Double tax agreements (DTAs) are important because they prevent taxpayers who are taxpayers of more than one country from suffering from the negative effects of double taxation. Indonesia is involved in many DTAs.
Definition of Double Tax Agreements
A double taxation agreement (DTA) is a treaty between two countries which is intended to eliminate double taxation which would otherwise have been imposed on an individual who is a tax resident of more than one country at the same time. The primary goal of such an agreement is to prevent the taxpayer from paying taxes to the tax authorities of both countries. Usually, the amount of tax owed is to be based on the number of days for which the taxpayer worked in each country.
Importance of Double Tax Agreements
Every country’s tax authorities are tasked with imposing taxation on all income generated within the country’s territory. However, in instances where two countries are involved in international taxation, there could be a problem of double taxation imposed on taxpayers which may sometime arise. This is where the DTA comes in. A DTA prevents double taxation from being imposed upon taxpayers by taking specific tax laws of the two countries into account. DTAs apply to any person including individuals, companies, and other entities which are deemed to be residents of at least one of the countries involved. Since a DTA prevents incidences of double taxation which would cause income to be subject to tax in both countries involved, it allows one’s tax burden to be greatly reduced.
DTAs provide international tax exchange information for such tax authorities of each of the countries involved. Such information helps in reducing the administrative costs incurred by each country’s tax authorities. DTAs also have legal status. This is because the laws of most countries mention how international taxation upon income is to be imposed upon the taxpayer. Another reason why DTAs are important lies in the fact that they encourage foreign investment activities to be conducted. This is because the laws regarding foreign investment as they pertain to the DTA will be clearly specified. Therefore, investors will not have to worry about the specific details of any international tax laws.
The authorities which oversee DTAs ought to provide clear prescriptions on how certain profits should be calculated, offer guarantees of fair treatment to those affected by a DTA who work abroad, provide clear procedures on how to solve certain disputes which might arise, and facilitate the exchange of any tax-related information between the tax administrators of multiple countries.
Why Indonesia Is Part of Many Double Tax Agreements
Indonesia is the most populous nation in Southeast Asia. It is also the country in the region with the largest economy. Indonesia’s economy has also been growing at a steady rate over recent years. These factors have thus combined to cause many foreigners to come to Indonesia to live and work. Once they have done so for a sufficient period of time, they will eventually be classified as tax residents. Once classified tax residents, they would be able to take advantage of the benefits of Indonesia’s many DTAs.
Furthermore, the country is one of the countries which is extremely rich in natural resources; this fact has also served to attract foreign direct investors to the country. The amount of foreign direct investment in Indonesia has been constantly increasing in recent years. These foreign direct investors often become tax residents of Indonesia while already being tax residents of their respective home countries; thus, DTAs will take effect with regard to such investors.
The large population of Indonesia also provides the necessary labor force for the various companies and industries within the country. This in turn has caused the economy to grow and subsequently causes foreigners to desire to play a role in the growth of the economy by coming to Indonesia to live and work. When these foreigners become tax residents of Indonesia, they would also gain from the existence and use of the DTA. Therefore, there are several important reasons why Indonesia is involved in DTAs with many different countries.
DTAs are just one aspect of international tax planning. It could be the case that you are a taxpayer in Indonesia who also requires assistance with your international tax planning. If such is true, we at Paul Hype Page & Co are able to serve your needs in this area. Our tax experts will work with you so that you will not have to suffer the effects of double taxation. We will ensure that all the steps we take are completely legal in both Indonesia and any other country involved.
How Double Tax Agreements Have Brought Benefits to Indonesia
Indonesia’s many double taxation agreements serve to make the country much more attractive site to investors from all over the world because foreign investors would understand that they would be able to avoid the effects of double taxation. Therefore, the double tax agreements which exist between Indonesia and other countries have caused the country to prosper with regard to the entry of and contributions made by foreign investors. These foreign investors have begun to trust the Indonesian government and tax authorities because they have found these treaties to have made the country conducive to business activities which are conducted by foreigners.
Indonesia through its DTAs have allowed it to strengthen its economic ties with other countries. Such treaties have caused Indonesia’s economic reputation within the global context to improve. The country is also replete with natural resources which it often exports to other countries; thus, it is important for Indonesia to have strong economic ties with many other countries.
Tax evasion is defined as the illegal practice of failing to file one’s taxes as per the taxation rules of a particular country. Many people might try to evade paying taxes when there are no clear measures created to address transactions which involve the tax authorities of multiple countries. This is one other reason why DTAs are important; DTAs provide the tax authorities of the countries involved with important information which they may exchange. In this way, the countries’ tax authorities can work together to prevent tax evasion.
Tax avoidance is defined as the process by which individuals as well as business entities attempt to avoid paying taxes; however, tax avoidance rather than evasion necessitates that they do so in a legal manner. Although tax avoidance does not violate any laws of any countries, it nevertheless reduces the total amount of revenue collected by a country’s tax authorities. Therefore, Indonesia’s tax authorities may work with foreign tax authorities through DTAs in order to limit the prevalence of tax avoidance in the country to a level which is manageable in relation to the country’s current economic condition.
Should you require any assistance with any of your tax issues, you may contact us at Paul Hype Page & Co. The members of our tax team have deep knowledge and experience about all matters regarding taxation in Indonesia. We will ensure that all actions taken will keep you compliant with the tax authorities of Indonesia.
It can therefore be concluded that the double taxation agreements in which Indonesia is involved are of great importance as they nullify the negative impact of double taxation which some taxpayers would otherwise suffer. They also serve as a form of attraction for foreign investors and their investments. DTAs also make the monitoring of taxation a much easier task because the tax administrators of both countries will be able to have open communication with each other. This open communication would do much to strengthen the enforcement of the tax laws of Indonesia.
Paul Hype Page & Co. will give you more information and assistance on policy updates, compliance regulations and changes to tax conditions. Corporate tax in Indonesia.
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DPJ (Directorate General of Taxes) governs Indonesia’s tax system, helps develop a stronger economy, better environment and a more vibrant economy. All companies, regardless of industry, have a legal duty to pay taxes.
Indonesia attracts investments from around the world by reducing its corporate income tax rate and introducing different tax incentives. Indonesia has one of the lowest corporate tax rates in the world.
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Double Tax Agreements of Indonesia FAQs
Depending on the type of double tax agreement which is signed, any double tax agreement could be rendered obsolete. There are instances when a country updates its taxation system which will require updating of one or more tax treaties with other countries to prevent it from becoming obsolete.
Double tax agreements can be abolished if there are situations which are not favorable to the countries which are involved. The reasons for such an abolition may include tax evasion or avoidance by investors from a given country as well any other legal reasons which not be favourable to the double tax agreements of the countries which are involved.
The signings of double taxation agreements with other countries may sometimes force changes of the taxation laws which have been created by the Indonesian government. Furthermore, the government policies with regard to foreign direct investment may sometimes change after the signing of a double taxation agreement.
As of 2018, Indonesia is part a double tax agreement with 68 countries. Some of the most notable countries with which Indonesia has signed a double taxation agreement include the Australia, Canada, France, Japan, the Netherlands, Singapore, South Korea, the United Kingdom, and the United States among others. Although Indonesia is involved in many double tax agreements, it has only ever abolished one. In 2005, its double tax agreement with Mauritius was abolished.