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

2

Background of GAARs/SAARs in Indonesia

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

5

%

8.2

7.5

7.8

4.9

4.7

3.6

4.5

4.8

5.0

5.7

5.5

2002

2003

2004

2005

2006

6.3

6.0

6.2

6.5

6.5

6.8

2010

2011

2012

2013

4.6

0.8 0 1994

1995

1996

1997

1998

1999

2000

2001

2007

2008

2009

-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

9.6

8.5

10 6.3

6.6 6.1

5.0

5

6.0

10.410.6

9.2 6.2 4.2

5.2

5.2

9.2 7.6 7.5 7.8

6.6

6.5

6.2

4.6

4.3

2.6 1.1

8.2

7.2

6.5 3.7

4.3 2.7

6.9 4.2

5.5 3.0

4.0

0.1

0 -0.3 -2.3

-5

-7.8

-10

Indonesia

China

India

Philippines

Brazil Thailand Source: MOF, IMF, World Economic Outlook

Russia

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% 100% 0%

103,1%

101,9% 20,2%

64,0% 65,9%

23,4% -7,2% -23,8%

-100% Industry

98,4% 64,6%

-7,7%

Transport, Storage & Comm.

Mining

Food Crops & Plant

13,7%

30,5%

6,1%

67,6% 49,8%

23,1% -30,6%-12,9%

-39,4% Electricity, Gas & Trade & Repair Water Supply

Hotel & Restaurant

-74,7%

Real Estate, Ind Estate & Buss Acts

Industry and Mining Continue to be the Two Largest Invested Sectors (2011 Compared to 2012) Jan – Sept 2012

2011

Real Estate, Ind Estate & Business Activities Other Sectors Hotel & 1,4% 4,2% Restaurant 1,2% Trade & Repair 4,2% Electricity, Gas & Water Supply 9,6%

Food Crops & Plantation 6,3%

Mining 18,5%

Transport, Storage & Communication 19,8% Industry 34,8%

Source: BKPM, processed Note: Data excludes oil&gas and banking

Real Estate, Ind Estate & Business Hotel & Activities Restaurant 1,8% 10,3% Trade & Repair 4,0% Electricity, Gas & Water Supply 2,2% Transport, Storage & Communicati on 5,9%

Other Sectors 4,5%

Food Crops & Plantation 7,0%

Mining 17,3%

Industry 47,1%

5

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) Persen (%) Percent

Triliun Rp IDR Trillion 1200

20 1,032.6

1000

84.2

878.7 13.30

800

12.30

12.43

658.7 600

409.2 400

39.6 37.8 123.0

619.9 11.04

491.0

70.3 51.3

52.5 56.7

53.4 44.7

209.6

193.1

723.3 11.30

69.5 66.2

80.2 68.1 12.16

75.4

16

12.72

352.9

12

298.4

8

230.6

154.5

200 208.8

238.4

2006

2007

327.5

317.6

357.0

2008

2009

2010

432.0

520.0

0

4

0

Other Lannya

Excise Cukai

VAT PPN

2011 APBN-P RevisedTax Budget PPh Income

2012 Budget APBN 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%.

7

Non Tax Revenue (2006 – 2012) Persen Percent

IDR Trillion Triliun Rp 350

300

40%

34,9%

35,7% 30,5%

35%

27,1% 26,8%

250

30%

24,6% 21,2%

200

25% 20%

150

15%

100

10%

50

5%

0

0% 2006

Pend BLU BLU

2007

PNBP OtherLainnya

2008

2009

Dividen BUMN SOE Dividend

2010

2011 APBN-P Revised Budget

Penerimaan SDA Natural Resources

2012 APBN Budget

Ratio of Non Tax Porsi PNBP thdRevenue PDN /Domestic Revenue

• 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. 8

TAX AVOIDANCE/EVASION ?

Legal Tax Planning

TAX AVOIDANCE

Illegal Tax Planning

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 10

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. 12

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 13

INDONESIAN GAARs on Tax Treaty

Legal Base: 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 14

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). 15

SPECIFIC (TARGETED) ANTI AVOIDANCE RULES (SAARs)

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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. 18

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) 20

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. 21

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.

5.

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

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] 22

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

2.

 public hearing and consultation might be a way to avoid this Lower investment, particularly the inbound investment

3. 4.

 require profound and comprehensive analysis Politics and others Court Decision  Indonesia: Court makes references to the existing laws and regulations Stringent ?

OTHER ? Flexible ? 23

ANTI AVOIDANCE RULE : STRIKING THE BALANCE Return

Risks

RISK

RETURN

International Obligation

Domestic 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.

3.



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

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

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