On July 23, 2021, the updated Indonesia-Singapore double taxation agreement (DTA) entered into force, strengthening efforts to prevent tax evasion, increase the tax base, and increase investments between the two countries.
Updating the DTA can further enhance Singapore’s status as a hub for international investments into Indonesia. There were three significant changes to the tax treaty, namely, the introduction of an article that provides capital gains tax protection, the reduction of withholding tax (WHT) on royalties, and the reduction in branch profit tax (BPT).
In addition to updating their tax treaty, the Indonesia-Singapore Bilateral Investment Treaty (BIT) came into effect on March 9, 2021, and replaces the previous BIT. Under the treaty, investors from both countries will enjoy specific legal protection, such as access to international arbitration, thereby safeguarding bilateral investments and boosting investor confidence.
Indonesia and Singapore have substantial cooperation across a variety of sectors, and total merchandise trade between the two reached S$48.8 billion (US$36.1 billion) in 2020. Singapore has been Indonesia’s largest foreign investor since 2014, with total investments reaching S$13.2 billion (US$9.7 billion) in 2020. Further, there is approximately US$300 billion worth of Indonesian assets in Singapore.
What are the key changes in the updated DTA?
Introduction of the provision of capital gains article
The previous DTA did not regulate capital gains. Under the new DTA, the investor’s country of residence will be allocated the taxing rights on the capital gains from the sales of shares and assets of Indonesian companies.
This does not apply to the sale of immovable properties, the sale of movable property that forms part of the business property of a permanent establishment, or the sale of immovable properties or shares of private companies that derive more than 50 percent of their value from immovable properties. Meanwhile, gains derived from the sale of aircraft or ships pertaining to the operations of the aircraft will be taxed to the country where the selling entity resides.
Singapore investors will thus be no longer subject to the current five percent tax on gross proceeds from the sale of equity investments held by a foreign shareholder, under Indonesian law.
Reduction in the branch profit tax rate (BPT)
The previous BPT rate of 15 percent has now been reduced to 10 percent. However, the rate does not apply to companies or residents of Indonesia or Singapore that are parties to contracts related to oil and gas as well as the mining sectors.
Removal of limitation of relief to treaty benefits
The limitation of relief has now been removed from the Indonesia-Singapore DTA. Under Article 22 of the previous DTA, Singapore tax residents could only benefit from the provisions of the treaty if income is remitted to Singapore.
With the removal of this article, Singapore and Indonesian tax residents would no longer be required to remit the income into Singapore to benefit from the DTA, although this is subject to the principal purpose test (PPT) (an anti-abuse rule).
New provisions on anti-tax avoidance
The treaty issues a new anti-tax avoidance article (Article 28), which means businesses that are unable to satisfy the PPT may not be entitled to treaty benefits under this updated DTA.
Article 28 states that:
‘A benefit under the DTA shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the DTA’.
Exemption on interests for sovereign wealth funds and government-issued bonds
There is no change in the general interest withholding tax rate of 15 percent. However, amendments to existing for the following:
- Government-issued bonds or debentures;
- Institutions that constitute the ‘government’;
- Sovereign wealth funds and their subsidiaries; and
- Any penalty charge will not be regarded as interest under the definition of interest.
Reduced withholding tax rates for royalties
The previous withholding tax rate for royalty payments was 15 percent. Through the new treaty, the tax rate has been reduced to:
- 10 percent for the right to use, or use of any copyright of 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
- Eight percent for the right to use, or use of any commercial, industrial, or scientific equipment or knowledge.