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.
New article on capital gains
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:
- Indonesia retains the right to tax capital gains arising from the alienation of shares in Indonesian-resident companies listed on the Indonesian stock exchange at 0.1% of the gross value (or 0.5% for founder’s shares);
- Gains arising from the alienation of immovable property are taxed in the country where the property is located; and
- Gains arising from the alienation of shares in a company more than 50% of whose value is derived from real estate in a contracting state are taxable only in that contracting state, provided that the alienator resident in the other contracting states owns more than 50% of the issued shares of the company. However, there are two exceptions: (a) where the immovable property is used to carry on the alienator’s business; or (b) the alienation is the result of a corporate reorganisation, merger or other similar restructuring activity.
Lower tax rates on royalties and branch profits
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.
Corresponding Transfer Pricing adjustments
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.
Removal of remittance requirement and introduction of the principal purpose test
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.
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