016Indonesia: Google Nears Tax Settlement with Indonesian Government,Reuters Technology News November 23 2016. Available via the Internet: http://www.reuters.com/article/us-indonesia-google-tax-idUSKBN13I0H6.

Prepared by Thornton Matheson, Narine Nersesyan (both FAD), and Michael Kobetsky (Consultant, FAD).

See for example F. Barthel, M. Busse and E. Neumayer, 2009, “The Impact of Double Taxation Treaties on Foreign Direct Investment: Evidence from large Dyadic Panel Data,” Contemporary Economic Policy, Vol. 28, Issue 3, pp. 366–377; and B. Blonigen, L. Oldenski, and N. Sly, 2011, “Separating the Opposing Effects of Bilateral Tax Treaties,” NBER Working Paper No. 17480; and P. Egger, and V. Merlo, 2011, “Statutory Corporate Tax Rates and Double-Taxation Treaties as Determinants of Multinational Firm Activity,” FinanzArchiv, Vol. 67, Issue 2, pp. 145–170.

A CFC is a foreign company in which an Indonesian resident, either alone or jointly with other resident taxpayer(s), holds at least 50 percent of registered capital.

MOF Regulation 256/PMK.03/2008 and implementing DGT regulation PER-59/PJ/2010.

This would arise where there was, for example, an evidence of email messages or directions from residents controlling the CFC and the directors were following the directions.

MOF Regulation 169/PMK.010/2015.

Debt includes both short-term and long-term debts as well as interest-bearing trade payable. Both, the related party loans and loans from independent lenders are included.

Simulations of tax revenue that could have been “recovered” had Indonesia imposed, for example, a 30 percent EBITDA rule in the year the data was reported, shows additional revenue in the order of 15.4 percent of the total tax revenue paid by the firms in the database. Similar simulations for 20 percent and 10 percent of EBITDA rule show 19.3 percent and 26.8 percent of “recovered tax,” respectively. The results of the simulations should be interpreted with extreme caution as no behavioral response has been assumed—an unlikely outcome as corporations would be expected to adjust their tax planning strategy as a consequence of a stricter rules.

Master file will contain a high-level information on global MNE business operations and transfer pricing policies; it will be available to all relevant country tax administrations. Local file will require more transactional transfer pricing documentation in each country. CbC reports should be filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information.

The Minister of Finance is the designated competent authority, delegated to the Director of Tax Regulation II of the DGT.

That includes Article 32A of ITL (No. 36 of 2008), Article 59 of government regulation No. 74/2011 (with reference to Law No. 16/2009), and Ministry of Finance Regulation No. 60/PMK.03/2014 as last amended Ministry of Finance Regulation No. 125/PMK.010/2015.

The Convention is effective from May 2015.

More specifically, the CRS MCAA defines the scope, timing, procedures, and safeguards according to which the AEOI should take place.

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