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August 16, 2021
2021-5872

New Indonesia–Singapore tax treaty enters into force

Executive summary

Indonesia and Singapore signed a new tax treaty on 4 February 2020 (New Treaty). The New Treaty was ratified by Indonesia on 11 May 2021 and entered into force on 23 July 2021 after ratification by Singapore. The New Treaty will replace the existing tax treaty that has been in effect since 1992 (Current Treaty) and will take effect for most purposes on 1January 2022.1

Highlights of the New Treaty include:

  • Reduction of the withholding tax rates for royalties and branch profits
  • Introduction of capital gains protection
  • Implementation of the principal purpose test to counter tax treaty abuse.

This Alert summarizes the key changes in the New Treaty.

Detailed discussion

Fiscal domicile (Article 4)

The New Treaty removes the exclusion of a permanent establishment of a foreign enterprise from the residency definition. It also adds a nationality test to the tie breaker rule to determine the tax residency of an individual.

Associated enterprise (Article 9)

The New Treaty adopts provisions equivalent to the latest OECD2 Model Tax Convention (MTC) to govern adjustment procedures (with certain limitations3).

Dividends (Article 10)

There is no change to the rate of dividend withholding tax (WHT). The branch profits tax (BPT) rate for permanent establishments is reduced from 15% to 10%. The New Treaty also clarifies that the reduced BPT rate may not affect agreed clauses under oil and gas production sharing contracts (PSCs) or other mining sector works contracts. The ”most favored nation” provision for PSCs is removed in the New Treaty.

Interest (Article 11)

There is no change to the rate of interest WHT. The New Treaty expands the list of government institutions which are exempt from tax in the source country to include sovereign wealth funds and their subsidiaries.4 The New Treaty discontinues the source country tax exemption for interest on government bonds and excludes penalty charges for late payment from the definition of interest.

Royalties (Article 12)

The New Treaty reduces the WHT rate for royalties to 8% or 10%5 from the Current Treaty WHT rate of 15%. The alienation of certain types of intangible assets is removed from the royalty definition.

Capital gains (Article 13)

The New Treaty introduces a capital gains provision. The provision adopts the latest approach under the OECD MTC with the following differences:

  • The disposal of shares in a land rich company6 may be exempt from tax in the source country if one of the following conditions is met:
    • The alienator owns less than 50% of the total issued of shares being alienated.
    • The immovable property is used by the company to carry on its business.
    • The gains arise from the framework of a reorganization, a merger, a demerger or similar operation.
  • Indonesia has the right to tax gains on the disposal of shares in an Indonesian listed company.

Other income (Article 22)

The New Treaty adopts the ”other income” provision equivalent to the United Nations MTC 2011, as compared to the Current Treaty which contains a clause allocating the taxing right to both countries pursuant to their domestic law.

Exchange of information (Article 26)

This provision reflects the latest OECD MTC provision.

Entitlement to benefits (Article 28)

The New Treaty adopts the ”principle purpose test” provision to limit treaty abuse.

Limitation of relief (Article 22 under Current Treaty)

The tax treaty benefits under the Current Treaty are granted to a Singapore resident only to the income that is remitted to or received in Singapore. The New Treaty does not include a similar provision.

_________________________________________

For additional information with respect to this Alert, please contact the following:

EY Indonesia, Jakarta

Ernst & Young Solutions LLP, Singapore

Ernst & Young LLP (United States), Indonesia Tax Desk, New York

Ernst & Young LLP (United States), Singapore Tax Desk, Chicago

  • Clement Lim | clement.lim2@ey.com

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

  • Pongpat Kitsanayothin | pongpat.kitsanayothin@ey.com

_________________________________________

Endnotes

  1. In Singapore, with regard to taxes chargeable (other than taxes withheld at source), the New Treaty will take effect with respect to income for the year of assessment beginning on or after 1 January 2023. The term “year of assessment” (YA) refers to the year in which income tax is assessed on the company. The basis period for a particular YA for a company is the financial year ending in the year preceding that YA.
  2. Organisation for Economic Co-operation and Development.
  3. The corresponding adjustment shall not apply where judicial or other legal proceedings have resulted in a final ruling that one of the enterprises concerned is liable for a penalty related to fraud, gross negligence or willful default.
  4. The list of eligible entities may be agreed between the competent authorities.
  5. The 8% royalty WHT rate applies to payments for the use of, or the right to use, industrial, commercial or scientific equipment, or for any information concerning industrial, commercial, or scientific experience. The 10% royalty WHT rate applies to payments for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process.
  6. A land rich company refers to those companies that derive more than 50% of their value directly or indirectly from immovable property.
 
 

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