THE INDONESIA

ANTI–AVOIDANCE RULES:
GAARs & SAARs

By:
Astera Primanto Bhakti
Director of Center for State Revenue Policy,
Fiscal Policy Agency, Ministry of Finance of The Republic of Indonesia

on the event of:

4th IMGF-Japan High Level Tax Conference Program
TOKYO, April 2013

1
 OUTLINE
3
1 Background of GAARs/SAARs in Indonesia

2 The Indonesian GAARs

3 The Indonesian SAARs

4 GAARs/SAARs :
Some Consideration for Its Effectiveness

5 Conclusion

2
GAARs / SAARs in Indonesia :
The Background

3
 Indonesia’s Economic Growth:
High and Stable
 Indonesia has achieved continuous high economic growth since 2000, 6.5% real GDP growth in 2011.
 Maintaining growth in line with capacity, 6.5% expected for full year 2012 and 6.8% projected for 2013.
 Consistently outpacing its most BRIC and South-East Asian peers.
Indonesia’s GDP growth
%
10
6.3 6.2 6.5 6.5 6.8
5.7 5.5 6.0
4.7 4.9 4.5 4.8 5.0 4.6
7.5 8.2 7.8 3.6
5
0.8

0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-5

-10

-13.1
-15

Indonesia’s economic growth vs. BRIC and Southeast Asian peers

% 2007 2008 2009 2010 2011 2012
20

14.2
15
10.0 10.410.6
9.6 9.2 9.2
10 8.5 8.2
7.6 7.5 7.8 7.2
6.3 6.6 6.1 6.2 6.6 6.2 6.5 6.5 6.9
6.0 5.2 5.5
5.0 5.2 4.6
4.2 4.3 3.7 4.3 4.2 4.0
5 2.6 2.7 3.0
1.1
0.1
0
-0.3
-2.3
-5

-10 -7.8

Indonesia China India Philippines Brazil Thailand Russia

Source: MOF, IMF, World Economic Outlook
4
 FDI has been Growing Rapidly
Across Sectors...
FDI Growth by Sectors (%YoY)
434%
400%
5 years ave growth 2011 Jan-Sept'12
293,8%
300%
185,4%
200%
101,9% 103,1% 98,4%
100% 64,0% 65,9% 13,7% 67,6% 49,8%
23,4% 64,6% 30,5% 23,1%
20,2% 6,1%
0%
-7,2% -7,7%
-23,8% -39,4% -30,6%-12,9%
-100% -74,7%
Industry Transport, Mining Food Crops & Electricity, Gas & Trade & Repair Hotel & Real Estate, Ind
Storage & Plant Water Supply Restaurant Estate & Buss
Comm. Acts
Industry and Mining Continue to be the Two Largest Invested Sectors (2011 Compared to 2012)
Real Estate, Ind
Estate & Business
2011 Jan – Sept 2012
Activities Real Estate, Other
Hotel & Other Sectors Food Crops
1,4% Ind Estate & Sectors
Restaurant 4,2% Food Crops & & Plantation
1,2% Business Hotel & 4,5%
Plantation 7,0%
Activities Restaurant
6,3%
Trade & Repair 1,8% 10,3%
4,2%
Electricity, Gas &
Trade & Mining
Water Supply Mining
Repair 17,3%
9,6% 18,5%
4,0%
Electricity,
Transport, Gas & Water
Storage & Supply
Communication 2,2%
19,8%
Industry Transport,
Storage & Industry
34,8% 47,1%
Communicati
on
5,9%
Source: BKPM, processed 5
Note: Data excludes oil&gas and banking
 Investment Growth in Indonesia
The Investment Realization of the year 2010-2012
(& Target for the year 2013)

Source: The Indonesian Investment Coordinating Board

6
 Tax Revenue Growth
(2006 – 2012)
IDR Trillion
Triliun Rp Percent
Persen (%)
1200 20

1,032.6
1000 84.2
878.7 16
75.4
13.30 723.3 80.2
12.43 619.9 12.72
800 12.30
11.30 68.1
658.7 11.04 12
69.5 12.16 352.9
70.3 66.2
600 52.5 298.4
491.0 51.3 56.7
409.2 53.4 230.6 8
44.7 209.6 193.1
400 39.6
37.8
154.5
123.0 520.0
432.0 4
200 357.0
327.5 317.6
208.8 238.4

0 0
2006 2007 2008 2009 2010 2011 2012
APBN-P Budget
APBN
Other
Lannya Excise
Cukai VAT
PPN RevisedTax
PPh
Income Budget Tax Ratio

• 2006-2012: Tax Revenue increased by 2.5 times, from IDR 409,2 T (2006) to IDR 1.019.2 T (2012).
Average growth is 17% annually.
• 2011–2012: Tax revenue increased by 17.5%; Non-oil tax revenue increased by 22.2%.

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 Non Tax Revenue
(2006 – 2012)
IDR Trillion Persen
Percent
Triliun Rp
350 40%
35,7% 34,9%
300 35%
30,5% 27,1%
26,8% 30%
250
24,6%
21,2% 25%
200
20%
150
15%
100
10%
50 5%

0 0%
2006 2007 2008 2009 2010 2011 2012
APBN-P
Revised Budget APBN
Budget

Pend
BLU BLU PNBP
OtherLainnya Dividen BUMN
SOE Dividend Penerimaan
Natural SDA Ratio of
Porsi Non Tax
PNBP thdRevenue
PDN
/Domestic Revenue
Resources

• During the period of 2006-2012, Non Tax Revenue increased by 6% annually.

• Natural Resources, particularly the Oil and Gas, have been the primary
sources of non tax revenue.

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 TAX AVOIDANCE/EVASION ?

Legal Tax Illegal Tax

Planning TAX Planning
AVOIDANCE

LEGAL or NOT ?

Based on FACT &

SUBSTANCE
9
 TAX AVOIDANCE :
Some Stylist Facts
Which of the followings are considered as tax avoidance ?

1. Company Reporting Losses / No Income in its Tax Return

for several years, but the business remains exist
2. Not reporting income earned abroad (interest, dividends,
and capital gains)
3. Shifting debt to high-tax jurisdiction; vise versa, shifting of
profit and income into low-tax jurisdiction
4. Preference of debt to equity as financing source for its tax
benefit
5. Setting up shell corporations and trusts in foreign haven
countries to channel funds

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 GENERAL ANTI
AVOIDANCE RULES
(GAARs)

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 GAARs IN INDONESIA
LEGAL BASES:
Indonesian Income Tax Law (IITL), (as lastly amended by
Law No.36 year 2008)

a. Substance Over Form rule

ie. Article 4, 23, 26 of IITL (Income Determination)

Definition of Income:
“Any increase in economics capacity received by or accrued
by a taxpayer from Indonesia as well as from offshore, which
may be utilized for consumption or increasing the taxpayer’s
wealth, in whatever name and form, including .......”

The above provisions forms the principles in determining taxable

income, and it operates as one of the measures to counter tax
avoidance and/or evasion.

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 GAARs IN INDONESIA
b. Article 18(1) : Debt and Equity
 Determine the Debt to Equity ratio of companies for tax calculation
purposes
c. Article 18(4) : Control / Ownership
“Related Taxpayer” shall be deemed to exist in the case of:
 A taxpayer who owns directly or indirectly at least 25% of equity of
other Taxpayers;
A relationship between taxpayer through ownership of at least
25% of equity of two or more taxpayer, as well as relationship
between two or more taxpayers concerned;
 A Taxpayer who controls other Taxpayer; or two or more Taxpayers
are directly or indirectly under the same control;
 A family relationship either through blood or through marriage
within one degree of direct or indirect lineage.

General Applicability of the provisions  GAARs

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 INDONESIAN GAARs
Legal Base:
on Tax Treaty
a. Article 26 (1a) of Law of The Republic of Indonesia Number 36 of
2008 concerning Fourth Amendment of Law Number 7 of 1983
concerning Income Tax
b. DGT Regulation no. 62/PJ./2009 as amended by no 25/PJ./2010
concerning The Prevention of Misuse of Double Taxation
Avoidance (DTA) Agreement

DTA abuse occurs in case of:

a. transaction that has no economic substance, which is done by
using the structure /scheme in such a way with a view solely to
obtain tax treaty benefits.
b. transaction with a structure / scheme where legal form differs
from economic substance, in such a way with a view solely to
obtain tax treaty benefits
c. income recipient is not the beneficial owner
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 INDONESIAN GAARs
on Tax Treaty
Beneficial Owner is defined as income recipient who is:
a. Not acting as Agent;
b. Not Acting as Nominee; and
c. Not a Conduit Company

In the case of misuse of DTA :

a. DTA does not apply; and
Apply regular taxation rules in accordance with Indonesian Income
Tax Law.
b. In the case of difference between the legal form of a structure /
scheme with their economic substance (economic substance), the
tax treatment will be based on their economic substance
(substance over form).
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 SPECIFIC (TARGETED)
ANTI AVOIDANCE RULES (SAARs)

16
 SAARs IN INDONESIA

LEGAL BASES:
Indonesian Income Tax Law No.36 year 2008 :
a. Article 18(2): Controlled Foreign Companies (CFC)
 Minister of Finance is authorized to determine when a dividend is
deemed to be derived by a resident Taxpayer on participation in
an offshore company other than public companies, where:
 Taxpayer owns at least 50% of the paid in capital of the
company; or
 Taxpayer together with other resident Taxpayer own at least
50% of the paid-in-capital of the company

b. Article 18(3,3a,3b,3c,3d): Related Party + SPV/SPC related

Transactions
 Transactions between related parties should be carried out in a
“Commercially Justifiable Way” and on Arm’s Length Basis.

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 SAARs IN INDONESIA

 18(3): Interest Stripping

 DGT is authorized to reallocate income and deductions between
related parties and to characterize debt as equity, aiming to
properly reflect the transaction between “independent party”
 Resale Price, Cost-Plus, or other methods

 18(3a): Advance Pricing Agreement (APA)

DGT is authorized to conclude agreement with a Taxpayer and with Tax
Authority from other countries on Transfer Pricing method between
related Taxpayer

 18 (3b): SPV/SPC Related Transaction

Taxpayer who purchases shares or assets of other entity through a
special purpose company (SPC) can be deemed as the real party who
conducts the transaction, provided that such taxpayer is the affiliation
of the SPC and the price of the transaction is unfairly settled.

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 SAARs IN INDONESIA

 18 (3c): SPV/SPC related transaction

The sale or transfer of shares of a conduit company or SPC which is:
 established (or domiciled) in tax haven countries; or
 affiliated with company/PE established (or domiciled) in Indonesia
could be deemed as the sale or transfer of shares of an entity that is
established (or domiciled) in Indonesia or PE in Indonesia.

 18 (3d): International Hiring-out of Labor

The amount of income that individual resident taxpayer has received from
an employer which is the affiliation of non residents entity may be
adjusted by tax authority, in case of the employer transfers the payment in
forms of expenses or other expenditures which is paid to his affiliation.

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 ANTI AVOIDANCE RULES:
THE OPERATIONAL REGULATIONS

1. Thin Capitalization Rule :

Currently is still under preparation.

2. Controlled Foreign Company Rule :

a. [Minister of Finance (MOF) Regulation No. 256/PMK.03/2008 ]
concerning the Determination of when dividend is accrued by a
resident Taxpayer on participation in an offshore company other
that public companies

b. [DGT Regulation no PER - 59/PJ/2010]

Dividend is deemed to be derived in the :
 4th month following the deadline for filling the tax return in the
offshore country; or
 7th month after the offshore company’s tax year ends (in case
the country does not have a specific tax filling deadline)

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 ANTI AVOIDANCE RULES:
THE OPERATIONAL REGULATIONS

3. Related Party/Transfer Pricing Rules :

a. [DGT Regulation no PER 43/2010 as amended by PER-32/2011]
Application of the fairness and the prevalence principles for
transactions with related party
 “Commercially Justifiable Way” and on Arm’s Length Basis.

b. [DGT Regulation no 69/PJ/2010 Advance Pricing Agreement ]

 Agreement between Tax Competent Authorities and Tax Payer
concerning Pre-defined Transaction Price
 The agreed price shall be in effect for maximum 3 consecutive
tax years commencing from the tax year the price was
agreed.

c. [DGT Regulation no 48/PJ/2010 Mutual Agreement Procedure]

 Optional way for taxpayer to solve problems due to
misapplication of DTA clauses.
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 ANTI AVOIDANCE RULES:
THE OPERATIONAL REGULATIONS

4. SPV/SPC Related Transaction:

a. MOF Regulation No. 140/PMK.03/2010 concerning Determination of
Taxpayer who genuinely purchases shares or assets of other entity
through a special purpose company that is a related party and the
price is unfairly settled.
[Anti Stepping Rules for Paragraph (3b) of Article 18 of IITL]
b. MOF Regulation No 258/PMK.03/2008 concerning Article 26
Withhoding on Income from Sales or Alienation of Shares as referred
to Paragraph (3c) of Article 18 of Income Tax law which is received or
accrued by Non-Resident Taxpayer
5. International Hiring Out Labor
MOF Regulation No 139/PMK.03/2010 concerning Realocation of the
amount of income that individual resident taxpayer has received from an
employer which is the affiliation of non-residents entity
[rule for Paragraph (3d) Article 18 of IITL]
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 GAARs & SAARs :
Some Considerations
Some of the issues that need to be anticipated to clear the way towards
the GAARs/SAARs implementation:
1. Taxpayer/Business refusal
 public hearing and consultation might be a way to
avoid this
2. Lower investment, particularly the inbound investment
 require profound and comprehensive analysis
3. Politics and others
4. Court Decision
 Indonesia: Court makes references to OTHER
?
the existing laws and regulations
Stringent Flexible
? ?

23
 ANTI AVOIDANCE RULE :
STRIKING THE BALANCE

Return Risks
RISK

RETURN

International Domestic
Obligation Needs

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 Conclusion
1. The fast development in business sophistication has resulted in
enchanced complexity of transactions. The tax planning involving the
complex transactions may entangle tax avoidance scheme.

2. The existence of anti avoidance rule is important as a mean to obtain

proper base for the implementation of domestic tax regulation.
 The Indonesian GAARs/SAARs were introduced as part of the
measures to prevent and counter abusive tax planning (tax
avoidance/evasion) from taxpayer.
 Overall, the Indonesia Anti Avoidance Rule applies the Substance
Over Form approach  in line with International
standard/approach.
 When deciding on cases, court refers to the laws and regulations in
Indonesia

3. In order to have an optimal result, the formulation of anti avoidance

rules should consider all relevant aspects/factors for both Government
and Taxpayers sides, ie : Risk vs Return ; Prudence vs Flexilibility
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THANK YOU

26