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How the Indonesia-Netherlands Tax Treaty Enables Tax Avoidance an Analysis of the Treaty and Indonesian Court Decisions on Corporate Tax Disputes

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How the Indonesia-Netherlands Tax Treaty Enables Tax Avoidance an Analysis of the Treaty and Indonesian Court Decisions on Corporate Tax Disputes How the Indonesia-Netherlands tax treaty enables tax avoidance An analysis of the treaty and Indonesian court decisions on corporate tax disputes Perkumpulan Prakarsa & SOMO August 2019 Colophon How the Indonesia-Netherlands tax treaty enables tax avoidance An analysis of the treaty and Indonesian court decisions on tax disputes August 2019 Authors: The authors wish to thank their former colleagues Cut Nurul Aidha & Ah Maftuchan (Prakarsa), Maria Lauranti (formerly Prakarsa), Katrin Maarten Hietland & Jasper van Teeffelen (SOMO) McGauran and Indra Römgens (formerly SOMO) Layout: Frans Schupp who initiated this report and were responsible Cover photo: Ferry Octavian for much of the research and report writing. Acknowledgements Published by We would like to thank Nurkholis Hidiyat for his analysis of the tax treaty court cases and Indonesia tax law. Special thanks are due to a number of reviewers of the report, notably, Stichting Onderzoek Multinationale Ahmad Sadiq Urwah (Indonesian Ministry Ondernemingen of Finance), Martin Hearson (Institute of Centre for Research on Multinational Development Studies), Bart Kosters (IBFD), Corporations Francis Weyzig (Oxfam Novib), Geerten Michielse (Professor in Tax Law), Rachel Saw (IBFD, Sarphatistraat 30, 1018 GL Amsterdam Asia Division) and Victoria Franggidae, Widya The Netherlands Kartika, Dia Mawesti, and Rahmanda M. Thaariq T: +31 (0)20 639 12 91 from Prakarsa. [email protected] | www.somo.nl Financed by This publication was made possible with financial assistance from the Dutch Ministry of Foreign Affairs. The content of this publication is the sole responsibility of SOMO and Prakarsa and can in no way be taken to reflect the views of the Perkumpulan Prakarsa Dutch Ministry of Foreign Affairs. Jln. Rawa Bambu I Blok A No. 8-E RT 010 RW 06 Kel/Kec. Pasar Minggu – Jakarta Selatan 12520 Indonesia T: +62-21-7811-798 | F: +62-21-7811-897 [email protected] theprakarsa.org How the Indonesia-Netherlands tax treaty enables tax avoidance An analysis of the treaty and Indonesian court decisions on tax disputes Perkumpulan Prakarsa and SOMO Cut Nurul Aidha & Ah Maftuchan Maarten Hietland & Jasper van Teeffelen Amsterdam, August 2019 Contents Executive Summary ..................................................................................................... 7 1 Introduction ........................................................................................................ 10 2 Research methodology .......................................................................................... 13 3 Tax treaties and tax avoidance in Indonesia ............................................................... 18 3.1 Tax treaties and the need for reform................................................................... 18 3.2 Taxation, democracy and economic equality ........................................................ 21 3.3 The importance of taxation for women’s rights ..................................................... 22 3.4 The problem of corporate tax compliance in Indonesia ........................................... 23 3.5 Evidence of tax avoidance schemes used in Indonesia ........................................... 25 3.6 The role of tax treaties in tax avoidance in Indonesia .............................................. 28 4 The Netherlands: a conduit country ......................................................................... 30 4.1 The Netherlands as offshore financial centre: FDI in relation to GDP .......................... 30 4.2 What makes the Dutch tax regime so attractive? ................................................... 34 4.2.1 Substance requirements .................................................................................. 34 4.2.2 Participation exemption .................................................................................. 36 4.2.3 Tax treaties .................................................................................................. 36 4.2.4 No withholding taxes on outgoing payments ....................................................... 36 4.2.5 Tax rulings (advance agreements between the revenue authority and large taxpayers) .... 37 4.2.6 Fiscal unity ................................................................................................... 38 4.2.7 Corporate legal forms ..................................................................................... 38 4.3 Tax treaty policy of the Netherlands ................................................................... 40 4.4 The 2015 Protocol and OECD BEPS Multilateral Tax Convention ............................... 41 5 The Indonesia-Netherlands tax treaty and Indonesian tax law ........................................ 45 5.1 History of the Indonesia-Netherlands tax treaty ..................................................... 45 5.2 Indonesia’s tax law system .............................................................................. 49 5.2.1 Application of the treaty in practice ................................................................... 55 6 Analysis of 27 court decisions in Indonesia on corporate abuse of the treaty .................... 58 6.1 Main issues raised and relevant treaty articles in selected tax disputes ....................... 60 6.1.1 Incorrect use of Certificate of Domicile (tax residency) granted by the Dutch authorities . 60 6.1.2 Problems with beneficial ownership (article 11 DTA) ............................................... 61 6.1.3 National law vs. treaty law ............................................................................... 66 6.1.4 Disputes regarding dividends (Article 10 DTA) ...................................................... 67 6.1.5 Royalties (Article 12 DTA) ................................................................................ 68 6.1.6 Taxing business profits (Article 7) of a permanent establishment (Article 5)..................... 69 6.2 Why did the Indonesian tax authorities lose most tax cases in court? .......................... 70 2 7 How telecommunications company Indosat used the Netherlands-Indonesia tax treaty for tax avoidance purposes ..................................................................................... 72 8 Conclusion and recommendations ............................................................................ 76 8.1 The Indonesia-Netherlands tax treaty is one of Indonesia’s biggest tax leaks ................ 76 8.2 Tax treaties are outdated and lead to revenue losses .............................................. 78 8.3 The introduction of the MLI .............................................................................. 78 8.4 Domestic reforms are needed in Indonesia and the Netherlands ............................... 79 8.5 Policy recommendations – Indonesia .................................................................. 80 8.6 Policy recommendations – the Netherlands .......................................................... 83 Bibliography ............................................................................................................ 84 Annex ..................................................................................................................... 89 3 List of Figures Figure 1 Simplified treaty shopping scenario .................................................................... 11 Figure 2 Indonesian government revenues (2014-2018) ...................................................... 23 Figure 3 Treaty shopping through Dutch loan financing scheme ............................................ 27 Figure 4 Inward direct investment, top 10 reporting economies, 2017 (IMF) ............................. 31 Figure 5 Dutch investments in Indonesia through mailbox companies in million US$ .................. 33 Figure 6 Dutch conduit structure ................................................................................... 39 Figure 7 Tax dispute decision-making tree ....................................................................... 53 Figure 8 Hierarchy of laws in Indonesia ........................................................................... 54 Figure 9 Indosat financing structure ............................................................................... 73 Tables Table 1 Direct investment from and to the Netherlands. Top five source and destination countries ...32 Table 2 Changes between DTA 1973, DTA 1993, DTA 2002, Protocol 2015 .............................. 47 Table 3 Number of tax disputes filed 2012 - 2018 .............................................................. 51 Table 4 Tax Dispute Settlements in Indonesian Tax Court 2012-2018 ...................................... 52 Table 5 Percentage dispute outcomes of total 2012 - 2018 .................................................. 52 Table 6 List of tax dispute decisions and their outcomes (2010-2015) ...................................... 58 Table 7 Withholding tax rates applicable under Indonesian tax treaties (2018) .......................... 89 Table 8 Inward Direct Investment Positions into Indonesia (USD billion, rounded off) (Top 10 Counterpart Economies) ������������������������������������������������������������������������� 91 Table 9 Inward and outward direct investment, top 10 reporting countries (Billion US Dollar, rounded off) ............................................................................ 91 Table 10 Detailed changes between DTA 1973, DTA 1993, DTA 2002, Protocol 2015 ................. 92 Boxes Box 1 Dutch substance requirements
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