A Guide to the Singapore-Indonesia Double Taxation Avoidance Agreement (2023)

Entry

In terms of GDP, Indonesia ranks first as the largest economy in Southeast Asia. The country has access to a substantial and skilled workforce, an excellent location and abundant resources. As in Singapore, Indonesia's exponential growth in recent decades has been attributed to its investment-friendly policies attracting many investors and businesses every year.

Although Indonesia and Singapore have had diplomatic relations for over 50 years, the Singapore-Indonesian tax treaty between the two countries was not legally agreed until 1990. The Indonesia-Singapore Tax Agreement aims to improve bilateral trade and investment between the two nations.

All citizens and companies in both countries can benefit from this Singapore-Indonesia tax treaty if they follow the rules. In addition, the fact that this agreement is comprehensive indicates that it covers all types of taxes and sets out different tax rates applicable in Singapore and Indonesia.

What is the tax deal between Singapore and Indonesia?

In 1992, Indonesia and Singapore signed the Indonesia-Singapore Tax Agreement, which stipulates that all taxes levied on a taxpayer's income in either of the contracting countries must be subject to its provisions. The revised agreement on eliminating double taxation and preventing tax evasion was signed by Singapore and Indo on February 4, 2020 and entered into force on July 23, 2021. The estimates of both governments would increase bilateral trade, which exceeded USD 40 billion in 2019. quantity, improvement.

Main objectives and scope

The double taxation agreement prevents tax avoidance and double taxation and protects taxpayers against their effects. The Singapore-Indonesia Tax Agreement applies to Singaporean or Indonesian resident individuals and companies.

Anyone who is a resident of one or both of the Contracting States shall be subject to the provisions of the Indonesia-Singapore Tax Agreement. "Individual" refers to any person, company or group that is treated as an entity for tax purposes. All taxes levied on income on behalf of a Contracting State shall be governed by the tax laws of Indonesia or Singapore as set forth in the tax treaty. In the case of Indonesia, the rules apply to income tax and, to the extent permitted by that income tax, corporate income tax and tax on interest, dividends and royalties. In the case of Singapore, the agreement includes income tax. It details the tax rates applicable in Singapore to Indonesia and what applies to each person.

Definitions

Residence

Any person who is a resident of a Contracting State for tax purposes of that Contracting State is called a resident of a Contracting State. The term does not refer to the permanent office of a foreign company that is considered resident for tax purposes. If you live in both countries, your tax residency will be assessed based on your permanent residence. For example, if a person is from Indonesia but resides in both Singapore and Indonesia, the Indonesian tax will apply. However, their center of interests will be taken into account if their permanent residence is not in either of the two countries.

Citizenship is taken into account if the person does not have a permanent residence in both countries. Assume that the person is not a Singaporean or Indonesian citizen, has no place of residence or vital interests. In such a case, the Contracting States shall determine by mutual consent the place of residence. If a person other than an individual is a resident of both Contracting States, the State of his place of effective management shall choose him as his domicile. In case of doubt, the competent authorities of the Contracting States shall decide on the stay by consensus, taking into account all relevant facts.

Permanent business unit

The Permanent Establishment Clause is one of the most important parts of the Indonesia-Singapore tax treaty. Permanent business units of Indonesian and Singaporean companies include:

• Office
• Administrative function
• Quarry, mining site or gas or oil well
• The office where the company conducts many of its activities
• Construction or construction project
• factory or workshop

Taxes (Singapore and Indonesia) covered by the Singapore-Indonesian Double Taxation Treaty (DTT)

Regardless of how income taxes are levied, this Agreement will apply if imposed by a Contracting State, one of its political subdivisions or local authorities. All taxes levied on total income or components of income, such as taxes on gains from the sale of movable or immovable property, taxes on the full amount of salaries paid by businesses, and taxes on capital gains, are treated as income taxes.

The following taxes are subject to the agreement:

Income tax (Singapore tax and Indonesian tax)

The Agreement supplements or replaces existing taxes and applies to all identical or substantially equivalent taxes imposed after the date of signing the Agreement. The competent authorities must notify each other of any substantial change in the tax laws of the Contracting States.

Important provisions of the UPO

Dividend taxes

Dividends paid by your company to shareholders resident in a Contracting State other than yours are taxable in that State. However, such a payment may be subject to the maximum tax rate in the country where your business is located.

If the recipient is a company with at least 25% of your company's capital, you will receive 10% of the gross dividend amount or 15% of the gross dividend amount, whichever is greater.

license tax

Royalties shall be taxed accordingly in the other Contracting State if earned in one and received in the other, as is interest in the case of royalties.

Royalties may be taxable in the country where they are spent, depending on the laws of that country. In this scenario, the license fee beneficiary has to pay tax not exceeding 15% of the gross amount.

Capital gains tax

The contract does not mention capital gains. The taxation of capital gains would therefore be determined by each country's national tax laws, Art. 21. In the case of capital gains tax, Indonesia has the right to tax capital gains acquired domestically. Capital gains are not taxable in Singapore. For example, a company that operates in both Singapore and Indonesia and earns capital gains will have to pay capital gains tax in Indonesia but not in Singapore.

Treating company profits

If an enterprise of a Contracting State does not carry on business in the other Contracting State through a permanent establishment, its profits shall be taxable only in that State. However, the other Contracting State may tax only that part of the profits which is directly attributable to the permanent establishment.

Treatment of property income

The clause applies to income from real estate owned by the company and income from real estate used for self-employed personal services. The agreement covers income from the direct use, rental or other use of the property.

Treatment of revenues from sea and air traffic

An enterprise which derives income from the operation of aircraft in a Contracting State shall be taxable only in that Contracting State. For example, if a company operates an airline from Singapore to Indonesia with operations in Singapore, it will be taxed in Singapore. The Indonesian tax rate does not apply.

Note, however, that if the income is taxable in the other Contracting State, the tax withheld in the other Contracting State will be reduced by 50%. These provisions shall apply to any share of income from the operation of ships or aircraft which an enterprise of a Contracting State derives from its participation in an international association, joint venture or agency.

Cooperation with related companies

In the case of associated companies, the Singapore-Indonesia tax treaty provides that the contracting states may treat income that would otherwise be earned if the parties were independent as taxable income and tax the companies after making this assessment.

If a Contracting State taxes the profits of a resident company, those profits are already taxable in the other Contracting State. In this case, the first country argues that this profit would accrue to the company irrespective of the state of the related company. It must adjust the tax levied on those profits accordingly, provided the other country considers the adjustment to be reasonable. The competent authorities of the Contracting States shall consult each other as necessary.

Amendments to the tax treaty between Indonesia and Singapore

On July 23, 2021, the revised Indonesia-Singapore Tax Agreement entered into force, reinforcing efforts to fight tax evasion, broadening the tax base and increasing bilateral investment. The contract update aims to strengthen Singapore's position as a major foreign investment in Indonesia. There are three major changes to the Singapore-Indonesia tax treaty:

Addition of a capital gains tax protection provision

Capital gains were not covered by the previous Singapore-Indonesia tax treaty. The investor's country of residence will be entitled to tax capital gains from the sale of shares and other assets of Indonesian companies under the terms of the new tax treaty.

This exemption does not apply to the sale of real estate, real estate included in the assets of a fixed economic entity or shares in private companies, the value of which is at least 50% derived from real estate. The country where the selling company is based will be taxed on all profits from the sale of ships or aircraft related to the operation of those ships.

As a result, Singaporean investors will no longer be subject to Indonesia's 5% tax on gross proceeds from the sale of equity investments held by a foreign shareholder.

Reduction of withholding tax on royalties in Indonesia and Singapore

The withholding tax in Indonesia is 20% and the same tax in Singapore is 15%. Previously, a 15% withholding tax applied to copyright payments. The new agreement lowered the tax rate.

• 10% for the use of a scientific, artistic or literary work protected by copyright, including cinematographic films or audio or video tapes, as well as patents, trademarks, plans, designs or trade secrets
• 8% goes to the use of equipment or knowledge used in business, industry or science

Industry Profit Tax (BPT) Reduction

The current BPT rate is 10%, lower than the previous rate of 15%. However, the rate does not apply to Singaporean or Indonesian companies or citizens who are parties to contracts related to the mining, oil and gas industries.

Who can benefit from the Singapore-Indonesia Tax Agreement?

The Singapore-Indonesia double tax treaty can be used by both individuals and companies established in one of the two countries and doing other business in the other country.

The Indonesia-Singapore Tax Agreement considers the following types of taxpayers:

• Individuals whose personal income is taxable in Singapore and Indonesia.
• Companies subject to Indonesian and Singaporean taxes on income and other profits.
• Companies of a Contracting State shall be deemed to be taxable in the other Contracting State.
• Taxpayers in Singapore and Indonesia are partnerships, associations and corporations.

The Ministry of Finance in Singapore and the Ministry of Finance in Indonesia are the institutions regulating the manner in which persons and companies are taxed in the Contracting States.

Other treaties between Singapore and Indonesia

Free Trade Agreement

Free trade agreements enable two or more economies to trade and invest more effectively. Singapore and Indonesia participate in the ASEAN Free Trade Area as members of ASEAN. The ASEAN Trade in Goods Agreement (ATIGA) promotes the free movement of goods between member states and reduces trade barriers. It strengthens economic ties between members, lowers the cost of doing business, promotes trade and gives ASEAN companies access to a larger market and significant economies of scale. With the help of ATIGA, 99.65 percent of Singapore and Indonesian goods were no longer subject to ASEAN import duties.

Bilateral agreement between Singapore and Indonesia

BITs or bilateral investment treaties encourage and protect investment between two countries. On October 11, 2018, Singapore and Indonesia signed a Bilateral Investment Treaty (BIT). BIT will strengthen the close economic relationship between Singapore and Indonesia while protecting investors' interests. In addition, the BIT sets out the obligations, rights and dispute resolution procedures for foreign investors from one country doing business in another country. Companies operating from Singapore to Indonesia will benefit from protection and access to international arbitration for investment disputes. Singapore will provide similar investment protection to Indonesian companies operating there.

Application

With at least 100 double tax treaties, Singapore prevents non-resident companies from paying tax twice. Several double tax treaties also provide tax exemptions or credits. The signing of a tax treaty between Singapore and Indonesia reduces tax evasion and increases the efficiency of cross-border trade. The treaty has made taxation fairer for people who have a job outside of Singapore and are entitled to all the benefits of the treaty.