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Things in Indonesia are booming. When I talk with those unfamiliar with
Indonesia, they are often amazed. I
maintain that Indonesia is one of the world’s best kept secrets. So many people do not even know that Bali is
a part of Indonesia.
By some measures, Indonesia is the 16th largest economy in
the world. It gives credibility to ASEAN
given its size. As a young democratic
country, Indonesia has maintained political stability since emerging from
decades of autocratic rule. Demand for
infrastructure in Indonesia is fueled by both economic growth and urbanisation,
while petroleum and minerals continue to make up the majority of exports. To
continue reforming its investment climate, the government has rolled out
measures to ease red-tape, open up sectors for investment and improve public
services.
Often Singapore (we go into details in this guide about American tax Singapore) is used as a base for investing in
Indonesia. This is understandably a
sensitive topic. In July 2017, the Indonesian
President was quoted as saying that he aims to persuade companies that have
significant operations in Indonesia, but are listed on overseas stock markets
to sell shares on Indonesia’s bourse. President Widodo claimed he has a list of such
firms, mostly operating in mining and plantation sectors, and said he would seek
to persuade them, without force, to become a public company in Indonesia.
There are many good reasons for Indonesian companies to list
in Singapore. For instance, Indonesia-based companies such as Golden
Agri-Resources Ltd (SGX: E5H) and Wilmar International Limited (SGX:
F34) needed access to a more international investor base to help fund
their operations. Given the less mature stock market in Indonesia, a listing in
Singapore can often make sense.
IE Singapore writes on its website that the demand for
infrastructure creates opportunities for Singapore companies in the maritime,
utilities, manufacturing and industrial park development sectors:
• Maritime –
With 17,000 islands, Indonesia is
an archipelago nation and President Jokowi envisions it to be a “Global
Maritime Axis”. Sea port infrastructure is hence crucial to reduce the high
logistics costs Indonesia currently faces. Singapore companies should consider
investing in key nodal ports and its supporting infrastructure, through
partnerships with state-owned enterprise, Pelindo I-IV or other established
Indonesian companies.
• Utilities –
The new administration is
committed to improve on the provision of utilities for the country. They target
to increase the country’s electricity capacity by 35,000 megawatts and provide
the entire population with access to clean water by 2019. For the power sector,
Singapore companies can become Independent Power Producers can look beyond Java
for additional opportunities. For large water projects, Singapore companies
should cultivate relationships with the respective government stakeholders as
areas of jurisdictions differ for each project. Besides government or
government related projects, Singapore companies should also consider
infrastructure projects in the private space, for example, dedicated power
plants or industrial water treatment plants servicing industrial parks.
• Manufacturing and Industrial
Parks –
Indonesia’s new administration has
emphasised the need to revitalise its manufacturing sector by developing
integrated industrial estates. Indonesia aims to revive its status as a
globally renowned cost-competitive manufacturing hub. Other than competitive
production costs, Singapore manufacturers will have access to the country’s
population of 250 million when they set up production facilities in Indonesia.
Singapore manufacturers that set up factories in industrial parks also enjoy
common facilities such as utilities and security. Industrial park developers
should explore opportunities out of West Java due to its competitive costs.
• Although not mentioned by IE Singapore, another
growth area in Indonesia is real estate development. Despite various state incentives, the Indonesian
property development sector is still unable to keep pace with the growing population
and demand. Overall, investment
opportunities in the property development sector are promising given the
backlog and the government’s determination to boost the rate of housing
development.
Of course, there are implications to an Indonesian company
being listed in Singapore. Singapore
investors either set up a foreign-owned limited-liability Indonesian company (“PT.
PMA”) or acquire an existing Indonesian company.
For investors tax resident in Indonesia considering offering
shares in their PT to foreigners, consideration should be given to the steps
given below. From a tax point of view, here
are some taxes to be aware of –
·
Land and Building Transfers
o
A 2.5% tax on sales value is levied on companies
and individuals for the sale/transfer of land rights and/or buildings. For
transfers of simple houses and apartments by tax payers engaged in property
development business, the tax rate is 1%.
o
The 2.5% tax on sales value is final.
o
The transfer tax deposit slip (Surat Setoran
Pajak) must be presented to the National Land Agency office together with the
request for land title transfer.
·
Asset Revaluations
o
The net gains from asset revaluations (approved
by the tax authority) are subject to a 10% final tax. An additional final
income tax of 15% is imposed if the revalued assets are sold or transferred
within a certain period after revaluation (for example, for land/building
assets, the period is less than ten years). This additional tax does not apply
to assets transferred to the government or transferred in the course of a
tax-free business merger, however such mergers must be for business purposes
and not tax driven.
·
Shares
o
Foreign companies and individuals are subject to
a 20% withholding tax on dividends from property companies (subject to tax
treaty provisions, where relevant).
o
A final tax of 0.1% applies to income from the
sale of shares at the Indonesian Stock Exchange (collected
“automatically” by the Stock Exchange). The rate is 0.6% if the
seller is a founding shareholder.
o
A 5% tax is applicable to the sale of shares by
a foreign shareholder, unless it is exempted under a tax treaty.
·
Tax on Dividends
o
If there’s a DTA, such as the Singapore –
Indonesia DTA, dividends paid by a resident company of a Contracting State to a
resident of the other Contracting State may be taxed in that other State. However it may be subjected to tax in the
Contracting State of which the company paying the dividends is a resident. But
where the recipient of the dividend is the beneficial owner and resident of the
other contracting state the tax so charged 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.
o
This provision shall not apply if the recipient
has a PE in the contracting state of which the company paying the dividends is
a resident and such dividend received is effectively connected to that PE. Such
income from dividends connected to a PE will be treated as a Business Profit
and subjected to tax treatment accordingly.
·
Tax on Interest in the case of the Singapore –
Indonesia DTA
o
Interest arising in a Contracting State and paid
to a resident of the other Contracting State may be taxed in that other State.
However, such interest may also be taxed in the Contracting State in which it
arises; if the recipient is the beneficial owner of the interest, the tax so
charged shall not exceed 10% of the gross amount. The Government of a
Contracting State shall be exempt from tax in the other Contracting State in
respect of interest derived from that other State. Interest arising in one
contracting state shall be taxable only in the other contracting state in the
following circumstances:
§
If the interest is paid in respect of a bond,
debenture or other similar obligation of the government, political subdivision,
local authority of contracting country, or
§
If the interest is paid in respect of a loan
made, guaranteed or insured, or a credit extended, guaranteed or insured by the
Monetary Authority of Singapore, or the “Bank Indonesia” (The Central Bank of
Indonesia), or any other lending institution, as may be specified and agreed in
letters exchanged between the competent authorities of the Contracting States.
o
The above provisions shall not be applicable if
the beneficial owner of the interest, has a PE or fixed base in the contracting
state in which the payer is resident and the interest paid is effectively
connected with such PE or fixed base. If, due to the special relationship
existing between the payer and the recipient, the interest paid is in excess of
the amount that would have otherwise been paid, then the provision of the
treaty shall apply only to that amount and any excess amount of interest paid
will be taxable according to the laws of each Contracting State.
·
Tax on Royalties in the case of the Singapore –
Indonesia DTA
o
Royalties arising in a Contracting State and
paid to a resident of the other Contracting State may be taxed in that other
State. Royalties shall be deemed to arise in a Contracting State when the payer
is a resident of that State. However, such royalties may also be taxed in the
Contracting State in which they arise and according to the laws of that State,
but if the recipient is the beneficial owner of the royalties the tax so
charged shall not exceed 15% of the gross amount of the royalties. Royalties
encompass payments of any kind received as a consideration for the use of, or
the right to use, any copyright patent, trademark, design or model, plan etc.
If, due to the special relationship existing between the payer and the
recipient, the royalties paid is in excess of the amount that would have
otherwise been paid, then the provision of the treaty shall apply only to that
amount and any excess amount of royalty will be taxable according to the laws
of each Contracting State.
·
Treatment of Business Profits in the case of the
Singapore – Indonesia DTA
o
The profits of an enterprise of a Contracting
State shall be taxable only in that State unless the enterprise carries on
business in the other Contracting State through a PE situated therein. But only
that portion of the profit that can be effectively attributable to the PE can
be taxed in the other Contracting State. For the purpose of determining the
profits of the PE it shall be allowed all expenses and deductions that could be
reasonably attributable to the PE and deductible if the PE were an independent
enterprise and profits of the PE shall be determined as if it were a distinct
and separate enterprise engaged in the same or similar activities under the
same or similar conditions and dealing wholly independently with the enterprise
of which it is a PE. A PE’s mere purchase of goods or merchandise for the
enterprise shall not render profits attributable to that PE. Profit attribution
to the PE must be made by the same method every year unless there is a valid
reason for the contrary. Where information available to the competent authority
is inadequate the provisions of the agreement shall not impede the laws of the
contracting state or the discretion of the competent authority.
·
Treatment of Income from Property in the case of
the Singapore – Indonesia DTA
o
Income derived by a resident of a Contracting
State from immovable property situated in the other Contracting State may be
taxed in that other State. Income from immovable property of an enterprise and
income from immovable property used for the performance of independent personal
services shall also be covered by this provision. Income from direct use,
letting or use in any other form of immovable property shall be covered by the
agreement. The term “immovable property” shall comprise of properties as
defined by the law of the contracting state in which the property is located.
It shall include accessories, equipment, livestock, rights and usufruct of
immovable property and rights to variable or fixed payments as consideration
for the working of, or the right to work, mineral deposits, sources and other
natural resources. However, ships and aircraft shall not be regarded as
immovable property.
·
Treatment of Income from Shipping & Air
Transport in the case of the Singapore – Indonesia DTA
o
Income derived by an enterprise of a Contracting
State from the operation of aircraft in international traffic shall be taxable
only in that Contracting State. In which case, where such income is subjected
to tax in the other Contracting State, the tax imposed in that other
Contracting State shall be reduced by an amount equal to 50%. The provisions
applies to the share of the income from the operation of ships or aircraft
derived by an enterprise of a Contracting State through participation in a
pool, a joint business or an international operating agency.
·
Treatment of Associated Enterprises in the case
of the Singapore – Indonesia DTA
o
If an enterprise or persons involved in an
enterprise of a Contracting State participate directly or indirectly in the
management, control or capital of an enterprise of the other Contracting State,
the enterprises involved are said to be associated enterprises. The terms and
conditions of operations and transactions between the associated enterprises
will differ from those made between independent enterprises, thus affecting the
profitability and income of the enterprises. In the case of associate
enterprises the DTA provides that the contracting states may deem a taxable
income that would have otherwise accrued if the parties were independent and
tax the enterprises accordingly.
·
Treatment of Individual Income in the case of the
Singapore – Indonesia DTA
o
Independent Personal service
§
Income derived by a resident of a Contracting
State in respect of professional services or other activities of an independent
character shall be taxable only in that State unless he is present in the other
Contracting State for a period or periods exceeding in the aggregate 90 days in
any twelve-month period. Only that portion of the income attributable to his
stay and activities performed in the other state may be taxed. The term
“professional services” includes especially independent scientific, literary, artistic,
educational or teaching activities as well as the independent activities of
physicians, lawyers, engineers, architects, dentists and accountants.
o
Dependent Personal Service
§
Salaries, wages and other similar remuneration
derived by a resident of a State for employment shall be taxable only in that
State unless the employment is exercised in the other Contracting State. If the
employment is so exercised, such remuneration may be taxed in that other State.
However even if the employment is exercised in the other Contracting State the
recipient shall only be subjected to tax in the first mentioned state in the
following circumstances:
·
the recipient is present in the other State for
a period or periods not exceeding in the aggregate 183 days in the calendar
year concerned; and
·
the remuneration is paid by, or on behalf of, an
employer who is a resident of the first-mentioned State; and
·
the remuneration is not borne by a PE which the
employer has in the other State.
o
Director’s Fees
§
Directors’ fees and similar payments derived by
a resident of a Contracting State in his capacity as a member of the board of
directors of a company which is a resident of the other Contracting State may
be taxed in that other State.
o
Entertainers, Artists & Athletes
§
Income derived by a resident of a State as an
entertainer, such as a theatre, motion picture, radio or television artiste, a
musician, or an athlete, from his personal activities as such exercised in the
other State, may be taxed in that other State. However, such incomes shall be
exempt from tax if they are accrued for such activities exercised in one of the
contracting state under some mutually agreed exchange programs or substantially
supported by public funds of the Government, a political subdivision, a local
authority or a statutory body of the other Contracting State.
o
Pensions
§
Pensions and other similar remuneration arising
in a Contracting State and paid to a resident of the other Contracting State in
consideration of past employment may be taxed in the first-mentioned State.
o
Persons on Government Service
§
Salaries, wages and other similar remuneration,
other than a pension, paid by a Contracting State or a political subdivision or
a local authority or a statutory body thereof to an individual in respect of
services rendered to that State, subdivision, authority or body would be taxed
by that State. However, such remunerations will be taxable only in the other
contracting state if the services are rendered in that state and the resident
recipient is a national of the state and his residency is not solely for the
purpose of rendering the service.
o
Students and Trainees
§
Students and trainees who were a resident of a
contracting state immediately before visiting the other contracting state,
where he receives training or education and is temporarily present in the other
contracting state solely for the purpose of education or training, shall be
exempt from tax in the other state. Taxation in the other state shall be
exempted on all remittances and grants received from abroad and any
remuneration not exceeding US$2,200 per annum in respect of services in that
other State provided the services are performed in connection with his study,
research or training or are necessary for the purposes of his maintenance.
Finally, here are the steps to foreign investment in
Indonesia:
(a) Initial stage: a foreign investor is
expected to submit their investment proposal with business description to the
Indonesia Investment Coordinating Board (“BKPM”). The proposal will be screened by BKPM where it
will be classified under the appropriate business field as stipulated in KBLI
(Indonesian Classification of Business Field) and evaluated to determine
whether it is closed or open with stipulations for foreign investment. If the
business sector is open or open with stipulations, the foreign investor will be
able to apply for an Investment Principal License, to begin the investment
process, subject to the stipulations stated in the DNI (Indonesia Negative
Investment List).
(b) Preparation stage: Once the investment
proposal is evaluated and deemed to be allowed under the DNI, the foreign
investor will be able to apply for an Investment Principal License from BKPM,
and start the process of setting up a legal business entity in Indonesia. Once
the Investment Principal License is approved by BKPM, the foreign investor will
be able to set up its business entity by engaging any public notary office to
draft the deed of establishment of PT. PMA. The deed of establishment will need
to be ratified by Indonesian Ministry of Law and Human Rights to be legalized
and officially posted in the State gazette. In parallel to establishing PT.PMA’s
deed of establishment, the foreign investor will also be able to apply for the
necessary provincial government licenses, which mainly refer to the regional
regulation and certification for operating business entity. PT. PMA will also need to apply for a tax
registration number, from the Directorate of Tax, and an immigration license –
to enable it to employ foreign workers – from the Directorate of Immigration.
(c) Setting-up stage: In the setting-up stage,
the foreign investor will be able to start (i) setting up its business infrastructure
and (ii) processing all the required licenses from Technical Ministries. With the establishment of BKPM One-Stop
Services Centre (“OSS-C”), high officials from 22 Technical Ministries and
government agencies will be positioned in the OSS-C to attend to all investment
inquiries and also application of the technical licenses pertaining to their
business sector. Investors will be able to apply for the technical licenses with
the OSS-C to simplify and expedite the setting-up process, and start the
business operations as soon as possible.
(d) Final stage: Once the company is ready for
the commercial stage, PT. PMA will be able to apply for its business license
from BKPM to start its business operations.
If a foreign investor decides to acquire a stake in an
existing Indonesian company, the above framework and considerations (in
relation to foreign-ownership restriction) still applies. According to Indonesian Law, any company with
any percentage of foreign shareholding is considered a PT. PMA. However, the investor may be able to save
significant time in the getting the required licenses from Technical Ministries
during the Setting-Up Stage (provided that those licenses do not have any
condition which restrict the change of ownership in the Indonesian company from
local-owned to foreign-owned) by acquiring an existing Indonesian company.
A Singapore investor should also note that Indonesia adopts
a civil law system which was inherited from the Dutch. Although, Indonesia has enacted law reforms in
the recent years to make it easier for foreign investors to make an investment
in Indonesia, a Singapore investor may be perplexed that certain corporate
actions that can be easily done in Singapore, such as acquisition of shares or
transfer of shares in a private company, would require significantly different
formality or significantly more time to execute in Indonesia.
The following are examples of peculiar features of Indonesian
law for foreign investors:
(
a) Law no. 24 year 2009, Article 31 paragraph (1)
requires the transaction documents to be in Bahasa Indonesia if a transaction
involves Indonesian individuals or business entities. Parties may execute a
legally binding agreement using bi-lingual documents, or parties may execute
the agreement in English and proceed with the translation of the agreement
shortly thereafter.
(
b) If a corporate action, such as merger and
acquisition, results in change of control of a company, the corporate action
must be advertised in at least one Indonesian national newspaper and the
company must announce the merger in writing to its employees. The corporate
action may not close within 30 days of the newspaper advertisement.
(
c) If such corporate action takes place and the
employees of the company being acquired are not willing to continue with their
employment, such employees shall be entitled to severance pay.
(
d) There is no concept of “trusts” in Indonesia.
(
e) Another peculiar feature of the Indonesian legal
system is the role of a public notary. An Indonesian public notary is the only
public officer who has the authority to issue or make authentic deeds
concerning all kind of acts, agreements and arrangements as provided by the law
or wished by the parties concerned.
(
f) A notarial deed is the most important legal
document in Indonesia because it has absolute authenticity by law, and is the
best guarantee for foreign investors to safeguard their business and financial
interests.
