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Comparative Analysis On The Taxation of Dividends, Interest, & Royalties - NZ, HK, & SA
Comparative Analysis On The Taxation of Dividends, Interest, & Royalties - NZ, HK, & SA
Abstract
This paper discusses on tax treaty relationship between Indonesia – South
Africa, Indonesia – New Zealand, and Indonesia – Hong Kong, that are concerning on
Dividend, interest and royalties based on local law which apply in their country and
also the treaty between countries, as the comparison of local law and treaty has
significant difference, in which the reduced tax rate due of the treaty is lesser than the
local rate since the treaty is established in order to deduct the burden of the tax payer.
The rate of the treaty is determined by the agreement of each country and as the rate
of the treaty differs due of nature relationship between Indonesia and the other
contracting parties.
Keywords: Dividend; Interest; Royalties; Tax Treaty.
1. INTRODUCTION
As known widely that British is the country that influences many countries in the
world through its colonization. Through its colonization, British brought its legal
system to the colony countries. Indeed, nowadays many British's colonies already got
its independence. However, the ex-British's colonies still adopt the law system
inherited from the British. Some examples of the ex-British's countries are New
Zealand, Hong Kong, and South Africa. Those countries got strong influence from the
British in the past. Indonesia that is not the ex-British's colony is actively trading with
many of the ex-British's colonies including New Zealand, Hong Kong, and South
Africa. Investment from those countries is also coming to Indonesia and vice-versa.
The investment can be in a form of stock investment whether through direct
investment or portfolio investment, debt investment, and usage of intangibles. In order
to share the tax rights upon the dividends, interest, and royalties, the investor's
countries signed the tax treaty with Indonesia. The tax treaty offers the reduced tax
rates on dividends, interest, and royalties. However, the reduced tax rate is treated
differently from country to country. Therefore, this study is conducted in order to find
out what are the similarities and the differences of the tax treaty between Indonesia
and the ex-British's colonies, particularly New Zealand, Hong Kong, and South
Africa. New Zealand, Hong Kong, and South Africa are chosen as a model not only
because they are the ex-British's colonies, but also they are located in the different
continent with different economic condition and situation. Apart from the similarities
and the differences of the tax treaty between Indonesia and those countries, this study
also would like to find out is there any specific impact or any special relationship
between Indonesia and ex-British colonies in the implementation of tax treaty. In
specific, are there any factors that affect the different rates in the tax treaty between
Indonesia and those ex-British's colonies?
Indonesia charges resident and non – resident of dividend, interest and royalties with
different rate and under various circumstances. Below is the table of tax imposed on
payment of dividend, interest, and royalties.
Indonesia Resident Non - Resident
Dividend 15% (Companies) 20% (deductible by
10% Final (Individuals) treaties)
Interest 15% (if non-financial institution) 20% (deductible by
20% (if paid by bank) treaties)
20
Royalties 15% (Companies and Individual) 20% (deductible by
treaties)
source:worldwide coorporate tax guide 2014
South Africa
The definition of dividend itself according to the legal & policy of the South African
and revenue service is “A dividend is in essence any payment by a company to a
shareholder for a share in that company (excluding the return of contributed tax
capita”, dividend withholding tax was introduced in 1 April 2012, with the rate of
10% and known as secondary tax on companies. According to Africa local law,
dividend withholding rate tax will be charged by 15%, this dividend will be exempt if
the dividend declared from African-resident Company and public benefit
organization. Interest rate of South Africa, start from1 January 2015 is 15% and
applied for non – resident only. As refer to the legal & policy of SARS there is no
straight definition of interest in fact there are serveral type of interest income,the
interest that resulted from many business activity such as bond,bank loan and any
other financial instrument. The treatment of witholding tax on interest income in
south africa as follows, certain interest income will be exempt such as interest with
respect to government debt instrument, listed debt instrument and debt instrument
owed by bank.Conforming to the South African legal & policy act Concerning
royalties,the definition of witholding tax on royalties is “Amounts received for the
imparting of any scientific, technical, industrial or commercial knowledge or
information, commonly known as “know-how” payments, are specifically included in
the definition of “gross income”, and are taxable.”.The royalties’ rate applied in South
Africa for non- resident is 15% start from 1 January 2015 and this withholding tax
will apply for non- resident only.
Below is the rate table of South Africa local law, which is imposed by Africa
Company on payment of dividend, interest and royalties.
South Africa Resident Non- Resident
Dividend 0% (received from South 15% (Deductible)
African–resident company 10% (if the Indonesia
and public benefit resident at least has right
organization) 10% of the company and
15% (other company other no interest if the
than African – resident Indonesia resident did not
company) present exceed than 183
days)
15% (In other case)
Interest 0% (coorporation) 0(if physically not
Elective based on age of present for a period
the person and taxable exceeding 183 days)
income amount (interest (coorporation to
up to a cumulative individual non resident
R23,800(R34,500 for tax payor)
individuals older than 65 15 (paid by banks and
years of age)is exempt other institution to non
from normal income tax. resident tax
( individual) payor ,deductible by
treaties)
0/10(to Indonesia
resident)
Royalties 0% 15% (deductible)
10% (to Indonesia
resident)
source:worldwide coorporate tax guide 2014
New Zealand
According to New Zealand parliamentary councel office, the witholding tax rate for
for interest,dividend ,royalties in New Zealand are regulated under New Zealand
income tax act 2007,which is act as the local law.The authority whose respondsible of
levy the tax is inland revenue service,According to the world wide corporate tax guide
(2014), they identified New Zealand start from 1 February 2010 to be reduced by 15%
for cash dividend and 0% for non- resident interest due to the high rate of withhold
charge which is 30%. However, New Zealand has special treatment for their resident
regarding interest tax rate with several elective condition as mention detailed
below,the elective tax rate charge on interest vary 10,5% for individual that expect
their annual gross income will not exceed NZ$14,000 and for trustees for
deceased estates)and 17,5%,30% or 33% if their tax recipient supply their tax
indentification number,the basis to elect the interest is unkown due to limited
information, for non – resident new Zealand will charge by 15% and it still
deductible based on tax treaty. The last discussion will be royalties for new Zealand
resident where new Zealand do not charge royalties to their resident but new Zealand
will charge their non – resident royalties tax rate by 15% final.
Hong Kong
Hong kong recognised as a special administartive region and as still considered as
part of Republic of China .However,Hong Kong has its own independent tax system
as refer to The Bacis Law of The Hong Kong Special Administrative Region of The
People’s Republic Of China under article 108 “The Hong Kong Special
Administrative Region shall practice an independent taxation system”.thus Hong
Kong has its own tax rate that resulting Hong Kong does not charge dividend and
interest rate for their resident and non- resident, however Hong Kong charge the same
rate for royalties to non- resident country which is 4.95% for corporate and 4.50% for
individual.
Hong Kong Resident Non Resident
Dividend 0% 0%
Interest 0% 0%
Royalties 16.5% (to 4.95% (to
corporation) corporation)
15% (individual) 4.50% (to
individual)
source:worldwide coorporate tax guide 2014
Tax Treaty of Dividend, Interest Royalties between Indonesia and each country
5. Closing
In Conclusion, Dividend, Interest and royalties tax treaty are serves and
contribute as an agreement for the contracting parties, in which the treaty itself
provides a mutual benefit for both contracting and the other contracting parties. Due
to the existance of tax treaty, it will reduce the rate of dividend, interest, and royalties
charges for non – resident under various circumstance and it also specifies the tax
exemption for the contracting parties, which resulted in preventing double taxation.
Moreover, the disticntion of treaties depends on the nature of the relation between the
country themself as the basis of rate determination.
6. References
UN. (2011). model double taxation convention. departmen of economic and social affairs
(p. 6). new york: UN.
chisik, r., & davies, r. (2004). Asymmetric FDI and tax-treaty bargaining: theory and
evidence. journal of public economics , 1119–1148.
davies, r. (2003). Tax Treaties, Renegotiations, and Foreign Direct Investment. economic
analysis and policy , 251–273.
Iqbal, Z. (ND). How Tax Treaties Allow Benefits from Double Taxation.
THE BASIC LAW. (1990). the basic law of hong kong and special administrative region of
the people's republic of china. 34.