Amendments to Guidance on Certain Payments Made Pursuant to Tax Treaty Provisions
In Indonesia, the Directorate General of Taxation (DGT) in late 2009 and early 2010 issued guidance* concerning income tax treaty provisions. The guidance / regulations were intended to tighten the procedures required to demonstrate foreign residency and beneficial ownership and thereby restrict the benefit from reduced withholding / tax treaty rates. See
*DGT Regulation No. PER-61/PJ/2009 (15 December 2009); DGT Circular No. SE-114/PJ/2009 (15 December 2009); and DBT Letter No. S-46/PJ.033/2010 (15 January 2010).
In response to comments regarding new procedural requirements which concerned the application of income tax treaty rates, the Directorate General of Taxation revised certain measures, to ease certain requirements and to address certain practical difficulties in implementing the guidance. See a summary of these changes, below.
Other issues reportedly will being clarified, and Indonesian tax officials have informally confirmed that a standard Certificate of Domicile (tax residence) issued by a Competent Authority in other jurisdictions would still be acceptable and valid for payments made to a non-resident taxpayer, provided that the income is not subject to tax (i.e., exempt) by virtue of application of a relevant income tax treaty. In such instances, there would be no need for a taxpayer to complete Indonesia’s Form DGT-1.
However, it has been reported that the tax authorities further indicated that they would not issue written confirmation (other than for U.S. tax residents) and suggested that taxpayers seek such confirmation from the appropriate tax office. Affected taxpayers may want to consider obtaining such confirmation as well as specific advice relating to the circumstances before relying on an existing Certificate of Domicile.
For U.S. residents, the Directorate General of Taxation informally confirmed that U.S. taxpayers may continue to use a Certificate of Domicile (U.S. Form 6166, as issued by the IRS), provided that it is signed by the appropriate IRS official (Field Director, Philadelphia Management Center). The signed Form 6166 must be attached to the Form DGT-1 or DGT-2 (in such instances, the first page of the DTG-1 or DTG-2 need not be signed by the IRS official). The Indonesian guidelines provide that this Certificate of Domicile will be valid for 12 months from the date it is issued by the IRS.
Tax professionals are aware that Competent Authorities in many other jurisdictions have accepted and signed the DGT forms; therefore, it may be advisable that resident taxpayers seek to encourage their non-resident counterparty to comply with the new requirements and complete the Form DGT-1 or DGT-2 (whichever is applicable). A failure to comply could result in application of the full 20% withholding tax on all payments of interest, dividends, royalties, or services fees made to foreign parties.
Summary of Amendments
- Page 1 of Form DTG-1 is valid for 12 months from the date of certification by the Competent Authority or an authorized representative or an authorized tax office of the tax treaty partner, provided that (1) the transactions are between a resident taxpayer in Indonesia and a taxpayer resident in a tax treaty country; and (2) the name and address of the non-resident taxpayer does not change during that period. [In the original regulation, these forms were required with each payment, and there were restrictions on who was an authorized signatory.]
- Page 2 of Form DTG-1 must be signed by the non-resident taxpayer and initialed by the resident taxpayer who will be the party withholding the income tax. [Previously, the rules required it was to be initialed by the Competent Authority].
- Page 2 of Form DTG-1 can be used for several payments made by a resident taxpayer to the same non-resident taxpayer within any month, provided that the total of each class of income (interest, dividends, royalties, service fees, other income) is stated. [Under the prior rules, it appeared that separate forms were required for each type of payment.]
- The party withholding the income tax must attach to the monthly withholding tax return (Article 26) a copy of page 1 and the original version of page 2 of Form DTG-1, together with a list of income.
- Form DGT-1 can be used by a non-listed company (one not listed on a stock exchange). [Under the earlier rules, the questions were worded such that it only applied to a listed company.]
- The Indonesian currency stated in Form DGT-1 may be converted to any applicable foreign currency, thereby removing a practical problem regarding the conversion rate.
- “Claims by other persons” mentioned in Part V, Question 12 on page 2 of Form DGT-1 refers to transactions when a conduit company is used to channel income to a non-treaty country. The third party’s claim to the non-resident taxpayer may be in the form of interest, royalty, service fees, or other payments and is intended to pass the income on to the beneficial owner of such income (excluding employment costs).
For more information, contact a KPMG tax professional in Indonesia:
Graham Garven, +62 215704888, Graham.Garven@kpmg.co.id