International Tax

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 BUDGETARY
 To collect tax from people and finance country’s
budget
 REGULATORY
 To regulate investment, production and
consumption behaviour

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 Capital exporting countries and capital
importing countries
 Developed countries and developing
countries
 Investment flows from developed to
developing countries depends on investment
climate

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 Every country has its own tax jurisdiction
 Different tax jurisdiction become ‘investment
barrier/constraint’
 Outbond transaction : Resident taxpayer will
be taxed as they have income from offshore
as well as from Indonesia
 Inbound transaction : Non resident taxpayer
will be taxed as they have income from
Indonesia.
 Definition of non-resident taxpayer and
his/her taxable income
 Definition of Permanent Establishment and
it’s taxable income
 Double taxation avoidance method
 The imposition of similar taxes in two or more
countries/states on the same taxpayer in
respect of the same base
  Double or multiple taxation on the same
tax subject and object
 “Conflict” of tax jurisdiction between/among
countries on the same subject or object
 domicile principle & source principle
 definition of resident
 source of income
 Unilateral: each country will govern its
avoidance on their tax regulation 
Indonesia: Income Tax Art. 3, Art. 15, Art. 24
 Bilateral: Tax treaty (P3B) between 2
countries
 Multilateral: Tax treaty among (more than 2)
countries  ASEAN & China
 Tax credit
 Full credit
 Ordinary credit

 Tax exemption
 Full exemption
 Progressive exemption
 Domicile countries permits the resident
taxpayer to credit it’s tax that has been paid
in source countries.
 Full Credit : all taxes paid in source countries
could be credited
 Ordinary Credit : all taxes paid in source
countries could be credited, limited to
maximum as same as tax calculated based on
domicile countries tax tariff.
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 Per country limitation
 (Taxable income from each source country /

Total taxable income ) X Current Income tax

expense

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Domicile Country Source Country
Tariff: Tariff
0 – 800.000 : 25% Case 1 : 20%
More than 800.000 : 35% Case 2 : 40%

Income: Income:
Domestic : 800.000 200.000
Offshore : 200.000
Total : 1.000.000
 Company A is a resident in Domicile Country
which applied world wide income and full
credit method
 Its domestic income is 800.000 and offshore
income (from Source Country) is 200.000
Domicile Country Source Country
Tariff : 35% Tariff : 20%

Income: Income : 200.000

Domestic : 800.000
Offshore : 200.000
Tax payable : 350.000 Tax paid : 40.000
Tax credit : 40.000
Tax paid : 310.000
Domicile Country Source Country
Tariff : 35% Tariff : 40%

Income: Income : 200.000

Domestic : 800.000
Offshore : 200.000
Tax payable : 350.000 Tax paid : 80.000
Tax credit : 80.000
Tax paid : 270.000
 Company A is a resident in Domicile Country
which applied world wide income and
ordinary credit method
 Its domestic income is 800.000 and offshore
income (from Source Contry) is 200.000
Domicile Country Source Country
Tariff :35% Tariff : 20%

Income: Income : 200.000

Domestic : 800.000
Offshore : 200.000
Tax payable : 350.000 Tax paid : 40.000
Tax credit : 40.000
Tax paid : 310.000
Domicile Country Source Country
Tariff : 35% Tariff : 40%

Income: Income : 200.000

Domestic : 800.000
Offshore : 200.000
Tax payable : 350.000 Tax paid : 80.000
Tax credit : 70.000
Tax paid : 280.000
 Company A is a resident in Domicile Country
which applied world wide income and full
exemption method
 Its domestic income is 800.000 and offshore
income (from Source Country) is 200.000
 Offshore income and its tax is not taken into
consideration of tax calculation in Domicile
Country
Domicile Country Source Country
Tariff :35% Tariff : 20%

Income: Income : 200.000

Domestic : 800.000
Offshore : 200.000
Tax payable : 280.000 Tax paid : 40.000
Tax credit : 0
Tax paid : 280.000
Domicile Country Source Country
Tariff : 35% Tariff : 40%

Income: Income : 200.000

Domestic : 800.000
Offshore : 200.000
Tax payable : 280.000 Tax paid : 80.000
Tax credit : 0
Tax paid : 280.000
 Ordinary credit
 Per country limitation  only parts of
income tax withheld from source countries
with higher tax tariff could be credited
 UN (United Nation) Model
 OECD (Organization for Economic
Cooperation and Development) Model
 Taxing right is divided between domicile and
source country
 Domicile country only
 Source country only
 Sharing
 If the taxing right is given to source country,
domicile country should facilitate tax
credit/tax exemption.

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 30 country member
 1943 : Mexico Draft  More taxing rights for
source countries
 1946 ; London Draft  More taxing rights for
domicile countries

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 1980.
 More taxing rights for developing countries
as source countries

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 Tax treaty is considered “lex specialis”, while
every country’s tax jurisdiction is considered
“lex generalis”
 Lex specialis derogat lex generalis

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 Person, taxes and states covered
 Income definition
 Taxing rights
 “Shall be taxable only”  Domicile Country
 “May be taxed”  Sharing
 Credit method/Exemption method
 Mutual Aggreement Procedures

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 Distributive rules : to distribute tax between
domicile and source country
 To prevent any double taxation
 Tax Treaty is superior than domestic
jurisdiction
 “ May be taxed in...”  source country still
has taxation right
 “Shall be taxable only in ....”  only one
country has taxation right, especially
domicile country
UN (United Nation) Model  fair distribution
between domicile and source countries
OECD (Organization for Economic
Cooperation and Development) Model 
resident principle
Indonesian  tend to adapt UN Model
1. Income derived from capital in the form of dividend, interest
including premium, discount, and compensation for a
guarantee loan, royalties, rent and other income related to
the use of property;
2. Compensation for services, employment and activities;
3. Gift and rewards in whatever name or form;
4. Pensions and other periodic payment.
5. Swap premiums and other hedge transactions
6. Gains from discharge of indebtedness
7. Gains from the sale of assets in Indonesia
8. Insurance premium paid to offshore insurance companies
 Indonesia : Income Tax Law Article 26 
tariff for non resident taxpayer : 20%
 Tariff in tax treaties for dividend, interest,
royalty, rent revenue should be lower than
20%
 Income from stock investment and other
securities
 Interest, royalty, rent revenue from movable
property
 Rent revenue from immovable property
 Compensation for services, employment and
activities
 Controlled Foreign Corporation
 Special Purpose Vehicle
 Beneficial Owner
 This agreement shall apply to persons who
are resident of one or both of the
Contracting state
 Tax treaty shopping avoidance
 Definition of resident taxpayer follows
domestic jurisdiction
 Countries: A, B, X
 There is tax treaty between A & B, but not
with X
 X should establish a company in A or B if it
wants to get any facilities from the treaty
between A & B
 A company that is a resident of a Contracting
State shall not be entitled to relief from taxation
under this Convention with respect to any item
of income, gains or profits if it is owned or
controlled directly or through one or more
companies, whenever resident, by persons who
are not residents of a Contracting State.
 Minimum amount of shares owned by a
resident taxpayer is 50% of paid-in capital
 The agreement shall aply to taxes on income,
 Including taxes on gains from the alienation
of movable or immovable property
 And taxes on the total amounts of wages and
salaries paid by enterprises
 Country
 Persons, Companies, Enterprises
 International Traffic
 Competent Authority
 National
 Any person who is liable to tax therein by
reason of his domicile, residence, place of
management or any other criterion of a
similar nature
 Permanent home  intention to live
permanently
 Centre of vital interest  he shall be deemed to
be a resident of the State which his personal and
economic relations are closer
 Habitual abode  Which countries he/she lived
longer
 Settled by the competent authorities (IM) / citizenship (OECD)
 A tercatat sebagai warga negara Jepang,
memiliki rumah di Singapore dan memiliki
perusahaan di Indonesia, Malaysia, Filipina
dan Timor Leste. Dia paling sering
mengunjungi Filipina dalam setahun.
 Penduduk negara manakah si A tersebut?
 Place of effective management
 Mutual agreement
 A place of incorporation
 A permanent establishment is an establishment
used by an individual who does not reside in
Indonesia :
 an individual who has been present in Indonesia for
not more than 183 (one hundred and eighty-three)
days within any period of 12 (twelve) months,
 and an entity which is established out side
Indonesia and is not domiciled in Indonesia
 conducting business or carrying out activities
1. a place of management;
2. a branch;
3. a representative office;
4. an office;
5. a factory;
6. a workshop;
7. a warehouse;
8. a space for promotion and selling;
9. a mine and a place of extraction of natural
resources;
10. an area of oil and gas mining;
11. a fishery, animal husbandry, agriculture,
plantation, or forestry;
12. a construction, installation or assembly
project
13. any kind of services provided by employees or any other
persons, provided that the services were done in more than
60 (sixty) days within a period of 12 (twelve) months;
14. an individual or entity acting as a dependent agent;
15. an agent or employee of insurance company which is
established outside Indonesia and is not domiciled in
Indonesia, receiving insurance premium or insuring risk in
Indonesia; and
16. computer, electronic agent or automatic equipments
owned, rented, or used by any electronic transaction
provider to conduct business through internet.
 Business profit of PE – attribution rule
 Income of head office derived from Indonesia
that similar with its PE – force of attraction
 Income of head office, should there are any
effective connection between PE and its
activities – effectively connected
 A fixed place of business through which the
business of an enterprise of a Contracting
State is wholly or partly carried on in the
other Contracting State
 Place available for conducting any business
(building or equipment)
 In a given location
 Need not any personel representation  e.g.
Vending machines
 A place of management
 A branch
 An office
 A factory
 A workshop
 A warehouse or premises used as sales outlet
 A farm or plantation
 A mine, an oil or gas well, a quarry or any other
place of extraction / exploration / exploitation of
natural resources.
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 Construction Project
 Furnishing of Services
 Dependent agent
 Insurance services
 A building site, a construction, assembly or
supervisory activities in connection therewith, but
only where such sute, project or activities continue
for a period more than ...... months
 The furnishing of services, including consultancy
services by an enterprise through employees for the
same project or a connected project within a
country for periods more than ...... Within any 12
months period

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 Storage or display of goods only
 Storage solely for the purpose of processing
by another enterprise
 Purchasing and collect information only
 Advertising and supply information only
 Preparatory and auxiliary activities only

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 Has an authority to conclude contracts in the
name of (foreign) enterprise
 Has no such authority, but maintains a stock
of goods or merchandise on behalf of the
enterprise
 Manufactures or processes goods or
merchandise belonging to the enterprise
 Secures orders for enterprises and its
subsidiary
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 Includes in PE are the insurance agent of
foreign insurance company which receives
insurance premium and insures risks in
Indonesia

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 The fact that a company which is a resident
of a Contracting State controls or is
controlled by a company which a resident of
the other Contracting State.
 Subsidiary is not considered as PE, except
fulfills the conditions as dependent agent.

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 Independent is not considered as PE.
 An enterprise carries on business on the other
state through a broker, general commission
agent, or any other agent of independent
status.
 “Independent” : based on the relation with
other enterprises and the risk of business.

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63
 Independent Personal Service
 Dependent Personal Service
 Director’s fee
 Artist and Sportsmen
 Civil Service
 Include as PE : Furnishing of service in
Indonesia more than 60 days in 12 months.
 If the service is furnished by personal tax
payer less than 60 days in 12 months  PPh
26 will be applied.

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 Fixed base
 Time test : Present in Indonesia for more than
60 days in 12 months

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 Income from independent personal
services
 Income from professional services
 Income from activities of an
independent character.
 Independent scientific, literary, artistic,
educational or teaching activities
 Independent activities of physicians,
engineers, lawyers, dentists, architects and
accountants

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 Independent:
 There is no continuous instruction and or control
from other enterprises
 Not in the relationship of superior-subordinate
(buruh-majikan).
 There is agreement on the quality of end result
between the consumers and the agent.
Income from employment for any
experts such as doctor who become
an employee of a hospital
Income of artist and sportsmen
from his/her self-employment
 Similar with business income
 Income derived by a resident of a state shall
be taxable only in that state (domicile
country)
 Unless there is a fixed base (PE) and fullfill the
time test condition in other state.
 ‘Fixed base’ : office or any other fixed place
for consulting service
 Income from self employment will be taxed in domicile
country except the taxpayer is doing his self
employment from a fixed base in source country.
 If then it is considered PE, tax object is limited only the
one attributable to that fixed base
 Similar with OECD model, wit twider taxing rights for
source countries, based on these 2 additional
conditions:
 Taxpayer stays in source country > 183 days in the fiscal year.
Only income which derived from source country will be taxed in
this country.
 The payment received in source country is paid by resident
taxpayer or PE in source country.
 The term “professional services” includes
especially independent scientific, literary,
artistic, educational or teaching activities as
well as the independent activities of
physicians, lawyers, engineers, architects,
dentists and accountants.
 Exception: Article 16 (Director’s fee), 18
(Pension) & 19 (Government services)
 OECD Model is similar with UN Model,
except:
 UN : a fiscal year concept
 OECD : any twelve-months period concept
 Employment income will be taxed at domicile country, with
the exception that if those jobs is done in source country,
then the source country will get the taxing rights.
 Based on ‘source rule’, except:
 Pension : remuneration for past time employment (Art.
18)
 Pension for civil services and government officer
 Salary for civil services and government officer (Art. 19)
 Although the assignment is done in source country,
domicile countries has the taxing rights if these
conditions exist:
 Employee stays in source country < 183 days in a fiscal year
 The employeer or payer is not the resident or PE or fixed base
own by employer in the source country
 Time test should be done to assess the days
of physical presence, including holidays and
any non-activity days, except days’ in transit.
 Be aware if there are any possibilities the
abuse with contract using terms “outsourcing
of employee”  who is the real employer
should be clear.
 International hiring-out of labor.
 Local company seek expatriates only for period < 183
days through offshore agencies, act as the employer.
 The substance of employer: a party who owns the right
of the result, having responsibility and taking risk for the
products or services delivered.
 Conditions : the real employer is the user of the labor (and
not the foreign intermediary):
 The hirer (intermediary) does not bear the responsibility
and risk for the results produced
 The authority to instruct the worker lies with the user.
 The work is performed at a place under control of the user
 The remuneration to the hirer is calculated on the basis of
time or any other method of connection
 The number and qualification of the employees are not
solely determined by the hirer
 Income derived from employment in a ship or
aircraft with international route will be taxed
in a country which is also the place of its
effective management.
 Director’s fee and other similar remuneration received
from offshore companies will be taxed in the source
country.
 Non resident commissioner of PT PMA in
Indonesia
 The commissioner received salary from PT
PMA
 Indonesia has the taxing rights  PPh Pasal
26 (20%)
 1. Notwithstanding the provisions of articles
14 (IPS) and 15 (DPS), income derived by a
resident of a Contracting State as
entertainer, such as theatre, motion picture,
radio or television artiste, or a musician, or as
a sportsperson from his personal activities as
such exercised in the other Contracting State,
may be taxed in that other State.
 2. Where income in respect of personal activities
exercised by an entertainer or sportsperson in his
capacity as such accrues not to the entertainer or
sportsperson himself but to another person, that
income may, notwithstanding the provisions of articles
7 (Business Profits), 14 and 15, be taxed in the
Contracting State in which the activities of the
entertainer or sportsperson are exercised.
 1. Notwithstanding the provisions of articles 7
(BUSINESS PROFITS) and 15 (DPS), income derived by
a resident of a Contracting State as entertainer, such as
theatre, motion picture, radio or television artiste, or a
musician, or as a sportsmen from his personal activities
as such exercised in the other Contracting State, may be
taxed in that other State.
 2. Where income in respect of personal activities
exercised by an entertainer or sportsmen in his capacity
as such accrues not to the entertainer or sportsmen
himself but to another person, that income may,
notwithstanding the provisions of articles 7 and 15, be
taxed in the Contracting State in which the activities of
the entertainer or sportsmen are exercised.
Article 18
 1. Subject to provision of Par.2 Art. 19
(Government Service), pensions and other
similar remuneration paid to a resident of a
Contracting State in consideration of past
employment shall be taxable only in that
State (Negara Domisili)
 2. Notwithstanding the provision of Par. 1,
pensions paid and other payment made
under a public scheme which is part of the
social security system of a Contracting State
or a political subdivision or a local authority
thereof shall be taxable only in that State.
(Negara Sumber)
 1. Subject to provision of Par.2 Art. 19 (Government
Service), pensions and other similar remuneration paid
to a resident of a Contracting State in consideration of
past employment may be taxable only in that State
(Negara Domisili)
 2. However, such pensions and other similar
remuneration may also be taxed in the other
Contracting State if the payment is made by a resident
of that other State or a PE situated therein.
 3. Notwithstanding the provision of Par. 1,
pensions paid and other payment made
under a public scheme which is part of the
social security system of a Contracting State
or a political subdivision or a local authority
shall be thereof shall be taxable only in that
State. (Negara Sumber)
 1. Subject to provision of Par.2 Art. 19
(Government Service), pensions and other
similar remuneration paid to a resident of a
Contracting State in consideration of past
employment shall be taxable only in that
State (Negara Domisili – Sama dengan UN
Alternatif A)
Article 17
Tax Treaty 1992
 1. Notwithstanding the provisions of articles
14 and 15, income derived by entertainers
(such as theatrical, motion picture, radio or
television artistes and musicians and
atheletes) their personal activities as such
may be taxed in the Contracting State in
which these activities are exercised
 2. Where income in respect of personal
activities of an entertainer as such accrues
not to the entertainer but to another person,
that income may, notwithstanding the
provisions of articles 7, 14 and 15, be taxed in
the Contracting State in which the activities
of the entertainer are exercised.
 3. Notwithstanding the provisions of par. 1 and 2,
income derived from activities referred in par.1
performed under a cultural agreement or arrangement
between Contracting States shall be exempt from tax in
the Contracting State in which the activities are
exercised if the visit to that State is wholly or
substantially supported by funds of the other
Contracting State, a local authority or public institution
of that other State.
Article 18
Tax Treaty 1992
 1. Pensions (including government pensions)
and annuities paid to a resident of
Contracting States in shall be taxable only in
that State
 2. Notwithstanding the provision of Par. 1, a
pension (including government pension) of
an annuity paid to a resident of one of the
Contracting States from sources in the other
Contracting States may be tax in that other
State, but the tax so charged may not exceed
15% of the gross amount of the
pension/annuity.
 3. The term ‘annuity’ means a stated sum
payable periodically at stated times during a
specified or ascertainable period of time
under an obligation to make the payments in
return for adequate and full consideration in
money or moneys worth.
 4. Any alimony or other maintenance
payment arising in one of the Contracting
States and paid to a resident of the other
Contracting State shall be taxable only in the
firstmentioned State.
Article 17
Tax Treaty 1987
 1. Notwithstanding the provisions of articles
14 and 15, income derived by a resident of a
Contracting State as entertainer, such as
theatre, motion picture, radio or television
artiste, or a musician, or as an athlete from
his personal activities as such exercised in the
other Contracting State, may be taxed in that
other State.
 2. Where income in respect of personal activities
exercised by an entertainer or an athlete in his capacity
as such accrues not to the entertainer or an athlete
himself but to another person, that income may,
notwithstanding the provisions of articles 7, 14 and 15,
be taxed in the Contracting State in which the activities
of the entertainer or athlete are exercised.
 3. Notwithstanding the provisions of par. 1 and 2,
income derived from activities referred in par.1
performed under a cultural agreement or arrangement
between Contracting States shall be exempt from tax in
the Contracting State in which the activities are
exercised if the visit to that State is wholly or
substantially supported by funds of the other
Contracting State, a local authority or public institution
thereof.
Article 18
Tax Treaty 1987
 1. Subject to provision of Par.2 Art. 19,
pensions, annuities and other similar
remuneration paid to a resident of a
Contracting State in consideration of past
employment shall be taxable only in that
State
 2. Notwithstanding the provision of Par. 1,
pensions and other payments made under
the social security legislation of a Contracting
States may be tax in that State.
 3a. The term ‘pensions’ as used in this article means
periodic payments made in consideration for past
services rendered.
 3b. The term ‘annuities’ as used in this article means a
stated sum payable periodically at stated times during
life or during a specified or ascertainable period of time
under an obligation to make the payments in return for
adequate and full consideration in money’s worth.
 4. Any alimony or other maintenance
payment arising in one of the Contracting
States and paid to a resident of the other
Contracting State shall be taxable only in the
firstmentioned State.