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Tax Alert the New Tax Treaty Between Singapore and Indonesia

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Tax Alert the New Tax Treaty Between Singapore and Indonesia Tax Alert ISSUE 03 | MARCH 2020 The New Tax Treaty between Singapore and Indonesia: Capital Gains Protection included at last! On 4 February 2020, Singapore and Indonesia dividend and interest income, which remain 10% signed an updated Avoidance of Double Taxation to15% for dividends and 10% for interest. It is Agreement (treaty). The new treaty will enter somewhat disappointing that there was no into force after it has been ratified by both reduction in the dividend WHT rate of 10% for countries, with the earliest possible date of substantial shareholdings to match the Hong effect being 1 January 2021 if ratified by both Kong – Indonesia tax treaty. Nevertheless, there countries during the course of the year 2020. are some positive changes which are set out Many of the existing treaty provisions continue, below. including the withholding tax (WHT) rates on 1. Introduction of a Capital Gains Article – impose up to 10% WHT on such income, as on any Including Protection from Indonesian Tax on other interest income. Sales of Indonesian Shares and Bonds While this will not affect Indonesian Government The existing treaty doesn’t have a capital gains article bonds that are issued offshore, as these already and hence does not restrict Indonesia’s ability to enjoy an exemption from interest WHT under impose taxes on Singaporean sellers of Indonesian Indonesian domestic law, it will impact Indonesian assets, including shares and bonds. This has long Government bonds that are issued in Indonesia; been a disadvantage of the Singapore – Indonesia tax hence, Singapore investors should take note of the treaty when compared to other Indonesian tax potential for increased interest WHT on their treaties, particularly as Indonesian domestic law Indonesian bond investments when the new treaty imposes a 5% WHT on gross proceeds for the sale of takes effect. unlisted shares sold by Singapore tax residents. 4. Branch Profit Tax Rate reduced from 15% The new treaty has addressed this issue by including to 10% a capital gains article (Article 13), which grants Indonesia imposes a 20% WHT rate on the after-tax Singapore the sole taxing right on gains from the sale distributions of Indonesian permanent of assets and shares, other than gains from the sale establishments. The treaty rate has been reduced of: from 15% to 10%. Note, however that the branches • immovable property, or shares in majority owned of Indonesian upstream production sharing contracts unlisted land-rich companies (other than where the and mining contracts of work are specifically immovable property is used in the business of the excluded from this rate reduction. Indonesian company and / or the transfer occurs as part of a group re-organization); 5. Removal of Limitation of Relief to • moveable property forming part of the business Remitted Income property of a permanent establishment; and Under the existing treaty, treaty benefits are granted to a Singapore resident only in respect of income that • Indonesian listed shares. is remitted to or received in Singapore. The new As a result, under the new treaty sales of shares in treaty does not include a similar limitation of relief Indonesian private limited companies and Indonesian provision. Considering that Singapore only taxes bonds by Singapore tax resident sellers should be certain foreign source income (e.g. interest income) taxable in Singapore only (so the 5% Indonesia WHT upon remittance into Singapore, the removal of the on sale of shares should no longer apply). requirement to remit into Singapore in order to enjoy The introduction of this article has long been called the treaty rate is a positive change. for and further enhances Singapore’s attractiveness 6. Introduction of the Principal Purpose Test as a jurisdiction from which to invest into Indonesia. The new treaty adopts the Principal Purpose Test 2. Reduction in Royalty WHT Rate from 15% (PPT), according to which a treaty benefit shall not be to 10% / 8% granted if obtaining that benefit was one of the Indonesia imposes a 20% WHT under domestic law principal purposes of any arrangement or transaction on payments of royalties to non-residents. Under the that resulted in that benefit. As Indonesia ratified the existing treaty this rate is reduced to 15% regardless MLI on 12 November 2019 (but has not yet deposited of the type of royalty. Under the new treaty, the rate its instrument of ratification with the OECD), the PPT of WHT has been reduced to: may become applicable to the current treaty between Singapore and Indonesia even before the new treaty • 10% on payments for the use of, or right to use, enters into force. copyright, any patent, trademark, design or model, plan, secret formula or process; and However, Indonesia has already long applied an effective PPT, along with a number of substance and • 8% for the use of, right to use, industrial, beneficial ownership tests, through its requirement commercial or scientific equipment or knowledge. that foreign claimants of treaty benefits complete the The reduction in royalty WHT rate is certainly a Form DGT. Hence, this change should not lead to a positive development for Singapore businesses significant burden for investors who have invested in seeking to license IP or lease equipment into Indonesia through Singapore due to valid commercial Indonesia. That said, at 8% the WHT rate on reasons. equipment lease payments still remains prohibitively high for the lessors of aircraft and ships to Indonesia. 7. Exchange of Information The new treaty expands the exchange of information 3. Interest on Government Bonds – Removal between Singapore and Indonesia in several ways. of Treaty Exemption The expanded exchange of information provision will Under the current treaty, interest paid on government become effective for requests made on or after the bonds or debentures are not subject to WHT in the entry of the new treaty into force. source country. Under the new treaty, this exemption is discontinued, so that the source country may KPMG observations This Tax Alert only seeks to highlight some of the key 2. Royalty WHT rate will be reduced; and changes, while further issues and interpretations may 3. Treaty relief will no longer be limited to income be identified going forward. remitted to Singapore. In general, the new treaty will make Singapore an even However, some amendments may adversely affect the more attractive base for investing into Indonesia, tax position of specific taxpayers. among others, for the following reasons: We welcome the opportunity to assist you in assessing 1. Investors from Singapore will benefit from tax the impact of the new treaty and tax laws on your exemption on capital gains arising in Indonesia structure and operations, including opportunities arising from the sale of movable property and shares, from the changes. under the conditions specified above; About Tax Alert KPMG Tax Alert highlights the latest tax developments, impending change to laws or regulations, current practices and potential problem areas that may impact your company. As certain issues discussed herein are time sensitive it is advisable to make plans accordingly. Tax Alert is issued exclusively for the information of clients and staff of KPMG Services Pte. Ltd. and should not be used or relied upon as a substitute for detailed advice or a basis for formulating business decisions. Authors Gordon Lawson Alia Lum Steven Solomon Partner Partner Director T: +65 6213 2864 T: +65 6213 3203 Indonesia Tax Desk E: [email protected] E: [email protected] T: +65 6213 2926 E: [email protected] Contact us Tay Hong Beng Ajay K Sanganeria BANKING & INSURANCE Partner Partner Alan Lau Head of Tax Deputy Head of Tax Partner T: +65 6213 2565 T: +65 6213 2292 T: +65 6213 2027 E: [email protected] E: [email protected] E: [email protected] REAL ESTATE & ASSET MANAGEMENT Teo Wee Hwee Agnes Lo Anulekha Samant Partner Partner Partner T: +65 6213 2166 T: +65 6213 2976 T: +65 6213 3595 E: [email protected] E: [email protected] E: [email protected] Leonard Ong Partner T: +65 6213 2038 E: [email protected] ENERGY, TECHNOLOGY, MEDIA & TELECOMMUNICATION Gordon Lawson Larry Sim Lim Li Peng Partner Partner Partner T: +65 6213 2864 T: +65 6213 2261 T: +65 6213 3709 E: [email protected] E: [email protected] E: [email protected] Contact us INFRASTRUCTURE, GOVERNMENT & HEALTHCARE Chiu Wu Hong Gan Kwee Lian Toh Boon Ngee Partner Partner Partner T: +65 6213 2569 T: +65 6213 2546 T: +65 6213 2052 E: [email protected] E: [email protected] E: [email protected] CONSUMER & RETAIL Tan Chee Wei Partner T: +65 6213 2470 E: [email protected] CORPORATE TAX PLANNING & COMPLIANCE Mak Oi Leng Pauline Koh Partner Partner T: +65 6213 7319 T: +65 6213 2815 E: [email protected] E: [email protected] PERSONAL TAX & GLOBAL MOBILITY SERVICES Anna Low Dennis McEvoy Partner Partner T: +65 6213 2547 T: +65 6213 2645 E: [email protected] E: [email protected] GOODS AND SERVICES TAX Lam Kok Shang Gan Hwee Leng Partner Partner T: +65 6213 2596 T: +65 6213 2813 E: [email protected] E: [email protected] TRANSFER PRICING Felicia Chia Lee Jingyi Partner Partner T: +65 6213 2525 T: +65 6213 3785 E: [email protected] E: [email protected] PROPERTY TAX & DISPUTE MANAGEMENT R&D & GRANTS CONSULTING Leung Yew Kwong Harvey Koenig Principal Consultant Partner T: +65 6213 2877 T: +65 6213 7383 E: [email protected] E: [email protected] Contact us TAX TRANSFORMATION & GOVERNANCE US TAX SERVICES Alia Lum Daniel Joe Partner Partner T: +65 6213 3203 T: +65 6213 2626 E: [email protected] E: [email protected] TAX – DEALS, M&A Adam Rees Principal Advisor T: +65 6213 2961 E: [email protected] KPMG Ranked Tier 1 Firm in Singapore – World Tax, World Transfer Pricing and Tax 16 Raffles Quay #22-00 Transactional 2019, International Tax Review Hong Leong Building National Transfer Pricing Firm of the Year – Asia Tax Awards, 2018 & 2019, Singapore 048581 International Tax Review T: +65 6213 3388 Withholding Tax Team of the Year – Asia Tax Awards 2019, International Tax F: +65 6220 9419 Review E: [email protected] For more information, please view our tax services page.
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