Sunday, December 6, 2009

Controlled foreign corporation rules in Indonesia

With the increasing global awareness of controlled foreign corporations, the Indonesian government has started to strengthen the rules governing them. The new income tax law (law no. 36 of 2008) includes provisions that set out ways to identify transactions between related parties in order to prevent transfer pricing.
One of the methods set out, among others, is stated under paragraphs (2) and (3) of article 18 of the income tax law. In addition, the Indonesian government has also amended the regulation governing deemed dividends on investments on unlisted offshore companies.
In a regulation issued by the Minister of finance in 1994 (Minister of Finance decree no. 650/KMK.04.1994) it is stipulated that deemed dividends on offshore investment are applicable for investments conducted in 32 countries on the condition that the investment is made on unlisted companies.
This regulation was revoked by Minister of Finance decree no.256/PMK.03/2008 dated December 31 2009 which took effect from January 1 2009 in order to strengthen the controlled foreign corporation rules.
The new regulation now expands the coverage of investments not only to 32 countries but worldwide. All the offshore investment by Indonesian taxpayers (except investment on offshore publicly listed companies) will be subject to this new regulation.
The regulation says that the dividend is deemed to be received by the Indonesian taxpayer on:
the fourth month after the deadline of submission of the annual corporate tax return of the offshore company for the respective tax year; or
the seventh month after the end of the financial year for those offshore companies that have no obligation to submit the annual corporate tax return or have no specific deadline for submitting the corporate tax return.
The Indonesian taxpayers that are subject to this decree are the taxpayers with the following conditions:
own at least 50% investment on that offshore company; or
jointly with other Indonesian taxpayers, own at least 50% investment in the offshore company.
The amount of the deemed dividend is based on proportion of the ownership on the profit after tax.
The Indonesian taxpayer then has to report this deemed dividend as taxable income and subject to 28% corporate tax. If the dividend has already been subjected to tax then the offshore tax is considered as a tax credit in Indonesia.

No comments:

Post a Comment