What’s in this article
When an individual or company has an income sourced outside of their resident country, they may be subjected to taxes from both their home country as well as the country the income is sourced from.
To resolve the issue, many countries globally have implemented Double Tax Agreements (DTAs) with one another, including Indonesia.
What are Double Tax Agreements in Indonesia?
A double taxation agreement (DTA) in Indonesia is a treaty between Indonesia and another country, 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 in Indonesia
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 sometimes arise.
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 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 Is Indonesia 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. Furthermore, Indonesia’s economy has 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, or even to set up their own company.
To be classified as an income tax resident, a foreigner has to be present in Indonesia for more than 183 days in 12 months. Once classified as 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. Foreign direct investors often become dual tax residents, making DTAs applicable to them.
When these foreigners become tax residents of Indonesia, they will 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.
How Double Tax Agreements in Indonesia Have Brought Benefits
Indonesia’s double taxation agreements attract global investors by helping them avoid the effects of double taxation.
Hence, some of the benefits of double tax agreements in Indonesia include
- Increased investments from foreigners which boost the economy as a whole
- Strengthened trust between foreign investors and the Indonesian government and tax authorities
- Strengthened economic ties with other countries in the global context
- Able to be replete with natural resources which it often exports to other countries
Tax Evasion & Tax Avoidance in Indonesia
Tax evasion is 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.
However, DTAs enable tax authorities to share vital information, enhancing their ability to collaborate and prevent tax evasion.
Although, tax avoidance is the legal process by which individuals and businesses minimize their tax liability.
Although tax avoidance does not violate any laws of any country, it nevertheless reduces the total amount of revenue collected by a country’s tax authorities.
Indonesia’s tax authorities can collaborate with foreign counterparts via DTAs to manage tax avoidance within the country’s economic conditions.
FAQs
An individual who does not submit tax return or submits an incorrect tax return will be subjected to 1 to 2 times of the tax that was underpaid or imprisoned from 3 months to 1 year.
As of 2021, Indonesia is part of double tax agreement treaties with 71 countries. Some of the most notable countries with which Indonesia has signed a double taxation agreement include Singapore, Malaysia, Hong Kong, Australia, France, Japan, United Kingdom and United States among others.
The signings of DTA 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 DTA.
Depending on the type of DTA which is signed, any DTA 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.
DTA can be abolished if there are situations which are not favourable 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 as any other legal reasons which may not be favourable to the DTA of the countries which are involved.
