Shortly before the end of year of 2022, the Government of Republic of Indonesia has issued Government Regulation No. 55 of 2022 on Adjustment of Regulation in Tax Sector (“GR 55/2022”), which serves as the implementing regulation of Law No. 7 of 2021 on Harmonization of Tax Regulation. GR 55/2022 is applicable as of 20 December 2022.
The Government strengthen measures that may be taken by tax authorities to combat tax avoidance practices – a scheme done by taxpayer to avoid, reduce, or postpone its tax obligations – in Indonesia. Although the practice of tax avoidance generally does not violate the substance of the laws, however, such scheme is contrary to the objectives of the formation of tax laws.
Through the issuance of GR 55/2022, the Government establishes set of measures aimed to empower the tax authorities to combat tax avoidance scheme:
Anti-tax avoidance measures in the context of related-party transaction:
- determine when the dividends are received and the basis of its calculation by domestic tax payer against its equity participation overseas on business entities that does not sell its shares on stock exchange;
- recalculate the amount of income and reduction and determine debt as capital to calculate the amount of taxable income deducted by the tax authorities;
- determine party buying shares or company’s asset via other party which established for such purposes, as long as there is irregularity in pricing;
- determine party carrying out sale or transfer of company’s shares either established or domiciled in country providing tax protection;
- recalculate the income of domestic individual taxpayer who transfers all or part of his income in the form of fees or other expenses paid to overseas company;
- recalculate the amount of outstanding tax based on comparison of the taxpayer’s financial performance. This regulates on benchmarking that will be applied to the taxpayers who report (i) the smaller amount of profit compared to other taxpayers with similar business activities or (ii) unreasonable loss for three consecutive years reported by the taxpayers who have carried out their business for five years,
Anti-tax avoidance measures in the context of any transactions
- set limitation on interest imposed on loan for the purpose of tax calculation;
- recalculate the amount of outstanding tax by removing payment made by domestic taxpayer to foreign taxpayer as deductible expenses due to utilization of differences in tax treatment of an instrument or entity that may have more than one characteristic in the country or jurisdiction where the taxpayer is domiciled. The payment is not deductible if the offshore recipient is not subject to tax for having such payment or can use such payment as its deductible expenses as well.
Through the implementation of the abovementioned measures, the Government expect that legal loopholes in Indonesian tax laws would be lessened which ultimately impact on the increasing number of tax compliance. Since the tax authorities is now granted with significant power to fight the tax-avoidance practices including applying substance over form principles if the anti-tax avoidance rule cannot be imposed, the taxpayer is forced to comply with the tax regulations specially for corporate taxpayers conducting corporate restructuring.
The substance over form application shall observe the following conditions:
- limit of authority and procedure of the implementation;
- the activity of the taxpayer is included in the tax avoidance coverage
- form and substance test;
- quality assurance mechanism; and/or
- taxpayer’s right protection
The existence of control to determine the special relationship is elaborated by the regulation as follows:
a. one party controls the other, or one party is controlled by the other, either directly and/or indirectly;
b. two or more parties are under the control of the same party, either directly and/or indirectly;
c. one party controls the other, or one party is controlled by the other through the management or technology utilisation;
d. there exist the same person or persons directly and/or indirectly involved or participated in the managerial or operational decisions of two or more parties;
e. the parties are commercially or financially known to or declaring themselves as belonging to the same business group; or
f. one party declares itself in a related party relationship with the other.
The transaction between unrelated parties may be considered as transaction between parties having special relationship if an affiliate of one or all parties doing the transaction has a power to determine the party in the transaction and the price. The regulation provides opportunities for the multilateral, bilateral and unilateral advance pricing agreement
Tax Challenges of Digital Economy
Under the regulation, the tax authority is authorized to enter into tax agreement with other competent tax authorities to solve the tax challenges due to the digital economy and other erosion of tax bases. The agreement may also affect qualified multinational enterprise to be deemed to qualify as tax subject and tax object thus subject to tax in Indonesia. The concept to have minimum global tax in Indonesia is also introduced.
For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia