Singapore is the largest supporting investor for Indonesia, with more than 30% of Indonesia’s investment coming from Singapore in 2021. According to Prof. Gunadi, Ak., M.Sc., Professor of Fiscal Administration, Faculty of Administrative Sciences, Universitas Indonesia, Indonesia and Singapore New Double Taxation Avoidance Agreement 2020 is more in line with the Organization for Economic Co-operation & Development (OECD) Model, United Nations (UN) Model, and aligned with the implementation of Base Erosion and Profit Shifting (BEPS) compared to the previous P3B in 1990.
This was conveyed by Prof. Gunadi at “The ASEAN Tax Seminar Series: Webinar on New Indonesia-Singapore Treaty” held by the Department of Fiscal Administration, Faculty of Administrative Science Universitas Indonesia (FIA UI) in collaboration with Singapore Management University, and the International Tax Center (ITC) Leiden. This webinar discusses the New Double Taxation Avoidance Agreement (P3B) between Indonesia and Singapore.
Besides Prof. Gunadi, experienced experts in the field of international taxation, was present as a speaker, namely Prof. Sum Yee Loong (Singapore Management University), Prof. Kees van Raad (ITC Leiden), Melani Dewi Astuti (Center for State Revenue Policy (PKPN), Fiscal Policy Agency, Indonesia), Irving Aw (WTS Taxise Singapore), and Iman Santoso (Ernst and Young Indonesia). Prof. Sum said that it has been 32 years since Indonesia and Singapore signed the Tax Treaty, which has enabled Singapore and Indonesia to increase their Gross Domestic Product by almost seven times in 1990-2021.
“Indonesia and Singapore are important parts of ASEAN. On the other hand, ASEAN is a region with the fastest economic growth. Indonesia itself is a country with the superior economy in ASEAN, with the highest population density in ASEAN. This makes a lot of investment in Indonesia. Cooperation and joint development between Indonesia and Singapore will not only benefit the two countries, but even the whole world,” said Prof. Sum in discussions taking place on Tuesday, March 8, 2022.
Professor of International Tax Law from Leiden University, The Netherlands, Prof. Kees van Raad, delivered a material entitled “The 2020 & 1990 Indonesia-Singapore tax treaties from a policy and a technical perspective.” He said, there was a difference between the Indonesia-Singapore P3B agreement in 1990 and 2020, namely in 1990 there were many deviations from the OECD/UN Model agreement. While the agreement in 2020 is considered more in line with the implementation of BEPS. “It’s a shame that only BEPS ‘minimum standards’ can be approved,” he said.
According to Prof. Kees, the reason for deviations from the OECD/UN Models in practice often occurs due to several factors. From the context of countries that have experience in making tax treaties, the provisions of the agreements made are often considered unclear, especially from the findings of the tax court. Meanwhile, for countries with minimal experience related to P3B, they have a greater risk of regulatory errors and inconsistencies, where the treaty negotiators are not necessarily experts in the field of taxation, as well as drafting laws that often do not meet the standards applied to the domestic regulations of the two countries. .
Furthermore, the Young Analyst of the Center for State Revenue Policy, Fiscal Policy Agency, Indonesia, Melani Dewi Astuti, delivered the material which began by explaining the background of the new P3B between Singapore and Indonesia. “There are several reasons for the renewal of the Tax Treaty between Indonesia and Singapore, namely to improve economic and trade relations; adapting to current international economic, business and taxation developments; align with international standards in the exchange of information; and provide more legal certainty and include anti-tax avoidance measures,” he said.
The basic differences in the renewal of the P3B Singapore and Indonesia, Melani said, are changes to individual Tie Breaker Rules, a reduction in the Branch Profit Tax (BPT) rate and the abolition of the most favored nation (MFN) clause, changes in relation to interest paid or received by the government, a reduction in tax rate on royalties, additional tax provisions on Capital Gain, inclusion of antitreaty shopping rules and corresponding adjustment articles, and adoption of new Exchange of Information standards.
The discussion of the new provisions in the P3B between Indonesia and Singapore was delivered by Irving Aw. Outbound Investment, namely dividends which include withholding tax in Indonesia of 10% (if Singapore investors own at least 25% of the Indonesian company’s capital) or 15%, regardless of whether the dividends are received in Singapore. “If for any reason dividends are not exempt from tax in Singapore, the tax credit will not take into account the Indonesian Corporate Income Tax, unless previously under the provisions of 50A ITA, the 25% share capital requirement and the lower 10% share capital requirement are met under Art. 23(2) (Elimination of Double Taxation),” he said.
The last resource person, Iman Santoso explained about Anti Tax Avoidance – Multilateral Instrument (MLI) where Art. 6 of the MLI have been adopted in the new P3B, including Art. 28 regarding the Entitlement of Benefits concept and the Principal Purpose Test to prevent abuse usage of P3B. In the context of Fiscal Domicile, the issue of citizenship is added to the tie breaker rule to determine individual tax domicile. In addition, the new P3B also regulates the reduction of the BPT rate from 15% to 10%, although on the other hand there is no change in the Withholding Tax rate on Interest, which is fixed at 10%.
Iman stated that this new Tax Treaty is very important to improve Indonesia’s fiscal investment as Foreign Direct Investment and Singapore’s holding structure will continue to be the main source of Indonesia’s investment. The implementation of the capital gains tax and other income provisions is considered to have a positive impact from the perspective of Singaporean investors because it was previously taxed in Indonesia and has been more equal in treatment for Singapore since the enactment of the new P3B. In general, this P3B change is the first post-MLI P3B which is considered to be the main reference in renewing Indonesia’s P3B with other countries in the future.
