Guide to The Singapore-Indonesia Double Tax Treaty
For international investors in search of the next major growth market, Indonesia is proving an increasingly strong candidate. As the largest economy and the most populated nation in South East Asia and an annual growth rate averaging over 5 per cent in the previous three years, foreign investors have a lot to be interested in. Where other regional economies suffered quite severely during and in the wake of the Global Financial Crisis, Indonesia was fortunate enough to emerge largely unscathed, retaining high growth rates (the third fastest growing in the Group of Twenty).
Rich deposits of natural resources such as petroleum and natural gas as well as metals such as gold, tin, lead and copper have remained a key focus for international investors and conglomerates. That said, while the country retains vast mineral and natural wealth and continues to exploit it, the economy is diversifying and focus is shifting to put greater emphasis on the Indonesian consumer. As recently as Q4 2015, foreign direct investment rose to a record-breaking 99.2 trillion rupiah, or more than S$10 billion. With a large population of more than 255 million, a young workforce and an ascendant middle class, consumer-focused investments are proving increasingly attractive to enterprise around the world. Boston Consulting Group has projected that the number of affluent and middle-class consumers in Indonesia would reach 141 million by 2020.
Critically for business, the unit labour cost of the nation is still far below that of conventional destinations such as Vietnam, India or China. Combined with the easing of licensing processes and government efforts to reduce the amount of red tape faced by new companies, looks set to improve Indonesia’s manufacturing competitiveness immensely. Indonesia is becoming a key investment destination in the ASEAN community and in the broader South East Asian neighbourhood.
The Singapore-Indonesia bilateral relationship
With a status as a world-class city state and an impeccable reputation as a leading regional hub for trade and investment, Singapore is better equipped than most other nations on earth to best access Indonesia’s economic potential. The strong bilateral relationship between the two nations is underpinned by consistent and friendly economic cooperation. Singapore has long been a key foreign investor for Indonesia, and investment seeking opportunities are only set to improve as Indonesia’s investment climate improves. Singapore has been a top investor in the country for years, and are close working partners in the ASEAN community.
To maintain its status as global economic and investment powerhouse, Singapore is constantly developing a network of treaty arrangements with business hubs in the region and around the world. The Singapore-Indonesia Double Tax Agreement (DTA) is one treaty arrangements written to protect investors and entrepreneurs in the contracting countries from double taxation and to ensure all benefit from attractive tax positions when trading or operating across borders.
What follows is a brief overview of the scope and content of the DTA.
Specifics of the Singapore-Indonesia DTA
This agreement between the Government of the Republic of Indonesia and the Government of the Republic of Singapore was concluded on 8 May 1990, and came into force on 25 January 1991.
Scope and extent of the double taxation agreement
The provisions of the DTA are to apply to persons who residents for tax purposes of one or both of the Contracting States. ‘Person’ here is used to refer to any individual, company or other bodies of persons treated as a singular entity for the purposes of taxation.
The provisions of the DTA are to apply to all taxes imposed on income on behalf of a Contracting State by the relevant tax authority. In Singapore, the agreement is to cover income tax. In Indonesia, the provisions are to apply to income tax and – to the extent provided in such income tax – the company tax and the tax on interest, dividends and royalties
The term ‘resident of a Contracting State’ refers to any person resident in a Contracting State for the purposes of taxation by that Contracting State. Permanent establishments of foreign enterprise treated as a tax resident are not included under this term. Where an individual is a resident of both countries, the location of their permanent home shall determine their tax residency. Should their permanent home be in both or neither country, the centre of vital interest shall determine their tax residency. Should neither the permanent home nor centre of vital interest tests determine their tax residency, the habitual abode of the individual shall determine their residency. Where they do not have a habitual abode in either country, then the nationality of the individual shall determine residency. Should the resident be a national of both or neither country, residency is to be determined through mutual agreement of the Contracting States.
Where a person is simultaneously not an individual and a resident of both contracting states, residency is to be determined by the location of the individual’s placed of effective management. Should there be any doubt about this, the respective tax authorities of the Contracting States shall determine the residency of the individual through mutual agreement after consideration of all relevant factors.
The fixed place of business through which an enterprise’s business is partly or wholly carried out is referred to as a ‘Permanent Establishment’ (PE). A PE can be a number of different locations or properties, including offices, factories, workshops, drilling rigs and other installations, or places of extraction of natural resources including oil wells, mines, quarries, et cetera. Only where a construction, installation or assembly project or building site lasts more than 183 days will it qualify as a Permanent Establishment.
Where services or consulting services are furnished by an enterprise through employees or other persons for an aggregate period greater than 90 days within a period of 12 months shall that furnishing constitute a Permanent Establishment. Where storage facilities are held by the enterprise for certain purposes such as goods storage for display, delivery, processing, etc., those storage facilities shall not constitute a PE. Maintenance of a fixed place for the purpose of the performance of activities of a preparatory or auxiliary character shall also not amount to a PE.
Where an enterprise carries on supervisory activities in the Contracting State in which it is not resident for a period greater than six months related to an assembly, installation or construction project undertaken in the State in which it is not resident, it shall be said to have a PE in that State.
Engagement of a broker, general commission agent or any other independent agent for the purposes of carrying business in either Contracting State shall not amount to a PE. Where the agent’s actions are devoted either wholly or almost wholly to the purposes of the enterprise and, additionally, habitually exercises the authority to conclude contracts with third parties on behalf of the enterprise, then the agent is deemed to be a PE. Where the agent’s activities are considered auxiliary in nature they shall not amount to a PE.
The control of a resident company of a Contracting State by a resident company of the other Contracting State shall not solely constitute a PE for either company.
Where a resident company of a Contracting State pays dividends to a resident company of the other Contracting State, those dividends may be taxed in the other State. Dividend income may be subject to taxation at the point of source (i.e. the Contracting State in which the company paying the dividends is a resident for tax purposes). Where the individual receiving the dividend payment is both the beneficial owner and a resident of the other Contracting State, the tax charged at the country of source is not to exceed:
- 10 per cent of the gross dividend amount where the recipient is a company in possession of a minimum of 25 per cent of the capital of the paying company;
- 15 per cent of the gross dividend amount in all situations where the above criteria is not met.
This provision is not to apply in situations where the recipient of the dividend payment has a Permanent Establishment in the same Contracting State in which the paying company is resident and the payment of the dividend is effectively connected to that Permanent Establishment. Where this occurs, the dividend payment is to be treated as a Business Profit and subjected to the appropriate taxation.
Interest paid to a resident of a Contracting State that arises in the other Contracting State is eligible for taxation at the point it is received. Interest may also be taxed in the Contracting State in which it arises. Please note that where the recipient of the interest payment is a beneficial owner of the interest, any tax charged is not to exceed 10 per cent of the gross interest amount. Interest derived in a Contracting State by the government of the other Contracting State is to be exempt from taxation by the first Contracting State. Only under the following circumstances shall interest arising in one Contracting State be taxable in another:
- Where the interest has been paid in respect of a bond, debenture or other similar obligation of the government, local authority or political subdivision of a Contracting State, or
- Where the interest has been paid in respect of a loan or credit made, guaranteed or insured by the Central Bank of Indonesia or the Monetary Authority of Singapore or any other similar lending institution as defined through agreement between the competent authorities of the Contracting States.
The above provisions are not to apply where the beneficial owner of the interest is in possession of a Permanent Establishment or fixed base in the same Contracting State in which the person paying is resident, and the interest received is effectively connected with the aforementioned PE or fixed base.
Additionally, should a special relationship exist between the recipient and the payer resulting in an amount of interest paid that would be in excess of what would have been paid in the absence of such a relationship, the provision of the double taxation treaty is only to apply to the amount that would have otherwise been paid and nothing in excess. Excess amounts are to be taxed according to each Contracting State’s laws.
Where a resident of a Contracting State receives royalties arising in another Contracting State, the royalties may be taxed in the country of residence of the recipient. Where the payer of a royalty is a resident of the Contracting State, the royalty payment is said to have arisen in that Contracting State. Royalties may additionally be taxed in the State in which they arise, according to the laws of that State. Where royalties are taxed in the State in which they arise, the tax levied shall not exceed 15 per cent of the gross royalty amount where the recipient is the beneficial owner of the royalties. Royalties are considered to be payments of any kind that were received by way of compensation for the right to use or use of any copy right patent, trademark, design or model, plan, et cetera.
Should a special relationship exist between the payer and the recipient of the royalty that results in the royalties being paid exceeding the amount that would have otherwise been paid in the absence of such a relationship, the provision of the treaty is only to apply to that amount that would have otherwise been paid. Any royalty amount in excess of this is to be taxed in accordance with the respective laws of each Contracting State.
The double taxation treaty between Indonesia and Singapore does not make reference to capital gains. Capital gains would thus be subject to the respective domestic tax laws of each Contracting State, as determined by Article 21 (i.e., income not expressly mentioned). In short, where the source for capital gains is Indonesia, Indonesia shall have the right of taxation. Singapore does not levy a tax on capital gains.
Profits derived by an enterprise of a Contracting State are only eligible for taxation in the State in which the enterprise is resident unless in situations where the enterprise conducts business in the other Contracting State through the operation of a Permanent Enterprise situated therein. The other Contracting State has the right of taxation on only the portion of the profit effectively attributable to the operations of the Permanent Enterprise. The Permanent Establishment is to be allowed all expenses that could be reasonably attributed or deducted were the PE an independent enterprise. The profits of the PE are to be determined as if it were a separate and distinct enterprise from its parent enterprise, engaged in same or similar activities under same or similar operating conditions, and dealing wholly independent with the parent enterprise.
Profits resulting from the mere purchase of merchandise or goods by a Permanent Establishment for the use or sale by the enterprise does are not attributable to that PE. Any attribution of profit to the Permanent Establishment must be made by the same method for each year, unless in situations where there is a valid reason for differentiation. Where information provided to the competent authority is insufficient or inadequate, the provisions of the double taxation agreement are not to impede the discretion of the competent authority nor the laws of the Contracting State.
Income from Property
Where a resident of a Contracting State derives income from an immovable property located in the other Contracting State, the other Contracting State shall have the right of taxation. Income resulting from immovable property that is used for the performance of independent personal services or owned by an enterprise is also covered by this provision. Income derived from immovable property through direct use, letting, or use in any other capacity is covered by the terms of the double taxation agreement.
‘Immovable property’ refers to properties defined by the respective laws of the Contracting State and the definition will vary depending on where the property is located. It is to include any accessories, equipment, livestock, rights and usufruct associated with the immovable property and any rights to receive fixed or variable payments as consideration for the right to work or working of mineral deposits, sources and other natural resources.
Please note that ships and aircraft are not to be considered immovable property.
Income Resulting from the Operation of Shipping and Air Transportation
Where an enterprise resident in a Contracting State derives income from the operation of aircraft in international traffic, only the Contracting State in which that enterprise is resident shall have the right to taxation. Any tax imposed by the other Contracting State shall be reduced by an amount equal to 50 per cent. Only the share of income derived by an enterprise’s participation in a pool, joint business or international operating agency through their operation of ships or aircraft is covered by the provision.
Associated enterprises are defined as a situation wherein one enterprise resident in a Contracting State participates either indirectly or directly in the management, control or capital of an enterprise resident in the other Contracting State. The profitability and income of the associated enterprises will be affected by the differing terms and conditions of transactions and operations between the individual enterprises. Under the provision of the double taxation agreement, the Contracting States may deem a taxable income for associated enterprises that would have otherwise been accrued were the enterprises independent. This new taxable income will then be subject to the appropriate taxation.
Performance of Independent Personal Services
Where a resident of a Contracting Sate derives income from the performance of personal services or any other activities of an independent character, that income shall only be eligible for taxation in the Contracting State in which the individual is resident. The other Contracting State may tax the income where the individual was present in the other Contracting State for a period or number of periods in a 12-month period exceeding in the aggregate 90 days. The other Contracting State only has right of taxation for the portion of income attributable to the individual’s stay and activities performed in the State. ‘Professional services’ refers to independent literary, educational, artistic, teaching and scientific activities as well as any independent activities undertaken by engineers, architects, lawyers, physicians, dentists and accountants.
Dependent Personal Service
An individual deriving salaries, wages or any other similar remuneration for employment shall only be taxed by the Contracting State in which they are resident unless they exercise their employment in the other Contracting State, in which case they may be eligible for taxation in the other Contracting State under certain circumstances. Even where the employment is exercised in the other Contracting State, the individual shall only be taxed in the Contracting State in which they are resident in the following circumstances:
- the individual is not present in the other state for a period or number of periods not exceeding in the aggregate 183 days in a calendar year; and
- remuneration has been paid by or on behalf of an employer resident in the same Contracting State as the recipient; and
- the remuneration has not been borne by a Permanent Establishment in the other State held by the individual’s employer.
A resident of a Contracting State receiving directors’ fees and similar payments in their capacity as a member of the board of directors of an enterprise resident in the other Contracting State may be eligible for taxation in that other State.
Sportspeople, Entertainers and Artists
A resident of a Contracting State deriving income from their personal activities as an entertainer such as a sportsperson, musician or as a theatre, radio, motion picture or television artiste exercised in the other Contracting State may be eligible for taxation in that other State. Such income may be exempt from taxation should they be accrued as a result of activities exercised in a Contracting State under a mutually agree exchange program, or were substantially supported by public funds of the Government, a local authority, a political subdivision, or a statutory body of the other Contracting State.
A resident of a Contracting State receiving a pension or other such remuneration that arises in the other Contracting State as consideration for past employment may be eligible for taxation in the other Contracting State (i.e. the source of the payments).
Payments Received as Remuneration for Government Service
An individual receiving payments in the form of salaries, wages or other remuneration paid by a Contracting State, or a political subdivision, local authority, or statutory body of the same in respect of services rendered to that State or organisation would be eligible for taxation by that paying State.
Such remuneration may be taxable solely in the other Contracting State should the individual be a) rendering their services in that state, b) resident in the other State, c) a national of the other State and d) their residency is not solely for the purpose of their rendering this services.
Trainees and Students
Students or trainees who are resident of a Contracting State and visiting the other Contracting State solely for the purposes of receiving education or training are to be exempt from taxation in the other state on all remittances and grants received from abroad, and on any remuneration not in excess of US$2,200 per annum received in respect of services provided in that other State, as long as those services are performed in connection their study, research or training are or are necessary for the purposes of the student or trainee’s maintenance.
Elimination of Double Taxation
The double taxation agreement between Indonesia and Singapore provides relief for individuals where their income is subject to tax in both Contracting States. For Indonesian residents, any Singaporean tax payable on income derived from a Singapore source may be admitted as a credit against any Indonesian tax payable on the same income. For Singapore residents, Indonesian tax payable on income derived from an Indonesian source may be admitted as a credit against any Singapore tax payable on that same income. Credits provided may not exceed the respective country’s tax as calculated prior to the granting of the credit.
Singapore’s domestic tax system offers a number of highly attractive features for investors looking abroad for wealth opportunities. With tax friendly policies including exemptions on foreign dividends and certain foreign income, a lack of withholding tax on dividends paid to non-residents of Singapore and no capital gains tax, our city is one of the most competitive and attractive centres of business in the world, and is a coveted location for holding companies.
In combination with an extensive network of double taxation agreements – including with Indonesia – Singapore offers a number of advantages from an international tax planning perspective.
For more details on this tax treaty, please refer to the IRAS Website.
For a broad overview on the DTAs Singapore is a party to, please refer to Ottavia’s guide on Singapore’s Double Taxation Agreements.