COMPARATIVE TAX ANALYSIS ON THE DIVIDENDS, INTEREST, AND

ROYALTIES BASED ON THE TAX TREATY BETWEEN INDONESIA

AND NEW ZEALAND, HONG KONG, AND SOUTH AFRICA

HALIM, TJAHJADI, AND SJAFEI

BINUS UNIVERSITY

Abstract
This paper discusses on tax treaty relationship between Indonesia – South
Africa, Indonesia – New Zealand, and Indonesia – Hong Kong, that are concerning on
Dividend, interest and royalties based on local law which apply in their country and
also the treaty between countries, as the comparison of local law and treaty has
significant difference, in which the reduced tax rate due of the treaty is lesser than the
local rate since the treaty is established in order to deduct the burden of the tax payer.
The rate of the treaty is determined by the agreement of each country and as the rate
of the treaty differs due of nature relationship between Indonesia and the other
contracting parties.
Keywords: Dividend; Interest; Royalties; Tax Treaty.

1. INTRODUCTION
As known widely that British is the country that influences many countries in the
world through its colonization. Through its colonization, British brought its legal
system to the colony countries. Indeed, nowadays many British's colonies already got
its independence. However, the ex-British's colonies still adopt the law system
inherited from the British. Some examples of the ex-British's countries are New
Zealand, Hong Kong, and South Africa. Those countries got strong influence from the
British in the past. Indonesia that is not the ex-British's colony is actively trading with
many of the ex-British's colonies including New Zealand, Hong Kong, and South
Africa. Investment from those countries is also coming to Indonesia and vice-versa.
The investment can be in a form of stock investment whether through direct
investment or portfolio investment, debt investment, and usage of intangibles. In order
to share the tax rights upon the dividends, interest, and royalties, the investor's
countries signed the tax treaty with Indonesia. The tax treaty offers the reduced tax
rates on dividends, interest, and royalties. However, the reduced tax rate is treated
differently from country to country. Therefore, this study is conducted in order to find
out what are the similarities and the differences of the tax treaty between Indonesia
and the ex-British's colonies, particularly New Zealand, Hong Kong, and South
Africa. New Zealand, Hong Kong, and South Africa are chosen as a model not only
because they are the ex-British's colonies, but also they are located in the different
continent with different economic condition and situation. Apart from the similarities
and the differences of the tax treaty between Indonesia and those countries, this study
also would like to find out is there any specific impact or any special relationship
between Indonesia and ex-British colonies in the implementation of tax treaty. In
specific, are there any factors that affect the different rates in the tax treaty between
Indonesia and those ex-British's colonies?

2. METHODOLOGY AND SCOPE LIMITATION

This research uses qualitative approach by comparing the tax treaty between
Indonesia – South Africa, Indonesia – New Zealand, and Indonesia – Hong Kong in
relation to the dividends, interest, and royalties. The domestic Tax Law of Indonesia
and its treaty partner's countries are gathered from secondary data through literature
review. This research only focuses on the tax issues in relation to the dividends,
interest, and royalties in the tax treaty context between Indonesia – South Africa,
Indonesia – New Zealand, and Indonesia – Hong Kong. The domestic tax law that
will be taken into consideration are only related to the dividends, interest, and
royalties in Indonesia, South Africa, New Zealand, and Hong Kong when deals with
the cross-border transaction in the absence of the tax treaty. The scope and limitation
of this research will be limited
3. LITERATURE REVIEW
Dividends, Interest and Royalties in the Domestic Tax Law of Each Country
Indonesia
According to the Indonesia Income Tax Law (UU 36 Year 2008, article 4, paragraph
h), dividend is “The share of profit received by shareholders or insurance
policyholders, or the distribution of net income of a cooperation received by its
members.” Moreover, the definiton of interest and royalties are follows
Based on Indonesia Income Tax law (article 4, paragraph f), the definition of interest
is “ the guarantees loan provided in various rate that are premium, or discount.”The
issuer of bond will gain income when the bond is premium, however it will become
an income for the buyer of the bonds. As refere to the last discussion based on
Indonesia Income tax law (article 4, paragraph h), the definition of Royalties is “ the
payment for the use of right over intangible or tangible property and transfer of
knowledge.”
The withholding tax rate may be reduced where the foreign resident is exempt or
eligible for a reduced rate by virtue of a tax treaty or through a negotiation between
the countries involved ,where the countries involved send their representatives to
determine who has the right to charge the resident(KPMG,2013)

Indonesia charges resident and non – resident of dividend, interest and royalties with
different rate and under various circumstances. Below is the table of tax imposed on
payment of dividend, interest, and royalties.
Indonesia Resident Non - Resident
Dividend  15% (Companies)  20% (deductible by
 10% Final (Individuals) treaties)
Interest  15% (if non-financial institution)  20% (deductible by
 20% (if paid by bank) treaties)
20
Royalties  15% (Companies and Individual)  20% (deductible by
treaties)
source:worldwide coorporate tax guide 2014

South Africa
The definition of dividend itself according to the legal & policy of the South African
and revenue service is “A dividend is in essence any payment by a company to a
shareholder for a share in that company (excluding the return of contributed tax
capita”, dividend withholding tax was introduced in 1 April 2012, with the rate of
10% and known as secondary tax on companies. According to Africa local law,
dividend withholding rate tax will be charged by 15%, this dividend will be exempt if
the dividend declared from African-resident Company and public benefit
organization. Interest rate of South Africa, start from1 January 2015 is 15% and
applied for non – resident only. As refer to the legal & policy of SARS there is no
straight definition of interest in fact there are serveral type of interest income,the
interest that resulted from many business activity such as bond,bank loan and any
other financial instrument. The treatment of witholding tax on interest income in
south africa as follows, certain interest income will be exempt such as interest with
respect to government debt instrument, listed debt instrument and debt instrument
owed by bank.Conforming to the South African legal & policy act Concerning
royalties,the definition of witholding tax on royalties is “Amounts received for the
imparting of any scientific, technical, industrial or commercial knowledge or
information, commonly known as “know-how” payments, are specifically included in
the definition of “gross income”, and are taxable.”.The royalties’ rate applied in South
Africa for non- resident is 15% start from 1 January 2015 and this withholding tax
will apply for non- resident only.
Below is the rate table of South Africa local law, which is imposed by Africa
Company on payment of dividend, interest and royalties.
South Africa Resident Non- Resident
Dividend  0% (received from South  15% (Deductible)
African–resident company  10% (if the Indonesia
and public benefit resident at least has right
organization) 10% of the company and
 15% (other company other no interest if the
than African – resident Indonesia resident did not
company) present exceed than 183
days)
 15% (In other case)
Interest  0% (coorporation)  0(if physically not
 Elective based on age of present for a period
the person and taxable exceeding 183 days)
income amount (interest (coorporation to
up to a cumulative individual non resident
R23,800(R34,500 for tax payor)
individuals older than 65  15 (paid by banks and
years of age)is exempt other institution to non
from normal income tax. resident tax
( individual) payor ,deductible by
treaties)
 0/10(to Indonesia
resident)
Royalties  0%  15% (deductible)
 10% (to Indonesia
resident)
source:worldwide coorporate tax guide 2014

New Zealand
According to New Zealand parliamentary councel office, the witholding tax rate for
for interest,dividend ,royalties in New Zealand are regulated under New Zealand
income tax act 2007,which is act as the local law.The authority whose respondsible of
levy the tax is inland revenue service,According to the world wide corporate tax guide
(2014), they identified New Zealand start from 1 February 2010 to be reduced by 15%
for cash dividend and 0% for non- resident interest due to the high rate of withhold
charge which is 30%. However, New Zealand has special treatment for their resident
regarding interest tax rate with several elective condition as mention detailed
below,the elective tax rate charge on interest vary 10,5% for individual that expect
their annual gross income will not exceed NZ$14,000 and for trustees for
deceased estates)and 17,5%,30% or 33% if their tax recipient supply their tax
indentification number,the basis to elect the interest is unkown due to limited
information, for non – resident new Zealand will charge by 15% and it still
deductible based on tax treaty. The last discussion will be royalties for new Zealand
resident where new Zealand do not charge royalties to their resident but new Zealand
will charge their non – resident royalties tax rate by 15% final.

New Zealand Resident Non - Resident

Dividend  33% (can be reduced by  30% (direct voting at
15% cash dividend and least 10%, will be
0% non-cash dividend) reduced by 15%)
 15% ( to indonesia
resident)
Interest Elective by condition 15%(deductible by treaties)
(Individual)  10,5%(for individual that
expect their annual gross
income will not exceed
NZ$14,000 and for
trustees for deceased
estates)
(Below are elective tax rate
imposed on interest for new
zealand resident if the recipient
supply their tax number)
 17,5 %
 30 %
 33 %

Interest  33 %(if interest  15 %(at a glance and

(corporate) recipients do not supply deductible)
their tax indetification  10%(indonesia resident)
number)
 28% (if the interest
recipients supply their
tax indetification
numbers)
Royalties  0%  15% final
  15%(to IDN resident)
source:worldwide coorporate tax guide 2014

Hong Kong
Hong kong recognised as a special administartive region and as still considered as
part of Republic of China .However,Hong Kong has its own independent tax system
as refer to The Bacis Law of The Hong Kong Special Administrative Region of The
People’s Republic Of China under article 108 “The Hong Kong Special
Administrative Region shall practice an independent taxation system”.thus Hong
Kong has its own tax rate that resulting Hong Kong does not charge dividend and
interest rate for their resident and non- resident, however Hong Kong charge the same
rate for royalties to non- resident country which is 4.95% for corporate and 4.50% for
individual.
Hong Kong Resident Non Resident
Dividend 0% 0%
Interest 0% 0%
Royalties  16.5% (to  4.95% (to
corporation) corporation)
 15% (individual)  4.50% (to
individual)
source:worldwide coorporate tax guide 2014

Tax Treaty of Dividend, Interest Royalties between Indonesia and each country

Indonesia – South Africa Indonesia – Indonesia –

New Zealand Hong Kong
Dividend  10% (at least 10%)  15%  5% (at least
 15%  15% 25%)
 10%
Interest  0% (tax exemption)  0%(tax  0%(tax
 10% exemption exemption)
)  10%
 10%
Royalties  10%  15%  5%
source:worldwide coorporate tax guide 2014

4. ANALYSIS: SIMILARITIES AND DIFFERENCES

The Comparison of Treaties Concerning Article 10 (Dividend)
This paper constructs an analysis that focuses entirely on the similarities and
differences of dividend, interest, and royalties between Indonesia and three different
countries, which are South Africa, New Zealand and Hong Kong. The Comparing
process will be started from each country Income tax law more focus on dividend,
interest, royalties and the last is comparison tax treaty between Indonesia and those
countries.
Based on, Indonesia income tax law, the dividend tax imposed from
Indonesian resident which are 10% final to individual; and 15% dividend payment to
Indonesian resident company. However, Indonesia will impose non – resident
company by 20%, which is deductible by tax treaty. According to the Indonesia tax
treaty between Indonesia and South Africa, New Zealand and Hong Kong, the rate for
dividend are various, the first similarities detected for the first substantial investment
will be charged with the lower rate under several circumstance, for instance, south
Africa resident generate income form Indonesia of dividend, they will be charged by
10% but he must at least has a control of the company 10%. Tax treaty Indonesia -
South Africa and Indonesia – Hong Kong has the same implementation, however the
difference is the rate itself and the requirement that has to fulfill. Comparing three
different treaties of dividend, the highest and constant dividend charged is by New
Zealand. Based on Indonesia – New Zealand Tax Treaty, it is not differentiate the rate
charged for portfolio or substantial investment.
The uniqueness detected in three different treaties comparing with their local
law, South Africa and Hong Kong does not charge Dividend tor their resident, and
they charge non – resident with higher rate compare with Africa or Hong Kong
Resident, which is normal, because by charging a higher rate of tax imposed, it will be
beneficial for the countries because if there is tax imposed by Africa or Hong Kong, it
might increase the demand people to invest money more in those countries, without
paying any tax. However, comparing New Zealand local law and tax treaty, New
Zealand imposed much higher tax dividend for resident of new Zealand, however new
Zealand will deduct by 15% if the income generating in term of cash dividend, which
is much lower compare with their resident.
 In analyzing the difference and similarities of tax treaty rate imposed by those
three difference countries towards Indonesia, it indicate that, Hong Kong does not
imposed higher dividend tax which is only charge by 5% for substantial and 10% for
portfolio, because the relationship of business between Indonesia and Hong Kong is
highly demanded, and Hong Kong would like to maintain the relationship between
Indonesia. On the other hand, New Zealand imposed tax by 15% which lower
compare with New Zealand Income tax law which is 30%, this happen because, New
Zealand would like to attract non resident to invest money in new Zealand.
The Similarities from three treaties, that the rate of tax treaty will not be
applied if the owner of dividend (non – resident) is being an Indonesia resident and
carries business in their home countries and pay the dividend through permanent
establishment to Indonesia, the tax applied will be business profit. In New Zealand,
they will be no charge for business profit, however, in south Africa and Hong Kong
will be charged by 10% for the business profit.
The last difference detected is Indonesia – Hong Kong, they have an
agreement where Indonesia resident has a company in Hong Kong, and the profit
generated will be subject to an additional tax by Hong Kong which is not exceed than
5% from the amount of profit after deducting from income taxes.
Additional comparison based on Indonesia, South Africa, New Zealand, and
Hong Kong local law. By comparing the rate between local laws of those countries,
the uniqueness detected, New Zealand charges non – resident with the lower rate
compare to new Zealand resident which is 33% deductible, based on analysis
assumption that new Zealand would like to attract more investor to invest in their
countries. On the other hand, comparing with South Africa charge by 15% deductible
for dividend, and there is special treatment for Indonesia resident who receives
dividend from Africa, they will be charged by 10% if the Indonesia resident present in
South Africa exceed 183 days, less than that will be 0%. Hong Kong charges 0%
dividend tax rate for resident and non – resident because the company who pay the
dividend has already charged the corporate tax.
There is another reason why New Zealand tend to charge tax higher compare
with south Africa and Hong Kong to Indonesia based on Tax treaty, this is due to
New Zealand is developed countries which has an intention to tax more in their
countries rather than Indonesia, this occurs because new Zealand think that their
country is providing the sources of capital to Indonesia.
The Comparison of Treaties Concerning Article 11 ( Interest )
The interest transaction between countries as the result of international transaction
regarding invesment and capital flow across countries, for example the transaction of
bonds between countries and investment in depository institution,as many expats and
multinational companies mobilize across countries and the investment across
countries grow significantly.This part of research will focus on the tax imposed on
interest payment for the object or the beneficiary of the interest between contracting
parties .The tax relationship(tax treaty) under article 11 concerning interest ,the
regulation of payment tax imposed on interest between south africa ,new zealand and
hongkong have been regulated under the international treaty.the indonesian treaty
itself between those countries varies since the nature of relationship of indonesia with
those 3 countries differ ,for instance the factor such as economic relationship (export
and import),diplomatic and historical relationship between those countries.
The treaties regarding article 11 provide flexibility for the beneficiaries of the
contracting parties relationship, in terms that the beneficiaries are allowed to reduce
the tax rate imposed on interest for particular levels of rate, thus it will reduce the
burden of the tax payor.As the DTA is expected to reduce the burden of the tax payor
so it will make an incentive for foreign investment (capital flow) and may resulting
mutual benefit for both financialy and economically
Generally, the comparison of the treaty between south Africa and new Zealand
has the similarities in which on the article 11 regarding interest consist of 7
paragraphs. However, the treaty of Hong Kong has 8 paragraphs. The analysis as
follows.
Firstly, regarding the article 11 paragraph one and two generally stated that the
resident of the contracting party shall be taxed on the other contracting party. for
instance if the new Zealand resident received interest income in Indonesia, thus it
shall be taxed in Indonesia and it applicable for south African citizen and Hong Kong
citizen those received interest in Indonesia as the source country. However,paragraph
2 has significant difference in which south Africa–Indonesia treaty is more straight
foward in terms that it may not be negotiable between the contracting parties, since
paragraph 2 concerning the tax imposed on interest shall not exceed 10 percent of
gross amount of interest, in which article 11 indonesia-africa treaty does not mention
any mutual agreement meeting for the limitation .unlike indonesia-south Africa treaty,
indoensia-Hong Kong and indoensia-new Zealand treaty is more adjustable for the
special circumstances, for example if there is a special occasion in which it shall
involve a mutual agreement meeting concering the tax imposed on interest shall not
exceed 10 percent of the gross amount of interest ,the treaty allows for the
representatives from each of their country for mutual agreement settlement, thus it is
more adjustable for the contracting parties involved, compare to the Indonesia-south
Africa treaty that may negotiable.
Secondly, concerning article 11 paragraph 3 regarding the tax exemption
between Indonesian contracting parties (Hong Kong, south Africa and new Zealand)
there is difference in terms that the detail and specific information on the tax
exemption, the Indonesia- Hong Kong treaty is the most specific since it stated every
sub divisional that allows for tax exemption of the contracting parties and stated the
tax exemption applicable for both point of view of inconesia and hong kong, for the
south Africa-Indonesia treaty is also specific but not as specific as Indonesia-Hong
Kong treaty and there is also tax exemption for the contracting state for the
government of the contracting parties .In contrast the Indonesia –new zealand treaty is
the most general and it does not provide any tax exemption for the Government of the
Contracting party including a political subdivision or a local authority and it shall
only taxabale in the other contracting state,for instance if bank of indonesia as the
beneficiaires of interest from the new zealand as the country it will be subjected to
tax only in the other contracting state and vice versa.The next paragraph which is 4th
there is no significant differences as it discuss concerning the definition of interest as
The term "interest" as used in the article means income from debt-claims of every
kind
Thirdly, in the article 11 for paragraph 5,6,7 ,there is no significant difference
for those the last 3 paragraphs regarding the validity of the treaty and the application
for the tax subject or the resident in the contracting parties, moreover the Indonesia –
Hong Kong treaty has an extra paragraph which is paragraph 8th

The Comparison of Treaties Concerning Article 12 (Royalties)

Royalties in the perspective of New Zealand and Hong Kong means any
payments of any kind received as a consideration for the use of, or the right to use,
any copyright of literary, artistic or scientific work including cinematograph films,
films or videotapes for use in connection with television or tapes for use in connection
with radio broadcasting, any patent, trade mark, design or model, plan, secret formula
or process, or for the use of, or the right to use, industrial, commercial or scientific
equipment, or for information concerning industrial, commercial or scientific
experience.  On the other hand, South Africa defines royalty as more detail to the
timing of the payment.
Based on Royalties tax treaty, Indonesia has a right to tax royalties, which are
arising from Indonesia. The way New Zealand, Hong Kong and South Africa have the
similarities in the implementation of royalties tax treaty, the one which make it
different is the rate implied, for Hong Kong resident is 5%, South Africa resident is
10%, and new Zealand is 15% from the gross amount of the royalties.
Royalties should be declared and be taxed at the state where the income is
being generated, whether the payer of the royalties is a resident or non resident of the
state who generates of pay the royalties still the need of declaration of royalties and
pay the tax which will be withhold by the country in which the income is generated
for example in the income generated in Indonesia and the royalties payment is paid to
New Zealand resident so in this way the income it self should be withhold by the
Indonesian individuals or company by 15% due to the treaty that is being made
between Indonesia and New Zealand.
Now a days more and more company getting smarter in where if they take the
profit out from Indonesia they manipulate the income so that they can bring the
money out from the company without paying high tax by using royalties as a media
but, the article 12 paragraph 6 stated that Where, by reason of a special relationship
between the payer and the beneficial owner or between both of them and some other
person, the amount of the royalties exceeds, for whatever reasons, the amount which
would have been agreed upon by the payer and the beneficial owner in the absence of
such relationship, the provisions of this Article shall apply only to the last-mentioned
amount. In such case, the excess part of the payments shall remain taxable according
to the laws of each Contracting Party, due regard being had to the other provisions of
this Agreement.
Firstly the tax rate that is given by Indonesia as a compensation for the other
contacting state for example Hong Kong, New Zealand, South Africa regarding the
royalties that is generated in Indonesia by the other is contracting state. For the rate of
tax of royalties in Indonesia for foreign resident is 20% flat rate however due to the
treaty agreement that have been made Hong Kong got their income withhold in
Indonesia for 5% which in their country they have to still pay 10% for individuals and
11.5% for corporation due to the 5% have been withhold in Indonesia, for south
Africa resident who get income in form of royalties from Indonesian company or
individuals they get withhold by 10% from the total payment due to the treaty that
have been agreed and in their home country they still need to pay the remaining of 5%
that haven’t been withhold in Indonesia. In the other hand New Zealand residence
they still need to pay the 15% tax rate from their income that is generated from
Indonesia in form of royalties in which actually in their own country as a resident of
New Zealand that did not need to pay any percentage from their income that is
generated by royalties in this way the resident of New Zealand who generate income
from Indonesia they did not need to pay any excess of tax in their home country.
In term of royalties Hong Kong have given the lowest rate compare to New
Zealand and South Africa this might be an indication where Hong Kong government
need more people who buy or use any right or a royalties in which in the end will
resulted income for the Hong Kong people, for a New Zealand which give a high rate
compare to other country is might be because of there in no tax that regulates about
royalties in their country which in this case if the New Zealand resident who make
money from outside country their income will be withhold in the country where they
generate the money to  be taxed by the country.
Comparing Indonesia – south Africa, Indonesia – new zealand, and Indonesia
– Hong Kong based on tax treaty detected that royalties charged by Hong Kong is the
lowest rates, based on assumption made this occurs because Hong Kong would like to
attrack people to invest and use Hong Kong Brand with the lower rate charge, in
purpose to expand their brand broader and tend to be central of business.

5. Closing
In Conclusion, Dividend, Interest and royalties tax treaty are serves and
contribute as an agreement for the contracting parties, in which the treaty itself
provides a mutual benefit for both contracting and the other contracting parties. Due
to the existance of tax treaty, it will reduce the rate of dividend, interest, and royalties
charges for non – resident under various circumstance and it also specifies the tax
exemption for the contracting parties, which resulted in preventing double taxation.
Moreover, the disticntion of treaties depends on the nature of the relation between the
country themself as the basis of rate determination.

6. References

OECD. (n.d.). history. Retrieved 3 1, 2015, from www.oecd.org:

http://oecd.org/about/history/
analyst, t. (2015). tax analyst. Retrieved 4 1, 2015, from tax analyst:
http://www.taxhistory.org/www/website.nsf/Web/THM1756?OpenDocument

whittaker, d. (1982). introduction. an Examination of OECD and UN model tax treaties , 2-

3.

UN. (2011). model double taxation convention. departmen of economic and social affairs
(p. 6). new york: UN.

chisik, r., & davies, r. (2004). Asymmetric FDI and tax-treaty bargaining: theory and
evidence. journal of public economics , 1119–1148.

davies, r. (2003). Tax Treaties, Renegotiations, and Foreign Direct Investment. economic
analysis and policy , 251–273.

Iqbal, Z. (ND). How Tax Treaties Allow Benefits from Double Taxation.

INDONESIA, L. O. (2008). LAW OF THE REPUBLIC OF INDONESIA. Concerning the 4th

amendment of law numer 7 of 1983 concerning income tax , 5-7.

tax guide. (2014). world coorporate tax guide 2014. 591-592;540-541;595;1250-1251.

kpmg indonesia. (2013). indonesia tax profile. coorporate tax , 10.

legal & policy. (2014). taxation in south africa 2014/2015.

THE BASIC LAW. (1990). the basic law of hong kong and special administrative region of
the people's republic of china. 34.