Singapore-Indonesia Tax Treaty - Recent Changes

This article highlights the important provisions of the Singapore-Indonesia DTA and the key changes proposed in the New DTA.

Introduction

Singapore and Indonesia have deep, multifaceted, and long-standing economic relations. Singapore has been the top foreign investor in Indonesia since 2014. The countries maintain close cooperation in a wide range of sectors, including education, culture, defense, and the environment.

In 1990, the first Singapore-Indonesia Agreement for Avoidance of Double Taxation was concluded. After negotiating for almost two years, Singapore and Indonesia have recently signed a new Double Tax Agreement (DTA), which will replace the Old DTA. The new DTA will come into force after it has been ratified by both countries. The new version amends regulations regarding cross-border tax rates and supersedes the general tax rates specified by the laws of either country. The amended agreement is designed to boost bilateral trade and investment flows between the two countries.

Singapore's Agreements with Indonesia

To remove barriers to economic cooperation and trade, Singapore and Indonesia have concluded several important agreements. Among these are the Free Trade Agreement, the Double Tax Avoidance Treaties, and the Bilateral Investment Agreement. These are briefly described below.

Free Trade Agreement (FTA)

Free Trade Agreements facilitate trade and investment between two or more economies. As members ASEAN, Singapore and Indonesia are part of the ASEAN Free Trade Area. The ASEAN Trade in Goods Agreement (ATIGA) promotes the free flow of goods between member states and diminishes trade barriers in the region; this leads to deeper economic linkages among members, lower business costs, increased trade, and a larger market and greater economies of scale for businesses operating within ASEAN. Through ATIGA, Singapore and Indonesia have eliminated their intra-ASEAN import duties on 99.65% of goods.

Double Tax Avoidance Agreements (DTAs)

DTAs serve to relieve the burden of double taxation of income that is earned in one jurisdiction by a resident of the other jurisdiction.

On February 4, 2020, Indonesia and Singapore signed the updated agreement on the elimination of double tax and the prevention of tax evasion. Once enacted, the New DTA will replace the existing DTA that has been in effect since 1992. The New DTA will lower the withholding tax rates for royalties and branch profits. It also incorporates internationally-agreed standards to counter abuse of the provisions of the treaty by unscrupulous taxpayers. Finally, the updated agreement tax provisions strengthen the attractiveness of Indonesia as an investment destination for Singapore-based investors.

Bilateral Investment Treaty (BIT)

Bilateral Investment Treaties (BITs) promote and protect investments between the two countries. Singapore and Indonesia signed a Bilateral Investment Treaty (BIT) on 11 October 2018. The BIT will protect investors’ interests and reinforce the strong economic ties between Singapore and Indonesia. The BIT also establishes the rights, duties, and dispute resolution procedures for foreign investors from one country while they are operating in the other country. Singapore companies operating in Indonesia will enjoy the protection and have access to international arbitration in case of investment disputes. Indonesian companies operating in Singapore will enjoy similar investment protection.

Scope of the Double Taxation Avoidance Agreement

The Singapore-Indonesia Double Tax Agreement (DTA) applies to all residents (individuals and legal entities) of one or both countries. Therefore, if you are a resident of Singapore, Indonesia, or both, then you can avail the provisions of this DTA.

According to Article 4 (Fiscal Domicile), the term "resident of a country" means any individual, company or other legal entity that, under the laws of that country, is subject to taxation in that country due to his or her domicile, residence, place of management, or place of incorporation.
If according to the above definition, an individual taxpayer can be considered as a tax-resident of both countries, the taxpayer’s residency status will be determined according to the following rules in order of decreasing priority:

  • Location of taxpayer’s permanent home.
  • If an individual has a permanent home in both countries, the location of his or her vital interests (family and social relations, political and cultural activities, the place of business and occupations) is taken into account to determine residency;
  • If the above factors fail to settle the residency status, an individual will be regarded as a resident of the country in which he or she has a habitual abode. It is determined by the frequency, duration, and regularity of stay that are part of the established routine of an individual’s life;
  • If a person has a habitual abode in both countries or in neither of them, he or she will be considered as a resident of the country of which he or she is a national;
  • If none of the above rules determines residency, the competent authorities of the countries will settle the question by mutual agreement.


Type of taxes covered

The DTA comprehensively covers tax on all types of income in Singapore and Indonesia.

Tax rates

The Singapore-Indonesia DTA specifies the tax rates applicable to various types of income that flows from one country (Country A) to the second country (Country B). For example, in the case of interest income, the specified withholding tax rate in the DTA is 10%. This is very beneficial for taxpayers of both countries since the withholding tax rate on interest in Singapore is 15% and the corresponding tax rate in Indonesia is 20%. Provisions like this are designed to encourage cross-border trade and income flows between the two countries.

The state where the income is taxed

The DTA also defines the country where the income of a resident of either Singapore or Indonesia will be subject to tax. This is important because, by default, the country where the income is taxable will determine the tax rate applicable to the taxpayer’s income if those rates are not explicitly specified in the DTA.

Key Provisions

Dividends

Dividends are traditionally taxed in the country of a recipient's residency.

However, in some situations, they may also be taxed in the country of residency of the company that is paying the dividends. In such cases, if the company is a resident of Country A and the beneficial owner of the dividends is a resident of Country B, the dividend tax charged by Country A shall not exceed:

  • 10% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the capital of the company paying the dividends;
  • 15% of the gross amount of the dividends in all other cases.

Please note that the above provisions will not be applicable if the recipient has a permanent establishment in the source country of the dividends (i.e. Country A) and such dividends are paid for shares of the permanent establishment or are otherwise effectively connected with that establishment. Such dividend income will be treated as Business Profits or Independent Personal Services and subject to tax treatment in that country (i.e. Country A).

Interest

The approach for avoiding double taxation of interest income is similar to that for dividend income described above. Interest is taxed in the country where the recipient of the interest income resides (i.e. Country B).

However, in some cases such interest may be taxed in the country in which it arises (i.e. Country A). For these situations, the DTA establishes an upper limit as follows. If the beneficial owner of the interest income is a resident of Country B, the tax charged by Country A shall not exceed 10% of the gross amount. Without the treaty, the withholding tax rate for interest income paid to non-residents is 15% in Singapore and 20% in Indonesia. Under the DTA, the withholding tax on interest in both countries is only 10%.

Notwithstanding the previous paragraph, the Government, the Central Bank, or any other government institution of Country B will be exempt from tax in Country A in respect of the interest income received from Country A.

Royalties

As a rule of thumb, royalties are taxed in the country of the recipient's residency, i.e. Country B.

According to the New DTA, in some cases royalties may also be taxed in the country where they arise, i.e. Country A. In such situations, the DTA establishes upper bounds on the tax payable as follows. If the recipient is a resident of the other country, i.e. Country B, the tax so paid to Country A shall not exceed:

  • 10% of the gross amount of the royalties paid for the use of any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process.
  • 8% of the gross amount of the royalties paid for the use of industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience.

Without the treaty, the withholding tax rate on royalties paid to non-residents in Singapore is 10% while in Indonesia, the tax rate is 20%.

It is notable that in the Old version of the agreement, the withholding tax on all types of royalties was 15%.

These rules are not applicable if the recipient of the royalty has a permanent establishment in the country in which the payer resides (i.e. Country A) and the royalty payment is attributable to that permanent establishment. Such income from royalties will be treated as Business Profits or Independent Personal Services Income in Country A.

Capital Gains

Generally, capital gains derived from the sale of immovable property situated in a country are taxed in that country. Likewise, gains from selling movable property that is part of a permanent establishment which an enterprise of Country B has in Country A will be taxed in Country A.

Please take into consideration that capital gains derived by an enterprise of a country from the sale of ships or aircraft operated in international traffic shall be taxable only in that country i.e. the country where the enterprise is based.

Finally, capital gains resulting from the sale of any property other than of the type described above shall be taxed in the country where the seller is a resident.

It is worth noting that in the earlier version of the DTA there were no provisions regarding the allocation of the taxing rights on capital gains.

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Comparison: Provisions of the Old and the New DTA

Type of Income or Payments

The Old DTA

The New DTA

Income From Immovable Property

Taxed in the country where the property is situated.

Taxed in the country where the property is situated.

Business Profits

Taxed in the country where the company is managed and controlled.

Taxed in the country where the company is managed and controlled.

Permanent Establishment Income

Taxed in the country where the permanent establishment (PE) is situated and carries out its business, but only on the amount attributable to that PE.

Apart from the corporate income tax, a branch profits tax may be imposed on the after-tax profits of the permanent establishment. The tax shall not exceed 15% of the amount of such profits after deducting income tax.

Taxed in the country where the PE is situated and carries out its business, but only on the amount attributable to that PE.

Reduction on branch profits tax (on the after-tax profit of a permanent establishment) to 10%.

Dividends

Taxed in the country where the recipient resides.

Taxed in the country where the recipient resides.

Interest

Taxed in the country where the recipient resides.

Taxed in the country where the recipient resides.

Royalties

Taxed in the country where the recipient resides. Single withholding tax of 15% on all types of royalties.

Taxed in the country where the recipient resides. The withholding tax rate for royalties is reduced from 15% to 8% or 10%, depending on the type of royalty.

Capital Gains

There is no Capital Gains Article in the Old DTA.

Taxed in the country where the property is located.

Shipping and Air Transport

Profits derived from the operation of aircraft in international traffic by an enterprise that is resident of Country A, shall be taxable only in Country A.

Profits derived from the operation of ships in international traffic by an enterprise that is resident of Country A may be taxed in Country B, but the tax imposed in Country B shall be reduced by 50%.

Profits derived from the operation of aircraft in international traffic by an enterprise that is resident of Country A, shall be taxable only in Country A.

Profits derived from the operation of ships in international traffic by an enterprise that is resident of Country A may be taxable in Country B, but the tax imposed in Country B shall be reduced by 50%.

Independent Personal Service

Taxed in the country where the recipient resides unless his or her stay in the other country is for more than 90 days in any twelve-month period.

Taxed in the country where the recipient resides unless he has a fixed base regularly available in the other country for the purpose of performing his or her activities, or his or her stay in the other country exceeds 90 days in a fiscal year.

Dependent Personal Services

(salaries, wages, and other similar remuneration)

Taxed in the country where the recipient resides unless the employment is exercised in the other country. However, there are some exceptions as described in the note below this table.

Note: The remuneration received in respect of any employment exercised aboard a ship or aircraft operating in international traffic by an enterprise that is resident of a country will be taxable only in that country.

Taxed in the country where the recipient resides unless the employment is exercised in the other country. However, there are some exceptions as described in the note below this table.

Directors’ Fees

Taxed in the country where the company (paying the directors’ fees) resides.

Taxed in the country where the company (paying the directors’ fees) resides.

Entertainers & Sportspersons

Taxed in the country where activities are performed.

However, such income is exempt from tax in that country if such activities are supported by the government or local authority of any of the two countries.

Taxed in the country where activities are performed.

Government Service

Taxed by the government of that country unless the individual is a national of the other country where he or she performs the services.

Taxed by the government of that country unless the individual is a national of the other country where he or she performs the services.

Pensions and other similar remuneration (including any annuity)

Taxed in the country in which such remunerations in respect of past employment arise.

Taxed in the country in which such remunerations in respect of past employment arise.

Payment to Students and Trainees

Exempt from tax in the country of education on:

  • All remittances from abroad for the purposes of his maintenance, education, study, research or training; and
  • The amount of the grant, allowance or award.
  • Any remuneration not exceeding $2,200 per year in respect of services performed in the country of education related to the study, research, or training or that are necessary for his or her maintenance.

Payments that a student or trainee receives for the purpose of his or her maintenance, education or training are not taxed in the country of education (Country A) if:

  • A student or trainee is a resident of the other country (Country B)
  • A student or trainee is present in Country A solely for the purpose of his or her education or training
  • Such payments arise from sources outside of the Country A.

Other Income

Income (wherever arising) that cannot be included in the above-mentioned categories shall be taxable only in the country where the recipient resides.

Income (wherever arising) that cannot be included in the above-mentioned categories shall be taxable only in the country where the recipient resides.

If the recipient of the Dependent Personal Services Income is a resident of Country B and carries out his or her services in Country A, the income will be taxable only in Country B if all of the following conditions are met:

  • The individual resides in Country A for a period less than an aggregate of 183 days for the year of income.
  • The remuneration is paid by, or on behalf of, an employer who is not a resident of Country A.
  • The income or profits are not attributable to any permanent establishment in Country A.

Salient Changes in the New DTA

Change

Detailed Description

Tax Residency Determination

In the New DTA, the tax residency status can also be applied for permanent establishments that are treated as residents for tax purposes.

Branch Profits Tax

Reduction on branch profits tax (on the after-tax profit of a permanent establishment) from 15% to 10%.

Royalties

The previous single tax rate of 15% has been reduced to 10% for copyrighted works of literature, arts and film, and 8% for the use of industrial, scientific, or commercial equipment.

Capital Gains

Capital gains were not regulated in the Old DTA agreement. The provision has been added to the New DTA and is amended in accordance with the Organization for Economic Cooperation and Development (OECD) model.

Exchange of Information

In the New DTA, Exchange of Information (“EoI”) under Article 26 follows the OECD Model Tax Convention standards. This provision prohibits the tax authorities from rejecting an information request from their foreign colleagues without a sound reason for such rejection.

Tax Exemptions for Government Institutions

The New DTA specifies withholding tax exemptions on any interest income received by the government institutions.

Most-favoured Nation Article on Production Sharing Contracts (“PSC”)

The ‘Most-favored Nation’ (MFN) clause has been removed in the New DTA. A brief description of the Most-favoured Nation Article on Production Sharing Contracts can be found below in the FAQs section.

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Frequently Asked Questions

Conclusion

Given the broad and enduring economic ties between Singapore and Indonesia, the establishment of the New Singapore-Indonesia DTA is a welcome step towards more effective tax administration between the two countries. The New DTA is expected to benefit businesses in both countries, and deepen cooperation between the two countries across multiple sectors.

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