STIAMI – Program Pascasarjana

Introduction to International
Taxation
13 September 2021

DDTC Academy
AGENDA

1 Fundamental on International Taxation

2 Introduction to Tax Treaty

3 Persons Covered and Resident

Fundamental on
International
Taxation
Introduction

Malaysia wants to tax the dividend

“XYZ Sdn Bhd as the recipient is the resident
of Malaysia.”

Indonesia wants to tax the dividend

XYZ Sdn Bhd “Dividends paid by PT. X, resident of
Indonesia. Income sourced in Indonesia.”
Malaysia

Indonesia
Own shares DOUBLE IS IT
dividend TAXATION FAIR??
?

PT. X
What is International Tax?

INTERNATIONAL aspects in
DOMESTIC Tax Rules

Domestic Foreign
Taxpayer Taxpayer

Connecting Factor
Foreign Domestic
Income Income
Jurisdiction to Tax

Objective
Personal
Connecting
Connecting
Factor
Factor

▪ The jurisdiction to tax is based on a ▪ The jurisdiction to tax is based on the

connection between the person and
the State (residence principle);
▪ Example for individuals: Physical
Presence, Personal Attachment,
Citizen;
▪ Example for companies: Head office
location, Place of management
location, Incorporation.
income being from a SOURCE within
the State (source principle);
▪ Example: Physical location of assets,
Where capital is invested, Where the
payer resides, Where the contract is
signed.

Source: Darussalam dan Danny Septriadi, “Pajak Internasional suatu Pengantar,”

dalam Perjanjian Penghindaran Pajak Berganda: Panduan, Interpretasi, dan Aplikasi,
ed. Darussalam dan Danny Septriadi (Jakarta: Penerbit DDTC, 2017).
Example

30% x 100 = 30
Personal
attachment
Resident

State A (tax rate 30%)

DOUBLE TAXATION
State B (tax rate 25%)

Economic Income 25% x 100 = 25

attachment
Types of Double Taxation

Criteria Juridical Economic

Definition
Same Taxpayer More than one

Same Income Same Income

Example Permanent
Establishment (PE) Dividend
Foreign Passive Income
Occurance International Domestic

Solved by tax
Yes No
treaties
Juridical Double Taxation: Causes

COUNTRY A COUNTRY B Source Country

Domestic rule
Income from
shipping
Country A & B
operations

Sails through its Embark the cargo or

territorial waters passenger Double Taxation
Domestic
rule

Not solved by Tax

SOURCE Country Treaty

Source vs Source Conflict (S-S)

Juridical Double Taxation: Causes
(Cont’d)

COUNTRY A COUNTRY B Residence Country

Domestic rule
Company X
Country A & B

INCORPORATED ITS MANAGEMENT OFFICE

Double Taxation
Domestic rule
Dual Resident

Tax Treaty: “tie-breaker rule” to

RESIDENT
solve dual resident problem.

Resident VS Resident Conflict (R-R)

Juridical Double Taxation: Causes
(Cont’d)

COUNTRY A COUNTRY B Taxing Basis

Difference
Tax on
Tax on
WORLDWIDE
INCOME
Company A BRANCH the PROFITS Country A (Residence)
of Branch Country B (Source)
of Company A

Domestic rule Double Taxation

Tax Treaty: “allocation of taxing

TAXING BASIS
powers and relief”

Resident VS Source Conflict (R-S)

Juridical Double Taxation: Causes
(Cont’d)

COUNTRY A COUNTRY B
Difference Interpretation
Business Royalty of type of income
Profits (Art 7) (Art 12)

Double Taxation

Income from
Allocation of Taxing Right
Company X
technical services

Income Characterization Conflict

Economic Double Taxation

COUNTRY A COUNTRY B

Taxable Income: 1,050,000

Taxable Income: 1,500,000

Taxation: 450,000 (30%)

Company X Mr. Z

Dividends: 1,050,000
Introduction to
Tax Treaty
Interaction Between Domestic Law
and Treaty Law
Resident A

Corp A

State A

State B Tax Treaty:

Not subject interest ‘lex specialis
to WHT derogat legi
generali’

Corp B
Resident B DO NOT create
new taxing
A-B Tax Treaty OECD Model
rights
The doctrine states that if two laws govern the same
‘lex specialis derogat legi generali’ factual situation, a law governing a specific subject matter
(lex specialis) overrides a law governing only general
matters (lex generalis)
Source: Darussalam dan Danny Septriadi, “Perkembangan dan Model Perjanjian Penghindaran Pajak Berganda,” dalam Perjanjian Penghindaran Pajak Berganda:
Panduan, Interpretasi, dan Aplikasi, ed. Darussalam dan Danny Septriadi (Jakarta: Penerbit DDTC, 2017).
OECD Model v UN Model

OECD OECD UN OECD OECD OECD UN

Model Model Model Model Model Model Model
1977 1992 2001 2005 2010 2014 2017

1977 1980 1992 2000 2001 2003 2005 2008 2010 2011 2014 2017 2017

UN Model OECD OECD Model OECD UN OECD

1980 Model 2003 Model Model Model
2000 2008 2011 2017
OECD Model v UN Model

Application &
Negotiation
Interpretation
Text of the articles is not legally binding

Based on League of Nations

Model

Based on OECD Model

Both OECD Model and UN Model are not legally binding, they can
nevertheless be of great assistance in the application and interpretation of
the conventions and, in particular, in the settlement of any disputes.

See Darussalam dan Danny Septriadi, “Interpretasi Perjanjian Penghindaran Pajak Berganda,” dalam Perjanjian Penghindaran Pajak Berganda: Panduan, Interpretasi, dan
Aplikasi, ed. Darussalam dan Danny Septriadi (Jakarta: Penerbit DDTC, 2017).
OECD Model 2017 v UN Model 2017

Persons and taxes covered: Art 1-2

Definition: Art 3-5

Art. 14 of OECD Model 2017 has Art. 12A: Fees for Technical
been deleted since 2000 Services
Allocative Rule: Art. 6-22
Art. 14: Independent personal
services

Rules on elimination of double

taxation: Art. 23A & 23B

Special Provisions Art. 29: Entitlement to Benefits Art. 29: Entitlement to Benefits
OECD: Art. 24-30
UN: Art. 24-29
Art. 30: Territorial Extension

Final Provisions
OECD: Art. 31-32
UN: Art. 30-31
Application of Tax Treaty

Determine which of
the distributive
provisions apply.

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Apply the method If there is still dispute

Determine if the issue Apply the relevant
provisions for the between states,
is within the scope of definition.
elimination of double solved by Mutual
tax treaty
taxation: exemption Agreement Procedure
▪ Person covered;
or credit method. (MAP).
▪ Taxes covered;
▪ States covered. The income shall The income may
be taxable only be taxed in

Unrestricted right Restricted right of

of tax tax

Source: Darussalam dan Danny Septriadi, “Penerapan Perjanjian Penghindaran Pajak Berganda dan Persyaratan Administratif,” dalam Perjanjian Penghindaran Pajak
Berganda: Panduan, Interpretasi, dan Aplikasi, ed. Darussalam dan Danny Septriadi (Jakarta: Penerbit DDTC, 2017).
Shall be Taxable Only v May be Taxed

Residence country
Shall be has the exclusive
taxable only… taxing right. Source
state may not tax

Allocating the tax

imposed between
the Governments Residence state has
that are parties to Source state may tax
the residual taxing
WITHOUT LIMITATION
the Double Tax right
Convention May be
taxed…
Residence state has
Source state may tax
the residual taxing
UP TO a MAXIMUM %
right

Source: Darussalam dan Danny Septriadi, “Pajak Internasional suatu Pengantar,” dalam Perjanjian Penghindaran Pajak Berganda: Panduan, Interpretasi, dan Aplikasi, ed.
Darussalam dan Danny Septriadi (Jakarta: Penerbit DDTC, 2017).
Distributive Rules
Closed Open
Distributive
Distributive
Rules Rules
Alokasi hak pemajakan Alokasi hak pemajakan
secara eksklusif diberikan kepada
kedua negara
Pasal 12 (1) OECD Model: Pasal 6 (1) OECD Model:
“Royalties ….. shall be “Income derived by a
taxable only in that other resident …. from immovable
State.” property… situated in the
other Contracting State may
be taxed in that other
State.”
Mixed Rules
Alokasi hak pemajakan
diberikan kepada kedua
negara apabila memenuhi
kondisi tertentu
Pasal 7 (1) OECD Model:
“The profits of an enterprise
… shall be taxable only in
that State unless ….. a
permanent establishment
situated therein … may be
taxed in that other State.
Methods for Elimination of Double
Taxation

Tax treaty:
▪ Residence State may tax

▪ Art 23 OECD MC:

Enterprise Double taxation relief
Residence State
TAX TREATY A-B
Source State

Tax treaty:
▪ Source State may also
tax
Income
Methods for Elimination of Double
Taxation (Cont’d)

Exemption Deduction
Method Method
▪ Full exemption;
▪ Exemption with
progression. ▪ Full credit;
▪ Ordinary credit.

Credit Method
Full Exemption

COUNTRY A COUNTRY B

50 50
Resident
(income) (income)

Tax rate 40% Tax rate 35%

Foreign Source Income 50
Domestic Source Income 50
Worldwide income 100
Foreign tax payable on foreign source income (40%x50) 20
Domestic tax payable on domestic source only (35%x50) 17.5
Total tax payable 37.5
Exemption with Progression Method

COUNTRY A COUNTRY B

50 50
Resident
(income) (income)

Tax rate 35% for income up to 50;

Tax rate 40% and 45% from 50 and above

Foreign Source Income 50

Domestic Source Income 50
Worldwide income 100
Foreign tax payable on foreign source income (40%x50) 20
Domestic tax payable on domestic source only (45%x50) 22.5
Total tax payable 42.5
Full Credit Method

COUNTRY A COUNTRY B

50 50
Resident
(income) (income)

Tax rate 35%

Tax rate 40%

Foreign Source Income 50

Domestic Source Income 50
Worldwide income 100
Foreign tax payable on foreign source income (40%x50) 20
Domestic tax payable on worldwide income (35%x100) 35
Less: Full credit on foreign tax paid 20
Tax payable in Country B 15
Total tax payable 35
Ordinary Credit Method

COUNTRY A COUNTRY B

50 50
Resident
(income) (income)

Tax rate 40% Tax rate 35%

Foreign Source Income 50

Domestic Source Income 50
Worldwide income 100
Foreign tax payable on foreign source income (40%x50) 20
Domestic tax payable on worldwide income (35%x100) 35
Less: Full credit on foreign tax paid 20
Tax payable in Country B 15
Total tax payable 35
Deduction Method

COUNTRY A COUNTRY B

50 50
Resident
(income) (income)

Tax rate 40% Tax rate 35%

Foreign Source Income 50

Domestic Source Income 50
Worldwide income 100
Foreign tax payable on foreign source income (40%x50) 20
Worldwide income 100
Less: Foreign tax paid 20
Tax income in Country B 80
Domestic tax payable on worldwide income (35%x80) 28
Total tax payable 48
Case Study

XYZ Sdn Bhd (resident of Malaysia) receive royalty from PT. X (resident of
Indonesia)

Step 1: determine if the issue is within the

scope of the tax treaty.
XYZ Sdn Bhd
Step 2: apply the relevant definition.
Malaysia royalty
Step 3: determine which of the distributive
Indonesia provisions apply.

PT. X If both states have taxing right:

Step 4: apply the method provisions for the
elimination of double taxation: exemption or
credit method.
Persons Covered
and Resident
Persons Covered and Resident

Personal scope of Art 1

Treaties
(treaty benefits)
“ This Convention shall apply to
persons who are residents of one
or both Contracting States”

Who is person?
Art 3 (1)(a) person: individual,
company and any other body of
persons

Who is resident?
Residence Art 4 (1) resident: any person who, under the laws of
that State, is liable to tax therein by reason of his
domicile, residence, place of management or any other
criterion of a similar nature
Resident under Indonesian Income Tax
Law (UU Pajak Penghasilan)
Pasal 2 ayat (3) UU PPh

Residen Individu → Orang Pribadi yang: Residen Badan → Badan yang:

▪ bertempat tinggal di Indonesia; didirikan atau bertempat kedudukan di
▪ berada di Indonesia lebih dari 183 (seratus Indonesia, kecuali badan pemerintah yang
delapan puluh tiga) hari dalam jangka waktu 12 memenuhi kriteria tertentu.
(dua belas) bulan; atau
▪ dalam suatu tahun pajak berada di Indonesia
dan mempunyai niat untuk bertempat tinggal
di Indonesia.

Source: UU No. 7 Tahun 1983 s.t.d.t.d. UU No. 11 Tahun 2020 (UU Cipta Kerja)
Resident

P3B/Tax Treaty tidak mengatur definisi

residen

Definisi residen diatur di domestic law

masing-masing negara.

P3B mengatur apabila terjadi permasalahan

dual resident
Dual Residence

Happened due to differences in domestic residence legislation

Permanent home Physical presence

Family connection Habitual abode

nationality Center of vital interests

Place of effective Place of incorporation

management
Accounting records
Place of the main
business purposes Residence of directors
Dual Residence (Cont’d)

Personal Scope of Art 1:

“This Convention shall apply to persons who are residents of one or both Contracting
States”

State A State B

Permanent home Physical presence

How to solve dual residence?
By giving priority to a connecting factor
(i.e. tiebreaker rule)
Tie Breaker Rule for Individuals

If both in CS If neither in CS Mutual

Agreement
Nationality
If both If neither
in CS in CS

Habitual Abode

If cannot be determined

Centre of Vital Interests

If both
If neither in CS
in CS

Permanent home
*CS = Contracting States
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