You are on page 1of 26

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

1
OUTLINE
3
1 Background of GAARs/SAARs in Indonesia
The Indonesian SAARs
2 The Indonesian GAARs
3
2
GAARs/SAARs :
Some Consideration for Its Effectiveness
4
Conclusion 5


GAARs / SAARs in Indonesia :
The Background
3
6.3
6.0
4.6
6.2
6.5 6.5
14.2
9.6
9.2
10.4
9.2
8.2
10.0
6.2
6.6
10.6
7.2
6.9 6.6
4.2
1.1
7.6
3.7
4.2
6.1
5.2
-0.3
7.5
2.7
3.0
5.0
2.6
-2.3
7.8
0.1
5.5
8.5
5.2
-7.8
4.3 4.3
4.0
-10
-5
0
5
10
15
20
2007 2008 2009 2010 2011 2012 %
Indonesia China India Philippines Brazil Thailand Russia
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.
Source: MOF, IMF, World Economic Outlook
Indonesia’s GDP growth
Indonesia’s economic growth vs. BRIC and Southeast Asian peers
4.7
0.8
4.9
3.6
4.5
4.8
5.0
5.7 5.5
6.3
6.0
4.6
6.2
6.5 6.5
6.8
7.5
8.2
7.8
-13.1
-15
-10
-5
0
5
10
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
%
4
Food Crops
& Plantation
7,0%
Mining
17,3%
Industry
47,1%
Transport,
Storage &
Communicati
on
5,9%
Electricity,
Gas & Water
Supply
2,2%
Trade &
Repair
4,0%
Hotel &
Restaurant
10,3%
Real Estate,
Ind Estate &
Business
Activities
1,8%
Other
Sectors
4,5%
5
FDI has been Growing Rapidly
Across Sectors...
FDI Growth by Sectors (%YoY)
Industry and Mining Continue to be the Two Largest Invested Sectors (2011 Compared to 2012)
Source: BKPM, processed
Note: Data excludes oil&gas and banking

2011 Jan – Sept 2012
20,2%
103,1%
185,4%
98,4%
293,8%
13,7%
23,1%
67,6%
101,9%
-23,8%
64,0%
64,6%
30,5%
6,1%
-30,6%
-74,7%
23,4%
-7,2%
65,9%
-7,7%
-39,4%
-12,9%
49,8%
-100%
0%
100%
200%
300%
400%
Industry Transport,
Storage &
Comm.
Mining Food Crops &
Plant
Electricity, Gas &
Water Supply
Trade & Repair Hotel &
Restaurant
Real Estate, Ind
Estate & Buss
Acts
5 years ave growth 2011 Jan-Sept'12
434%
Food Crops &
Plantation
6,3%
Mining
18,5%
Industry
34,8%
Transport,
Storage &
Communication
19,8%
Electricity, Gas &
Water Supply
9,6%
Trade & Repair
4,2%
Hotel &
Restaurant
1,2%
Real Estate, Ind
Estate & Business
Activities
1,4%
Other Sectors
4,2%
Investment Growth in Indonesia
6
Source: The Indonesian Investment Coordinating Board
The Investment Realization of the year 2010-2012
(& Target for the year 2013)
7
• 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%.
208.8
238.4
327.5 317.6
357.0
432.0
520.0
123.0
154.5
209.6
193.1
230.6
298.4
352.9
37.8
44.7
51.3
56.7
66.2
68.1
75.4
39.6
53.4
70.3
52.5
69.5
80.2
84.2
409.2
491.0
658.7
619.9
723.3
878.7
1,032.6
12.30
12.43
13.30
11.04
11.30
12.16
12.72
0
4
8
12
16
20
0
200
400
600
800
1000
1200
2006 2007 2008 2009 2010 2011
APBN-P
2012
APBN
Triliun Rp Persen (%)
Lannya Cukai PPN PPh Tax Ratio
Other
Excise VAT Income Tax Revised Budget
Budget
Percent IDR Trillion
Tax Revenue Growth
(2006 – 2012)
8
• 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.

Non Tax Revenue
(2006 – 2012)
35,7%
30,5%
34,9%
26,8%
27,1%
24,6%
21,2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
50
100
150
200
250
300
350
2006 2007 2008 2009 2010 2011
APBN-P
2012
APBN
Persen
Triliun Rp
Pend BLU PNBP Lainnya Dividen BUMN Penerimaan SDA Porsi PNBP thd PDN
BLU Other SOE Dividend
Natural
Resources
Ratio of Non Tax Revenue
/Domestic Revenue
IDR Trillion Percent
Revised Budget
Budget
TAX AVOIDANCE/EVASION ?
9
TAX
AVOIDANCE
LEGAL or NOT ?
Based on FACT &
SUBSTANCE
Legal Tax
Planning
Illegal Tax
Planning
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)
11
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
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.




13

General Applicability of the provisions  GAARs

GAARs IN INDONESIA
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
INDONESIAN GAARs
on Tax Treaty

SPECIFIC (TARGETED)
ANTI AVOIDANCE RULES (SAARs)
16
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.


17
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
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.


19

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 :
 4
th
month following the deadline for filling the tax return in the
offshore country; or
 7
th
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
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]


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
 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
the existing laws and regulations

23
Stringent
?
Flexible
?
OTHER
?
ANTI AVOIDANCE RULE :
STRIKING THE BALANCE
Return Risks
24
RISK
RETURN
International
Obligation
Domestic
Needs
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

25


THANK YOU
26