A revised double tax agreement (DTA) between Singapore and Indonesia DTA was brought into force on 23 July following ratification by both parties and will be effective as of 1 January 2022. The new treaty, signed in February 2020, will replace the existing DTA between the two countries that has been in effect since 1992.
The updated DTA lowers the withholding tax rates for royalties and branch profits and provides for tax exemption in the source state for certain capital gains. The withholding tax rates for interest and dividends under the updated DTA will generally remain unchanged. It also incorporates internationally agreed standards to counter treaty abuse.
The revised treaty will benefit businesses in both Singapore and Indonesia, as well as boost bilateral trade and investment flows between the two countries. Key changes include:
- Royalties – The maximum withholding tax rate for royalties under Article 12 will be lowered from the existing rate of 15% to the new rates of either: 10% %, for the use of or the right to copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process; or 8% for the use of or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
- Capital gains – The introduction of a new Article 13 will allocate taxing rights on capital gains from the sale of assets and shares in Indonesian private companies to the investor’s country of residence. Capital gains arising from disposals of immovable property and movable business property will be taxed in the state where such property is situated. This means that Singapore resident investors should be relieved from the current 5% tax under Indonesian domestic law on the gross proceeds from the sale of unlisted qualifying equity investments held by a foreign shareholder. There should be no Singapore tax exposure on remittance of capital gains because there is no capital gains tax in Singapore.
- Branch Profits Tax – Any additional tax that is imposed on the after-tax profits of a permanent establishment (PE) is reduced from 15% to 10%. The reduced tax rate of 10% does not apply to PE profits from production sharing contracts relating to oil and gas, and contract of works for other mining sectors.
- Anti-Tax Avoidance – The updated DTA introduces anti-avoidance provisions in line with recent updates to the OECD Model contained in the Multilateral Instrument (MLI) under the Base Erosion and Profit Shifting (BEPS) project. These place a greater emphasis on the requirement for substance to claim treaty benefits. Article 22 of the existing DTA only imposed a limitation of relief, which required income from the country of source to be remitted into, or received in, the country of residence for the tax treaty to apply. A new Article 28 provides that a party may not avail treaty benefits in respect of an arrangement or transaction where one of the ‘principal purposes’ of the arrangement or transaction is to obtain that benefit. This is a general anti-abuse rule also known as the Principal Purpose Test (PPT), as set out in the MLI.
- Exchange of Information – Article 26 on the exchange of information for tax purposes (EOI) has been brought in alignment with the OECD Model and international tax developments by adopting a broader test of ‘foreseeable relevance’ in place of the existing test of ‘necessity’. The scope of Article 26 has also been expanded to cover all information relating to the administration or enforcement of domestic laws concerning all types of taxes, rather than only items covered by the DTA.
Singapore is ranked as the top foreign investor in Indonesia and is often utilised as a holding jurisdiction for investing in Indonesia. The changes in the updated Singapore-Indonesia DTA should further enhance the flow of investments.
In addition to the reduced withholding tax rates on royalties and branch profits, capital gains from qualifying equity investments by Singapore tax resident investors should no longer be subject to tax under Indonesian domestic law on gross proceeds from the sale of unlisted shares. The removal of the limitation of relief article should also provide foreign investors with wider structuring options and the option to reinvest the income and/ or gains from investments without the need to remit such income and/ or gains to the investor’s country of residence to enjoy treaty benefits.