INTERNATIONAL TAXATION ISSUES

How does the government of Indonesia tax the income of foreign investor?

Non Resident Alien (NRA) may derive income from Indonesia by using several schemes; e.g. direct investment, portfolio investment, and establishing a branch or permanent Establishing (PE) in Indonesia. The income derived from Indonesia is taxed based on the nature of income.

Dividend from direct and portfolio investment will be subject to Article 26 withholding tax at 20%.

If the NRA recipient of dividend is able to provide Certificate of Domicile from the country which has a bilateral tax treaty with Indonesia, dividend will be taxed based on the Article of ‘dividend’ in the tax treaty.

A branch a PE of an NRA has the same obligation as Indonesian Corporations to comply with the Indonesian Tax Law is amended lastly in the year of 2000.

Additionally, a branch/PE has a specific obligation to pay a branch profit tax.

What is a Permanent Establishment?

The definition of Permanent Establishment provided in the OECD Model Tax Treaty is usually adopted with minor adjustments to accommodate the necessity of the country.

Under OECD Model Tax Treaty, as well as the UN Model Tax Treaty, a Permanent establishment is deem to exist in a country if one of the three tests below is met.

1.	Assets test Under assets test, a non-resident which has certain asset in a country is deemed to have a Permanent Establishment in that country. The definition of the assets usually includes:
	a.	a place of management;
	b.	a branch;
	c.	an office;
	d.	a factory;
	e.	a workshop;
	f.	a mining and extraction of natural resources, drilling used for mining exploration;
	g.	a fishery, animal husbandry, farm, plantation or forestry;
	in addition to above, Indonesia deems existence of a representative office in Indonesia to be a permanent establishment under income Tax law s amended lastly in the year of 2000.
2.	Activity test Certain activities performed by a non-resident in a country are deemed to create a permanent establishment in that country. The activities are:
	a.	construction, installation or assembly project conducted (for a period exceeding a prescribed limit in a tax treaty);
	b.	furnishing of services through employees or other personnel, if conducted for a period exceeding a prescribed limit.
	The differences in time test between tax treaties and Indonesia Income Tax Law are as follows (see List of Table – Table 2 for details of each tax treaty’s time test): Tax treaty Income tax law Construction, installation, assembly 90 day to 6 months depending on the treaty country No time test Furnishing of services 90 days to 6 months depending on the treaty country 60 days within 12 months
3.	Agency Test A non-resident having a dependent agent in a country is deemed have a permanent establishment. A dependent agent is deemed to exist if there is a person who carries on certain activities such as:
	-	concluding contract in the name of the non-resident enterprise;
	-	maintaining stock from which delivery is made regularly for or on behalf of the non-resident enterprise.

What is the taxable income for a Permanent Establishment?

Generally, the Permanent Establishment shall be taxable for the income derived within the country where the permanent establishment is located.

The income derived by a permanent establishment usually consists of (i) income attributable to the permanent establishment (attribution rule), (ii) income of the head office from the activities which are similar with that of the permanent establishment (either sale of goods or furnishing services) (force of attraction rule) , and (iii) income that is effectively connected with the permanent establishment effectively (effectively connected income rule) – (see List of Table – Table V for details of each tax treaty’s applicable rules).

What is the tax consequence if an individual performs services in Indonesia on order of a foreign company?

A non-resident individual who performs services in Indonesia as an employee shall be taxed in Indonesia for the remuneration received if he or she meets one of the conditions as follows:

a.	he/she is present in Indonesia for more than the time test listed in the Indonesian tax law or the relevant tax treaty (see List of Table – Table VI for details of each tax treaty’s time test); or
b.	the remuneration is paid by a resident of Indonesia; or
c.	The remuneration is borne by a permanent establishment which the foreign employer has in Indonesia

How does the above-mentioned employment income taxed?

An individual who is present in Indonesia for more than the time test will be subject to Article 21 of Income Tax Law (i.e. the same progressive income tax rates as applicable to resident individuals).*

An individual who is present in Indonesia not more than the time test, will be subject to Article 26 of Income Tax Law (i.e. 20% withholding tax).

Other cases shall be analyze further based on Income Tax Law and relevant tax treaty.

What is my tax obligation if I perform service in Indonesia independently in a field of science, education, lawyer, engineer, accountant, and other similar service?

Individual who performs service in Indonesia as independent personal services as defined in the tax treaty, shall be taxable in Indonesia if he/she is present in Indonesia for a period exceeding the time test listed in the tax treaty.