COMPARATIVE ANALYSIS ON THE TAXATION OF DIVIDENDS, INTEREST, AND

ROYALTIES UNDER THE TAX TREATY BETWEEN INDONESIA AND UNITED

KINGDOM, UNITED STATES, AND INDIA

Abstract
In today’s highly civilized era, many countries collaborate to establish tax treaty between the
countries. The main purpose of the tax treaty is to eliminate double taxation imposed on the
resident (either individual or body of person) which resides in another country. The purpose of
this study is in order to compare the tax treaty between Indonesia and other countries based on
the developed and developing countries. The comparison includes the differences and similarities
of the tax treaty between Indonesia and three model countries. The taxation treaty between
Indonesia and United States in relation to dividends, interest and royalties will be further
discussed.
Keywords: developed countries, developing countries, comparison of tax treaty, dividends,
interest, royalties

1. INTRODUCTION
In today’s highly civilized era, many countries collaborate to establish tax treaty between the
countries. The main purpose of the tax treaty is to eliminate double taxation imposed on the
resident (either individual or body of person) which resides in another country. There are three
types of treaties that consist of bilateral treaty, unilateral treaty, and multilateral treaty. Indonesia
has over sixty treaties with other countries which will benefit both the Indonesian resident and
the other country’s resident.
This study focuses on the bilateral tax treaty between Indonesia and United Kingdom, United
States, and India, particularly in relation to the dividends, interest, and royalties. The comparison
of those countries is based on the differentiation between the developed countries versus
developing country. Developed country is classified for a country that has high economic
structure and also highly developed technologies. There are several indicators to indicate country
as developed or developing countries. There are the standard of living, Human development
Index, Per capita income, level of industrialization, and GDP. On the other hand the term
developing country is associated with the country that has less economic structure with lower
standard of living, and low Human Development Index. Both Indonesia and India are considered
as the developing countries which will also be analyzed in this study.
The purpose of this study is in order to compare the tax treaty between Indonesia and other
countries based on the developed and developing terms as mentioned above. Moreover, United
Kingdom, United States and India are chosen as the model because these countries are located in
different part of the world.
The comparison includes the differences and similarities of the tax treaty between Indonesia and
three model countries. The study will analyze whether there is any impact to the tax treaty
between Indonesia and three model countries regarding the status of developed countries or
developing countries.

2.     METHODOLOGY
This study uses qualitative approach by comparing the tax treaty between Indonesia and United
Kingdom, United States, and India in relation to dividend, interest and royalties. The domestic
Tax Law of Indonesia and its treaty partner's countries are gathered from secondary data through
literature review.

3.     LITERATURE REVIEW
In 1960s, the classification of rich (developed) and poor (developing) countries is arising to
define the difference between country’s economies (Pearson, 1969). According to (Nielsen,
2011), There are no specific criterions for developed and developing countries, which are still in
argue for countries classification. However, there still a need to classify countries in order to
have a comparison of development between countries.
The classifications are basically seen from the standard of living of people in those countries
whereas this indicator is not really reliable to rely on since there is a big gap between rich and
poor. There are some other factors to indicate a country as developed countries. First, The
member of Organization of Economic Cooperation and Development (OECD) is considered as
developed countries because it is believed that the country have high economy that work together
in order to achieve economic development (Nielsen, 2011). OECD has already has 33 members
in 2013.  According to United Nation (2005), Second indicator is Human Development Index is
the indicator that considers the life expectancy, education, and income indices. The Human
Development index measure how good is the living condition of one country, which results in
the healthiness, and the creativeness of the people in that country (Moran, Wackernagel, Kitzes,
GoldFinger, & Boutaud, 2007). The HDI that equal to 1 shows the success of the country in
achieving maximum value for their people (Moran, Wackernagel, Kitzes, GoldFinger, &
Boutaud, 2007). A third indicator for developed country is from the Gross Domestic Product
(GDP) of the country. Country is indicates as developed if their people have income of minimum
$2 /day per person.
In late 1990s, there are significant changes in the global economy, financial and fiscal
environment. The growth of tax is affecting international economic relations. The League of
Nations and Organization for European Economic Co-operation (OEEC) have made a
convention of the United Nations Model Taxation between developed and developing countries
in order to eliminate double taxation (United Nation, 2011). These models have a huge
influenced in nowadays tax treaty between countries.
In the tax treaty, dividend is defined as the “income from shares, or other rights, not being debt-
claims, participating in profits, as well as income from other corporate rights assimilated to
income from shares by the taxation laws of the State of which the company making the
distribution is a resident and also includes any other item which, under the laws of the
Contracting State of which the company paying the dividend is a resident, is treated as a
dividend or distribution of a company.”  
The bilateral tax treaty between Indonesia and United Kingdom is signed in April 1993 and
effective since January 1995. The provision of dividends consists of eight paragraphs. The rate
for taxation of dividend is 15% for portfolio investment and 10% for direct investment. The
special condition for imposing 10% taxation of dividend is when the dividend receiver has at
least 15% ownership of the company. In the other hand, if the shareholders own less than 15% of
ownership, they will be imposed 15% tax dividend.
In this section, the taxation treaty between Indonesia and United States in relation to dividends,
interest and royalties will be further discussed. The taxation of dividend under the tax treaty
between Indonesia and United States is signed in 11 July 1988 and 1 February 1997.  The
provision of dividends consists of five paragraphs. The term contracting state will refer to
Indonesia and the other contracting state will refer to United States. The first paragraph is
highlighting about which country should imposed the taxation of dividends. The agreement
stated that if the dividends are obtained from the corporation in Indonesia by a citizen of United
States, the dividends may be taxed within both of the countries. The second paragraph stated that
the taxation of dividends is 10% of the gross amount if an individual owns directly at least 25%
of the total shares. In the other hand, the individual will be imposed 15% of the gross amount of
dividend if the beneficial owner poses less than 25% of the total shares. Nevertheless, the
agreement in the second paragraph shall not apply if the beneficial owner of the dividend is an
Indonesian resident who owns a permanent establishment or fixed base in United States. In such
cases, the provision of Article 8 about permanent establishment and Article 15 about
Independent Personal Service shall apply. In addition, the following paragraph stated that if an
Indonesian company has a permanent establishment in United States, an additional tax may be
imposed by United States according to the profits attributable of a permanent establishment. The
fifth or last paragraph of the provision emphasis that the rate of tax discussed in the paragraph 4
will not affect the rate of additional tax in the production sharing contracts. The contracts of
work are related to the oil, gas, and other mineral products negotiated by the body of Indonesia
with a resident of United States.
The taxation of dividends, interest and royalties under the tax treaty between Indonesia and India
will be discussed in the following section. The tax treaty is signed in 7 August 1987 and 1 Jan
1988. This is the first treaty that becomes effective among all of the three models. Both
Indonesia and India is a developing countries, the study wants to investigate any similarities or
differences within the taxation treaty. The provision of dividends consists of five paragraphs.
The term contracting state will refer to Indonesia and the other contracting state will refer to
India. Similar to the other treaty, the first paragraph is examining about which country should
imposed the taxation of dividends. It stated that the dividends paid by a company of Indonesia to
a resident of India should be taxed in India. In addition, the second paragraph specified the
taxation rate of dividend. The dividend tax will be imposed at the rate of 10% of the gross
amount of dividend if the beneficial owner holds at least 25% of the shares the company paying
dividends. In the other hand, the beneficial owner will be enforced to pay 15% dividend tax in all
other cases or the ownership is less than 25% of the company. The third paragraph of the
provision is clarifying about the meaning of the terms dividend used in the article which has been
mentioned in the beginning of the section.
This section is discuss about the comparison of interest based on the contracting state, which is
Indonesia and the other Contracting State, which are the United Kingdom, United States, and
India.
According to the treaty from each country that is United Kingdom, United States, and India their
interest arising in a Contracting State, which is derived by foreigners from other State, will be
taxed in that other States. The taxes imposed to them will not exceed by 10% of the gross
amount of the interest. Depart from the provisions; a Contracting State will not have to pay the
taxed if the government of the other Contracting State is using the interest. Other member that
also included besides the government is the Central Bank of the other State, the financial
institution owned by the government of other Contracting State, including the political
subdivisions and local authorities thereof. This rules is being used in all three countries, they are
using the same principles. In United Kingdom and India, some people will also exempt from tax
if they got the permission from the government.
Next, in terms of interest which means income from debt-claims of every kind, whether of not
secure by mortgage and whether or not carrying a right to participate in the debtor’s profits, and
other particular, income from government securities and income from bonds or debentures. In
United Kingdom, it shall not include any item that is treated as a distribution under the
provisions of Article 10 of this agreement. In India there will be a penalty charges for late
payment, as it will not consider as interest for the purpose of this Articles. Interest considered
arising in one country when the one that paid the interest is that country. If someone has a fixed
business in other country that the interest arises in that country, whether that person is a resident
of that county or not, the interest is paid is effectively connected with such permanent
establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case
may be, shall apply. In United Kingdom and India there is a principles that state, interest shall be
arise in one country when the payer is in citizen of that country. But, the person who pay the
interest is not only the resident of that country but the one that have a permanent establishment
or fixed based in that country.
Lastly, all the three countries have the same law that mention about special relationship between
both of country. The three countries stated that the amount of the interest, having regard to the
debt-claim for which it is paid, exceeds the amount which would have been agreed upon both of
countries in the absence of such relationship, the exceeds amount of interest will be taxed
according to each of countries, due to the provisions of this Agreement.
The provisions between Indonesia with United Kingdom in terms of royalties have 7 provisions;
Indonesia with United States has 7 provisions, and Indonesia with India have 6 provisions. In
this section, Royalties, which paid by Indonesia but derived from United Kingdom is paid by the
United Kingdom. However the receiver may also paid the royalties tax based on local tax law
and if the receiver is a United Kingdom citizen, the tax should not exceed 15% and 10%. The tax
rate of tax treaty between Indonesia with United States and India shall not exceed 15%. The
explanation above will not applied if the receiver of royalties is local Indonesian, which
performed the permanent establishment. This income would be considered as permanent
establishment income rather than royalties. Royalties is considered incurred from Indonesia
when the payer of royalties is Indonesia, a political subdivision, a local authority, or Indonesian.
The payer that paid the royalties from the permanent establishment in Indonesia also considered
as royalties incurred from Indonesia. Despite of the relationship of the payer and receiver of the
royalties, the gross amount of the royalties that is used is the last amount mentioned. If the payer
paid more than that, the excess of payment will be remain taxable under local tax laws of
Indonesia.

4.     ANALYSIS
4.1 Dividends

Tax Rate of Dividend UK US India

Portfolio Investment 15% 15% 15%

Direct Investment 10%a 10%b 10%c

a apply if dividends receiver is corporation that control decision-making, directly or indirectly at

least 15% at the dividends payer
b apply if dividends receiver is corporation (in addition to partnership) which owns direct capital
at least 25% at the dividends payer
c apply if dividends receiver is corporation that owns at least 25% shares at the dividends payer
This section will be investigating the implementation of the taxation of dividend according to the
tax treaty between Indonesia and United Kingdom, United States, and India. All of the models
have the identical meaning referring to the term dividends which has been mentioned in the
former section. All of the treaty imposed the similar rate regarding the taxation of dividends. The
taxation rate is 15% for portfolio investment and 10% for direct investment regardless the status
of developed or developing countries. However, each country has its own condition for the
implementation of the dividend tax rate
For instance, in United Kingdom the dividend receiver will be taxed 10% tax rate only if the
dividend receiver controls decision-making, directly or indirectly at least 15% of the ownership.
In the other hand, United States and India have the same condition regarding the minimum 25%
ownership that is poses by the dividend receiver in order to be imposed 10% tax rate. However,
all of the models have the same agreement to be enforcing 15% tax in all other cases mentioned
above such as in the tax treaty under Indonesia and United Kingdom will be imposing 15% tax
rate if the beneficial owner holds less than 15% of the total shares. The tax treaty under
Indonesia and United States and India will be imposing 15% tax of the gross amount if the
beneficial owner poses less than 25% of the ownership. The direct investor is obliged to pay a
lower tax rate because it is a compensation for them for bearing a higher risk in investing a larger
amount of capital in the company.
The same tax rate is imposed for the portfolio investment and direct investment in all of the tax
treaty models regardless the developed or developing countries. Despite, each country has its
own condition in classifying the direct investment which has been described in the former
paragraphs.
The tax treaty between Indonesia and United Kingdom will be more profitable to the resident in
both of the countries as the provision of direct investment is only 15% of the ownership which is
10% lower than the agreement with the other treaty models. It means that the investor will be
imposed a lower tax rate and minimize the tax expense. The unique similarities between the
taxation treaty under Indonesia and United Kingdom and United States or in other words the
taxation treaty with the developed countries are the similar paragraph mentioning about the
provisions of the paragraph that shall not affect the provisions contained in production sharing
contracts of work. The contracts of work are related to the oil, gas, and other mineral products
negotiated by the body of Indonesia with a resident of United Kingdom and United States. This
paragraph shows the significant relation relating to the mineral business between Indonesia and
both of the countries.

4.2 Interest
The term interest means “income from bonds, debentures, Government securities, notes, or other
evidences of indebtedness, whether or not secured by a mortgage or other securities and whether
or not carrying a right to participate in profits, and debt-claims of every kind, as well as all other
income which, under the taxation law of the Contracting State in which the income has its
source, is assimilated to income from money lent.” This section is about comparing the tax treaty
from each country which is the United Kingdom, United States, and India.

Taxed Contracting States Other Contracting States

United Kingdom V

United States V V

India V

Interest arising in one country that is derived by the foreigners from other country may be taxed
in their home countries.  In United Kingdom and India, they adopt the same rules that will be
applicable in their own countries. But United States has different rules, as they will tax the
interest in both countries. So their resident will get taxed in their own country and also the other
country as well.

Tax Imposed United Kingdom United States India

not exceed 10% 10% 10%

The rate of tax that will be imposed to the entire resident will not exceed 10 percent of the gross
amount of such interest. From the table above, we can conclude that all the countries that are
being compared have the same percentage in charging the tax.
 4.3 Royalties
This section focused on comparison of royalties on the tax treaty between Indonesia with United
Kingdom, United States and India. The terms royalties between Indonesia and United Kingdom
have two separate ideas. First, Royalties is defined as the payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic or scientific
work with the rate of 15% of the gross amount of the royalties. Second, Royalties is defines as
the payments of using any industrial, commercial or scientific equipment with the rate of 10% of
the royalties. While United States and India have the same definition of the royalties with only
rate of 15% of the gross amount of the royalties. This could mean that Indonesia towards United
Kingdom have more consideration for the royalties in terms of the scientific equipment that are
usually used for research and development. Indonesia and United States tax treaty have an
addition of the provisions that stated gains of the cooperation in using the rights or property
which is arise by the contracting state will be taxed by the contracting state. Indonesia and
United Kingdom also have an addition of the provisions that stated that royalties will not be
applied if the main purpose or one of the main purposes of any person concerned with the
creation or assignment of the right or property in respect of which the royalties are paid to take
advantage of this article by means of that creation or assignment. Under Indonesian local tax law
the rate of royalties for Indonesian is 15%, but for other countries is 20% almost the same for
Local resident who do not have tax file number. Tax treaty is made to avoid double taxation and
tax evasion in respect of tax. It is also improve the relationship with other countries, because
after the tax treaty agreement, the rate for other countries is not exceeds 15%
This study is proposing to compare the treaty between Indonesia and other state based on
developed and developing country. The analysis of the comparison is that developing country
has fewer provisions than developed countries. Developed countries have more demand on the
agreement to create a fair taxation for their state. However, Indonesia and India both is
developing country, so they adopt almost the same law.

5. CONCLUSION
As the conclusion, this study focuses on the comparison of the tax treaty between Indonesia with
United Kingdom, United States, and India in terms of dividends, Interest and Royalties.
According on the analysis above, the tax treaty is analyzed based on develop and developing
countries. United Kingdom and United States are considered as developed countries while India
is considered as developing country. In terms of dividends, the same rate is applied for United
Kingdom, United States and India in portfolio investment as well as in direct investment.
However, there is some different condition under United Kingdom treaty for classifying the
direct investment and the article between the countries contained of eight articles which have
three more articles in the other countries. The developed countries of the treaty models also
adopted the similar paragraphs regarding the contracts of work related to gas, oil, and other
mineral products being negotiated among the countries. In terms of interest, the analysis above
shows that there is no significant difference between tax treaty between Indonesia with United
Kingdom, United States, and India. In terms of royalties, developing countries (UK and US)
have more provisions which are 7 provisions than developing country (India) which are 6
provisions. This shows that India as developing country basically adopts the same law as
Indonesia. However, royalties also applied the same rate for the 3 countries (Not exceed 15%).
United Kingdom is the one who have separate rate for scientific equipment which is only 10%.
This statement shows that United Kingdom has more consideration at the research and
development with Indonesia.