In this briefing note, we summarise the updated agreement between the Government of the Republic of Singapore and the Government of the Republic of Indonesia for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (“Singapore – Indonesia DTA”).
The updated Singapore–Indonesia DTA that was signed by the respective representatives of Singapore and Indonesia on 4 February 2020 has been ratified by Indonesia on 11 May 2021 and entered into force on 23 July 2021 in Singapore.(1) The ratified Singapore–Indonesia DTA will replace the existing treaty and take effect on 1 January 2022.
A summary of the key changes are set out below:
(i) Introduction of Capital Gains Article
The existing treaty does not have a capital gains article. In contrast, the new Article 13 of the Singapore-Indonesia DTA will allocate to the investor’s country of residence taxing rights on capital gains from the sale of assets and shares in Indonesian private companies, other than that from the sale of immovable properties or shares of private companies deriving more than 50 per cent of their value directly or indirectly from immovable property, or the sale of movable properties that forms part of the business property of a permanent establishment.
In effect, Singapore resident investors should be relieved from the current final tax of 5% on gross proceeds from the sale of unlisted qualifying equity investments held by a foreign shareholder, under Indonesian domestic law. There is also no Singapore tax exposure on remittance of capital gains as there is no capital gains tax in Singapore.
(ii) Removal of limitation of relief to treaty benefits
The limitation of relief enshrined in Article 22 of the current Singapore- Indonesia DTA has been removed. Under the current DTA, persons could only enjoy treaty benefits if the income is remitted to or received in the country of residence. In short, Singapore tax residents could only benefit from the provisions of the treaty where such income is remitted to or received in Singapore.
With the removal of (the present) Article 22 in the updated Singapore-Indonesia DTA, with effect from 1 January 2022, Singapore tax resident investors would no longer be required to remit the income into Singapore to enjoy the treaty benefits accorded under the DTA, subject to the principle purpose test (“PPT”)(2). Further, foreign sourced income that are not remitted into, received or deemed received3 in Singapore would not be subject to tax under Singapore’s domestic tax regime.
(iii) Reduction in withholding tax on royalties
The revised Article 12 of the Singapore-Indonesia DTA reduces the withholding tax rate of 15% under the current DTA to: (i) 10% for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process; and (ii) 8% for the use of, right to use, industrial, commercial or scientific equipment or knowledge.
(iv) Reduction in tax on after-tax profits of a permanent establishment
Any additional tax that is imposed on the after-tax profits of a permanent establishment (“PE”) has been reduced from 15%(4) to 10%(5). This reduced tax rate of 10% does not apply to PE profits from production sharing contracts relating to oil and gas, and contract of works for other mining sectors.
The changes of the updated Singapore-Indonesia DTA would further enhance Singapore’s attractiveness as a hub for investments into Indonesia and flow of investments between Singapore and Indonesia. In addition to the reduced withholding tax rates on royalties and tax on after-tax PE profits, capital gains from qualifying equity investments by Singapore tax resident investors should effectively no longer be subject to tax under Indonesian domestic law on gross proceeds from the sale of unlisted shares, and the removal of the limitation of relief to treaty benefits article would provide foreign investors with a wider array of structuring options and the option to reinvest the income and/ or gains from investments without the need to remit such income and/ or gains into the investor’s country of residence in order to enjoy treaty benefits.
If you have any queries, please feel free to reach out to your usual Withers contacts, Leon Kwong Wing , Chua Yee Hoong or Charles Kwek.
(1) Income Tax (Singapore — Indonesia) (Avoidance of Double Taxation Agreement) Order 2021
(2) Under the PPT, tax authorities may disallow the application of treaty benefit if obtaining those treaty benefit was one of the principal purposes of an arrangement or transaction unless it is established that granting that benefit in the circumstances would be in accordance with the object and purpose of the relevant provisions of the DTA.
(3) Section 10(25) of the Income Tax Act
(4) Paragraph 3 of the 1990 Protocol between the Government of the Republic of Singapore and the Government of the Republic of Indonesia
(5) See: Article 10(6) of the updated Singapore – Indonesia DTA