The Latest Updates on Singapore-Indonesia Double Tax Agreement (DTA)

Singapore and Indonesia have a strong bilateral relationship that is supported by economic cooperation. Singapore has been the top foreign investor in Indonesia since 2014, with its investments spread across various sectors, including manufacturing, energy, and logistics. Last year, Indonesia was Singapore’s seventh-largest trading partner, with bilateral trade amounting to S$48.7 billion.

The Singapore-Indonesia Double Tax Agreement (DTA) was first concluded in 1990, which came into force in 1991. This agreement is one of the treaty arrangements that guarantee an attractive tax proposition for investors operating across the borders of the two countries. In this article, you will see an overview of the key provisions and recent changes of the DTA. 

Scope of the DTA

The Singapore-Indonesia 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, you can benefit from these DTA provisions.

The provisions of the DTA shall apply to all taxes imposed on income on behalf of a contracting state. In the case of Indonesia, the provisions shall apply to the income tax (pajak penghasilan), and, to the extent provided in such income tax, the company tax (pajak perseroan) and the tax on interest, dividends, and royalties (pajak atas bunga, dividen dan royalti). 

Residency

According to Article 4 (Fiscal Domicile), the term ‘resident of a contracting state’ means any person that, under the laws of that country, is subject to taxation in that country due to their domicile, residence, place of management, or place of incorporation. This term does not include a permanent establishment of a foreign company, which is treated as a resident for tax purposes. The taxpayer’s residency status will be determined according to the following rules in order of decreasing priority:

• If an individual is a resident of both countries, the tax domicile is determined by the location of their permanent residence. 
• If an individual has permanent residence in both countries, the location of their vital interests (family and social relations, political and cultural activities, place of business, and work) is taken into account to determine the place of residence;
• If both permanent home or vital interest factors fail to resolve the residency, then habitual abode will be considered;
• if an individual does not have habitual abode in both the countries, then their nationality will be taken into consideration;
• If none of the above rules determine the place of residence, the competent authorities of both countries will resolve the matter by mutual agreement.

Permanent Establishment

According to Article 5 in the DTA, Permanent Establishment (PE) means a fixed place of business through which all or part of the business of an enterprise is carried on. PE includes:

• An area of management;
• a branch;
• an office;
• a factory;
• a workshop;
• a farm or plantation;
• a mine, an oil or gas well, a quarry or other place of extraction of natural resources;
• a building site or construction, installation, or assembly project which exists for more than 183 days; and
• The furnishing of services or consulting services through employees or other persons engaged by the enterprise for an aggregate period of more than 90 days within twelve months.

PE shall not be deemed to include:

• Storage facilities held for specific purposes, such as storage of goods for the purpose of display, delivery, processing, etc.;
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;
• the maintenance of a supply of goods or inventory belonging to the enterprise solely for the purpose of processing by another enterprise;
• the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for gathering information for the enterprise; and
• the supervision of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or similar activities of a preparatory or auxiliary character, for the enterprise.

Key Provisions

Tax on Dividends

Dividends are traditionally taxed in the recipient’s country of residence. However, in some situations, they may also be taxed in the company’s country of residence that is paying the dividends. For example, if the company is a resident of Singapore and the beneficial owner of the dividends is a resident of Indonesia, the dividend tax charged in Singapore shall not exceed:

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

Please note that the above provisions do not apply if the beneficiary owns a PE in the state where the company paying the dividends is domiciled and the dividends received are effectively associated with the PE. Such dividend income will be treated as Business Profits or Independent Personal Services and subject to tax treatment. 

Tax on Interest

Interest is taxed in the country where the recipient of the interest income resides. However, in some cases, the interest may be taxed in the country in which it arises. For these situations, the DTA sets the upper limit as follows.

• If the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 percent of the gross amount.
• Without the treaty, the withholding tax rate for interest income paid to non-residents is 15 percent in Singapore and 20 percent in Indonesia.
• Under the DTA, the withholding tax on interest in both countries is only 10 percent.

Interest accrued in one contracting state will only be taxed in the other contracting state in the following circumstances:

• If interest is paid in respect of bonds, debentures, or other similar obligations of a government, political subdivision, local authority of a participating country, or
• If interest is paid in respect of a loan made, guaranteed or insured, or extended by the Monetary Authority of Singapore (MAS), or Bank Indonesia (The Central Bank of Indonesia), or other lending institution, as may be determined and agreed in the letters exchanged between the competent authorities of the contracting states.

Kindly note that the above provisions will not apply if the beneficial owner of the interest has a PE in the country where the payer resides and the interest paid is effectively related to the PE or fixed place.

Tax on Royalties

Royalties are taxed in the country of the recipient’s residency. However, in some cases, they may also be taxed in the country where they arise. In such circumstances, the DTA establishes upper bounds on the tax payable as follows:

• If the recipient is the beneficial owner of the royalties, the tax imposed 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 the industrial, commercial, or scientific experience.

Note: The previous withholding tax rate for royalty payments was 15 percent, but it has been reduced through the new treaty, which will be discussed below.

Tax on Capital Gains

Generally, capital gains derived from the sale of immovable properties located in a country are taxed in that country. Below are provisions regarding the capital gains:

• Gains from the sale of movable properties, which are part of a permanent establishment which an enterprise of a contracting state (Country A) has in the other contracting state (Country B), will be taxed in Country B.
• Capital gains obtained by an enterprise of a country from the sale of ships or aircraft operated in international traffic will only be taxed in that country.  
• Capital gains resulting from the sale of any property other than the types mentioned above will be taxed in the country where the seller is domiciled.

Note: In the previous version of the DTA, there were no provisions regarding the allocation of the taxing rights on capital gains.

You may find this relevant guide useful in helping you make a decision:

Setting Up a Company: Singapore vs Indonesia

Latest Changes in the DTA

On 23 July 2021, the renewed Singapore-Indonesia double tax agreement (DTA) came into effect, strengthening efforts to prevent tax evasion, increase the tax base and increase investment between the two countries. Below are the key changes in the updated DTA:

Introduction of the provision of capital gains article

The previous DTA did not regulate capital gains. Under the new DTA, the investor’s country of residence will be allocated taxation rights on capital gains from the sale of shares and assets of Indonesian companies (see the provisions explained above). Singaporean investors will thus no longer be subject to the five percent tax on gross proceeds from the sale of equity investments held by foreign shareholders under Indonesian law. 

Reduction in the branch profit tax rate (BPT)

The BPT rate, which was previously 15 percent, has now been reduced to 10 percent. However, these tariffs do not apply to companies or residents of Indonesia or Singapore who are parties to contracts related to the oil and gas and mining sectors.

Removal of limitation of relief to treaty benefits

The limitation of relief enshrined in Article 22 of the current Singapore- Indonesia DTA has been removed. Previously, Singapore tax residents could only benefit from the provisions of the treaty if income is remitted to Singapore.

Singapore tax resident investors are no longer required to remit the income into Singapore to enjoy the treaty benefits accorded under the DTA, subject to the principle purpose test (PPT). In addition, foreign-sourced income that is not remitted into, received, or deemed received in Singapore is no longer subject to tax under Singapore’s domestic tax regime.

Reduced withholding tax rates for royalties

The revised Article 12 of the Singapore-Indonesia DTA has reduced the withholding tax rate under the previous DTA. Please, refer to the tax on royalty provisions mentioned above to see the new withholding tax rates.

Interest exemption for sovereign wealth funds and bonds issued by the government

There is no change in the general interest tax withholding rate of 15 percent. However, amendments exist for the following:

• Bonds or debt securities issued by the government;
• Institutions that constitute the ‘government’;
• State wealth fund and its subsidiaries; and
• Any penalty fees will not be considered interest according to the definition of interest.

Conclusion

The updated Singapore-Indonesia DTA can further open the door for more effective tax administration between the two countries. The new provisions are expected to benefit businesses in both countries and deepen cooperation between them across multiple sectors. For general information on Singapore DTAs, please refer to Singapore’s Double Tax Treaties Explained.

If you need help with your accounting and taxation in Singapore, feel free to contact us. We can assist you as your company’s accountant, bookkeeper, business advisor, and company secretary. 

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