Global investors often face the challenge of double taxation, where the same income is taxed by two different countries. This can happen when a company is taxed in its resident country and also in a foreign country where it earns income through labor, services, or goods. Fortunately, tax treaty or Double Tax Avoidance Agreements (DTAAs) exist to address this issue, providing mechanisms to avoid double taxation and foster smoother international trade and investment.
This article delves into the significance of Indonesia’s tax treaties, how they function, and their implications for foreign investors and expatriates in Indonesia.
Key Takeaways
- Purpose of DTAAs: Learn how Double Tax Avoidance Agreements help prevent double taxation.
- Indonesia’s Tax Treaty Network: Discover the 71 countries that have DTAAs with Indonesia.
- Application of DTAAs: Understand who benefits from these agreements and under what conditions.
- Tax Residency in Indonesia: Get clarity on the criteria for being considered a tax resident in Indonesia.
Also read: Tax Treaty: Definition, Models, How It Works
What are Tax Treaty or Double Tax Avoidance Agreements (DTAAs)?
Double Tax Avoidance Agreements (DTAAs) are treaties between two or more countries designed to avoid double taxation on the same income. These agreements specify which country has the right to tax certain types of income, such as dividends, interest, royalties, and service fees. By eliminating or reducing the tax burden, DTAAs encourage cross-border investment and trade.
Importance of DTAAs for Foreign Investors and Expatriates in Indonesia
For foreign investors and expatriates working in Indonesia, understanding the relevant DTAAs is crucial. These agreements determine how income will be taxed and can significantly impact the financial outcomes of international business operations. Knowing the provisions of these treaties helps in making informed decisions and ensuring compliance with local tax laws.
The Hierarchical Status of Tax Treaties in Indonesian Law
In Indonesia, the provisions of tax treaties take precedence over domestic tax laws (Undang-undang PPh). This means that if a tax treaty includes specific provisions, those will override the local tax regulations concerning the taxation of foreign individuals or entities. Therefore, adhering to the tax treaty’s stipulations is essential for proper taxation.
Also read: What is SPT (Tax Return) in Indonesia?
Countries with DTAAs with Indonesia
Indonesia has established DTAAs with 71 countries, ensuring the elimination of double taxation through reduced withholding tax rates or exemptions.
A comprehensive list of countries with tax treaty with Indonesia includes:
- Algeria
- Armenia
- Australia
- Austria
- Bangladesh
- Belarus
- Belgium
- Brunei Darussalam
- Bulgaria
- Cambodia
- Canada
- China
- Croatia
- Czech Republic
- Denmark
- Egypt
- Finland
- France
- Germany
- Hong Kong
- Hungary
- India
- Iran
- Italy
- Japan
- Jordan
- Kuwait
- Laos
- Luxembourg
- Malaysia
- Mexico
- Mongolia
- Morocco
- Netherlands
- New Zealand
- North Korea
- Norway
- Pakistan
- Papua New Guinea
- Philippines
- Poland
- Portugal
- Qatar
- Romania
- Russia
- Saudi Arabia
- Serbia
- Seychelles
- Singapore
- Slovakia
- South Africa
- South Korea
- Spain
- Sri Lanka
- Sudan
- Suriname
- Sweden
- Switzerland
- Syria
- Taiwan
- Tajikistan
- Thailand
- Tunisia
- Turkey
- Ukraine
- United Arab Emirates
- United Kingdom
- United States
- Uzbekistan
- Venezuela
- Vietnam
List source: pajak.go.id
Who Do Tax Treaties Apply To?
DTAAs apply to both individuals and entities that are residents of either or both participating countries. A person is recognized as a taxpayer based on the criteria set in the agreements.
Tax Residency in Indonesia
An individual is considered a tax resident in Indonesia if they meet the following conditions:
- Presence in Indonesia for more than 183 days within a 12-month period, or
- An intention to stay in Indonesia substantiated by documents such as a permanent stay permit, a limited stay visa, or a limited stay permit.
Additionally, individuals are considered residents if they:
- Live in a place in Indonesia that they own or rent, and that is not a place of transit.
- Have important personal or essential interests in Indonesia.
- Have their regular or habitual residence in Indonesia.
Also read: PMA (Foreign Company) Taxation in Indonesia: Complete Guide
Understanding Indonesia’s DTAAs is essential for any global investor or expatriate looking to navigate the complexities of international taxation. By leveraging these agreements, businesses and individuals can optimize their tax obligations and avoid the pitfalls of double taxation, ensuring a smoother and more profitable international engagement. Stay informed and consult with tax professionals to fully benefit from the provisions of Indonesia’s extensive network of tax treaties.
If you need specific tax advice and detailed analysis, you can rely on InvestinAsia’s Indonesia tax consultant and compliance services. Our experienced team of professionals is ready to assist you in every tax matter, such as:
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