August 16, 2021
New Indonesia–Singapore tax treaty enters into force
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:
This Alert summarizes the key changes in the New Treaty.
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:
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
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago