Indonesia’s tax claim is based on either or both the residence of the tax subject and source of the income being taxed. The adoption of the same taxation basis by the other country creates exposure to double taxation. When an Indonesian tax resident earns income from a foreign source, Indonesia’s claim to tax that income on the basis of jurisdiction over the residence of the income earner may overlap with the claim of the other country to tax that same income on the basis of jurisdiction over the source of that income . Similarly, the other country’s claim to tax income earned by its tax resident, but sourced from Indonesia, may overlap with Indonesia’s claim to tax that same income on the basis of its jurisdiction over the source of that income. To avoid such exposure to double taxation and promote foreign investment, Indonesia recognizes the necessity for having double taxation treaties with other countries.
As of 2000, Indonesia has signed double-taxation treaties with 51 countries. Double-taxation treaties are ratified by the President. In this context, double-taxation treaties can be considered to rank at least equally with domestic law. There is no basis in domestic law to support the argument that treaties rank higher than domestic laws. Indonesia, however, recognizes the universal principle of international tax law that double-taxation treaties between sovereign states rank higher than the national tax laws and, therefore, the double-taxation treaty provisions take precedence over national law.
As regards interpretation of bilateral treaties, the Indonesian double-taxation treaties generally contain the Organization for Economic Co-operation and Development (OECD) general rule of interpretation as follows:
As regards the application of Convention by a contracting state, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that state concerning the taxes to which the Convention applies.
Indonesia, however, is not a member of the OECD, and none of Indonesia’s bilateral double-taxation treaties specifies any requirements that the treaty should be interpreted in accordance with DECD Model Conventions and their Commentaries. The Indonesian Tax Authority considers that both the OECD Commentary and, where appropriate, preferably the United Nations Commentary have some influence, but only in respect of matters defined in a treaty. The Tax Authority does not consider itself bound by the principles of interpretation set out in these commentaries. Matters not defined in a double-taxation treaty would be considered only in the context of domestic law.
To take advantage of a double-taxation treaty (in particular, to benefit from the reduced tax rate), a foreign company is required to justify its residency by providing the Indonesian company (as the payer of any income such as interest, dividend, or fees) with a certificate of residency from the foreign company’s local tax authorities . The Indonesian company should give a copy of the certificate to the tax office where it is registered. The certificated should be renewed annually. An exception is granted to banks or financial institutions specifically indicated in the double-taxation treaty or to banks or financial institution specifically approved by the tax authorities of Indonesia and the double-taxation treaty partner country.
Personal and Individual Tax
The Income tax law distinguishes between resident individual tax subjects and nonresident individual tax subjects. ‘Resident individual’ tax subjects are defined as any individuals who:
· reside in Indonesia ;
· are present in Indonesia for more than 183 days in any 12-month period ; or
· are present in Indonesia within the fiscal year and intend to reside in Indonesia .
‘Non-resident individual’ tax subjects are defined as individuals who are present
in Indonesia for not more than 183 days, with no intention to reside . Resident individual tax subjects are taxed on their worldwide gross income, less allowable deductions and non-taxable income. Non-resident individual tax subjects are taxed in Indonesia only if the income is derived from sources within in Indonesia, i .e. dividends, interest, royalties, rents for property, and compensation for technical, management, and other services.