A Guide to Indonesia-Singapore Double Tax Avoidance Agreement

Singapore and Indonesia have a robust bilateral relationship based on mutual economic interests. With Indonesia’s business climate advancing, Singapore’s closeness to this resource-rich country has made it a major route for investors seeking investment possibilities in Indonesia.

For several years, Singapore has been the biggest foreign investor in Indonesia, with investments totaling USD 9.8 billion in 2020. Moreover, Singapore has established a comprehensive network of treaties and agreements to guarantee its status as a preferred location for regional holding companies. The Singapore-Indonesia Double Tax Avoidance (DTA) agreement is one such treaty that ensures investors working in these countries receive favorable tax treatment.

This article will deal with comprehensive aspects of the Double Tax Avoidance Agreement under the Indonesia-Singapore Tax Treaty.

Understanding DTAA under Indonesia-Singapore Tax Treaty

Indonesia and Singapore signed their first DTA agreement in 1992 where the provisions of the agreement applied to all taxes imposed on the income of the tax-paying entity in either of the two contracting states.

On February 4, 2020, Indonesia and Singapore signed a revised agreement on the elimination of double taxation (DTA) and the prevention of tax evasion, which officially took effect on July 23, 2021. Both governments believe that such measures would help improve bilateral trade, which totaled more than USD 40 billion in 2019.

Key Changes in INA-SIN Double Taxation Avoidance Agreement

Provision of Capital Gains

Capital gains were not regulated under the old DTA. However, under the new regulations, the investor’s country of residence will be assigned taxation rights on capital gains from the sale of shares and assets of Indonesian firms.

As a result, Singapore investors would no longer be subject to Indonesian law’s current 5% tax on gross revenues from the sale of equity interests owned by a foreign shareholder.

New Branch Profit Tax (BPT) Rate

The BPT rate, which was formerly 15%, has now been lowered to 10%. The tariff, however, does not apply to Indonesian or Singaporean firms or residents who are party to contracts in the oil and gas or mining industries.

Lower Withholding Tax Rates for Royalties

The former rate of withholding tax on royalty payments was 15%. The tax rate has been reduced to 10% for the right to use, or use of any copyright of a scientific, artistic, or literary work, which includes cinematograph films or tapes used for radio or television, as well as any patent, trademark, plan, design, or secret formula; and 8% for the right to use, or use of any commercial, industrial, or scientific equipment or knowledge, thanks to the new regulations.

Removal of Most Favored Nations

The ‘most favored nation’ (MFN) clause is removed as it mandates a nation to give all WTO countries the same rights, concessions, and immunities. As a result, both the countries were unable to freely change the production sharing contracts (PSC).

With recent amendments, it will allow the two nations to negotiate specific PSC terms, allowing the process to be more flexible and seamless.

Removal of Limitation of Relief to Treaty Benefits

According to Article 22 of the previous DTA, Singaporean tax residents may only benefit from the treaty’s terms if their income was transferred to their country.

With this clause removed, Singaporean and Indonesian tax residents would no longer be necessary to send income into Singapore in order to benefit from the DTA, however, an anti-abuse rule called principal purpose test (PPT) would apply.

Indonesia’s DTAA with Other Countries

Indonesia has signed agreements (tax treaties) with the following 59 countries to avoid inadvertent double taxation on specific income such as earnings, dividends, interests, fees, and royalties:

• Australia
• United Kingdom
• United Arab Emirates
• China
• Russia, and 54 other countries

Based on the rules of the particular tax treaty, withholding tax rates applicable to citizens of these countries signing tax treaties with Indonesia may be lowered.

How InCorp Can Assist

Indonesia-Singapore tax treaty can further help Singapore cement its position as a center for foreign investments in Indonesia.

Despite the lucrative improvements, foreign investors are recommended to seek the advice of a competent tax expert, such as InCorp, to better understand the taxation in Indonesia and how they may benefit from the new legislation.

Furthermore, to help your company comply with the accounting and tax reporting nuances, InCorp Indonesia (an Ascentium Company) provides a full selection of accounting services in Indonesia. By outsourcing your business accounting and tax obligations, you would reduce your operating costs and administrative burden, while ultimately increasing your business flexibility and growth.