The new Singapore-Indonesia Double Tax Agreement (DTA) took effect as of 1 January 2022, thirty years after the previous DTA entered into force. Singapore is a key hub for international investments into Indonesia, and has been Indonesia’s largest foreign investor since 2014, while each country is also a top 10 trading partner to the other. The new DTA contains several changes that will benefit businesses in both Singapore and Indonesia and further boost bilateral trade and investment flows between both jurisdictions. Below is a summary of the key changes to the DTA from a corporate tax perspective.
Whereas the previous DTA was silent regarding the taxation of capital gains, the new DTA contains an article on capital gains which clarifies that the right to tax capital gains will generally be limited to the jurisdiction of residence of the seller. However, there are exceptions, including:
The withholding tax (WHT) rate for royalties has been reduced from 15% to 8% (for use of, or right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience) or 10% (for other types of royalty payments). Moreover, the branch profit tax rate has been reduced from 15% to 10%, although this is not applicable to production sharing contracts for the oil and gas sector.
The new DTA expressly requires the other contracting state to make corresponding Transfer Pricing adjustments, unless there is a final judicial or legal proceeding under which one of the enterprises concerned is liable to penalty for fraud, gross negligence, or wilful default.
Under the previous DTA, treaty relief is granted only if income that is taxable on a remittance basis has been remitted to or received in the other contracting state, which is generally the case in Singapore. This requirement has now been removed, and therefore, the reduced WHT under the new DTA for, say, interest income paid to a Singapore company, should apply even if the interest income is not remitted to or received in Singapore. However, the new DTA includes a new Article 28 (Entitlement of benefits) which essentially incorporates the treaty abuse principal purpose test as prescribed in Article 7 of the multilateral instrument.
With this newsletter, we inform multinational companies on changes in international tax law and country-specific tax law developments with respect to cross-border transactions.
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