Comparative Analysis on the Taxation of Dividends,

Interest and Royalties under Indonesia – Thailand

Treaty, Indonesia – China Treaty,
and Indonesia – Japan Treaty

Indonesian Taxation II

By Glenda Tania
Sylvia Halim
Winny Lie
1. Introduction

There is a classification towards countries, which are emerging, developing and

developed. Each country has different kinds of tax rights; it will all differ in
emerging, developing and developed countries. Different businesses invested
will be taxed differently, for example, taxing an agricultural land can be more
difficult in developing countries rather than in emerging countries. For example,
in India, due to information vacuum on the taxing system, it makes it harder
when compared to taxing it in emerging countries. Indonesia has been doing
business and investing in a lot of foreign countries, all in forms such as stock
investment, debt investment and etc. When investing in different kinds of foreign
countries, there is a need of agreement on the taxing rights; this is where the role
of a tax treaty can help. A tax treaty agreement generally consists of general
definitions, fiscal domicile, permanent establishment, income from immovable
property, business profits, shipping and transport, etc. This paper will
specifically highlight upon the dividends, royalties and interests in the tax
treaties of Indonesia – Thailand, Indonesia – China and Indonesia – Japan. The
research objective of this paper is to find out the similarities and differences of
how dividends, royalties and interests are being taxed in emerging, developing
and developed countries. Thailand, China and Japan are chosen mainly because
Thailand is an emerging country, China is a developing country and Japan is a
developed country. Another reason why it is chosen is because Indonesia has
enough experience in trading and making investments in these countries,
especially Japan. Japan is one of Indonesia’s major trading partners, and it has
been Indonesia’s largest export partner and a major donor of development aid.
This paper will also compare the dividends, royalties and interests under the
domestic law of Indonesia, Thailand, China and Japan to differentiate the rates.
The comparison of how dividends, royalties and interests are being taxed in
Thailand, China and Japan in the tax treaty will also be further elaborated to also
find out how are they different, and are there any factors that are affecting it.

2. Methodology and Scope Limitation

This research uses a qualitative approach by comparing the tax treaty between
Indonesia – Thailand, Indonesia – China, and Indonesia – Japan in relation to
dividends, royalties and interests. This paper will talk about the similarities and
differences of how dividends, royalties and interests are being taxed in the tax
treaty of Indonesia – Thailand, Indonesia – China and Indonesia – Japan. The
domestic tax law of Indonesia and its treaty partners (Thailand, China and Japan)
are gathered from secondary data through literature review.

3. Literature Review

Developed market has a highly industrialized economy and tends to have a high
GDP per capita income compared to developing markets. Developing market is
the opposite of developed markets, and emerging market are actually developing
market that is quickly moving towards becoming a developed market and it has
an annual GDP growth in the high single/double digits. Dividends, royalties and
interests are all taxed differently in emerging, developing and developed
countries. Under the domestic tax law of:
Indonesia
Payments of dividends by a resident company from another Indonesian company
are exempted from tax, but if the recipient company holds less than 25% of the
capital of the distributing company, it will be subjected to a 15% withholding tax.
Payments of dividends to a non-resident individual or companies are subject to a
20% withholding tax, and may be reduced under an applicable tax treaty. It is
also considered a final tax. The interest deductions are subjected to a 20%
withholding tax. It is imposed including guarantee fees paid or payable to non-
resident tax objects and this is considered a final tax. There is an exemption from
tax for interests that are paid to a bank or other financial institution. Withholding
taxes on royalties are 15% on domestic payments and 20% on remittances
abroad, unless the rate is reduced under a tax treaty and the recipient submits a
tax residence certificate from the tax authorities of its country of residence.
Thailand
Dividends paid to resident and non-resident individual or companies are subject
to a 10% withholding tax, and may be reduced under an applicable tax treaty.
Interests paid to a non-resident individual or companies are subject to a 15%
withholding tax, while interests paid on loans from financial institution or
insurance agency, and if the lender is a resident, it is subject to a 10%
withholding tax. Royalties paid within Thailand are treated as normal income for
tax purposes and royalties paid abroad are subject to a 15% withholding tax on
the gross amount.
China
Introduced as from 2008, dividends paid to a non-resident individual or
companies are subject to a 10% withholding tax, and may be reduced under an
applicable tax treaty. Interests are generally subject to a 10% withholding tax,
also may be reduced under an applicable tax treaty. A 5% BT also applies to
interest payments. Royalties from the licensing of trademarks and copyrights are
generally subject to 10% withholding tax and except for royalties payments that
involves the use of technology where an exemption can be granted, it is subject
to a 6% VAT.
Japan
Dividends for portfolio investments are subject to 15% withholding tax and
dividends from parent-subsidiary shareholdings are subject to 5% withholding
tax. However, after January 1, 2009 a 20% withholding tax rate will take effect.
The tax rate on interests under the Japanese domestic law is generally subject to
20% withholding tax and there are a number of important exemptions under
some treaties of Japan with other country where the rate is reduced to 10%.
Royalties from trademarks, patents and know-how, etc. are subject to 20%
withholding tax. These rates will differ in the Japan treaty with other countries.
 Indonesia Thailand China Japan
Dividends 20% 10% 10% 20%
Royalties 15% 15% 10% 20%
Interests 20% 15% 10% 20%
Table: Comparison of dividends, royalties and interests rates under domestic law of
Indonesia, Thailand, China and Japan

4. Analysis

Dividends
Under these three treaties, dividends refer to income from shares or other rights,
which is applied to the same taxation treatment as income from shares by the
taxation of laws of the contracting states of which the company making the
distribution is a resident. Furthermore, the dividends paid by a company, which
is a resident of a contracting state to a resident of the other contracting state,
may be taxed in that other state.

However, it is possible that the dividends are taxed in the contracting state of
which the company paying the dividends is a resident and the tax rate is
accordance to the laws of that state, but if the recipient is the beneficial owner of
the dividends, the tax charged shall differs under the three treaties being
compared; Indonesia-Thailand, Indonesia-China, Indonesia-Japan. Under the tax
treaty Indonesia-Thailand, the tax charged shall not be more than 15 percent of
the gross amount of the dividends if the company paying the dividends engages
in an industrial undertaking, and 20 percent of the gross amount of the dividends
in other cases. While under the Indonesia-China tax treaty, the tax charged is
limited to 10 per cent of the gross amount of the dividends. In the case of the
Indonesia-Japan treaty, the taxed charged should be up to 10 percent of the gross
amount of the dividends if the beneficial owner is a company which owns at least
25 percent of the voting shares of the company paying the dividends during the
period of twelve months immediately before the end of the accounting period for
which the distribution of profits takes place and up to 15 per cent of the gross
amount of the dividends in all other cases. The tax rate shows that China, as a
developing country, imposed the lowest rate among these three tax treaties.
There is a possibility that this happened as China has set up a number of special
economic zones, economic and technological development zones, export
processing zones to attract domestic and foreign investments and export
activities. The provisions shall not affect the taxation of the company in respect
of the profits out of which the dividends are paid under all treaties.

The laws stated above shall be ineffective for the three countries if the beneficial
owner of the dividends, being a resident of a contracting state, has a business in
the other contracting state of which the company paying the dividends is a
resident, may it be in the form of permanent establishment or in the form of
personal services, or when the dividends are paid is related with such permanent
establishment of fixed base.

Royalties
The term royalties has the same definition under all of the tax treaties being
compared. It refers to 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, or films or tapes used for radio or television
broadcasting, any patent, trademark, 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, or the right to receive payment as consideration for or in respect of
the exploitation of or the right to explore for or exploit mineral, oil or gas
deposits, quarries or other places of extraction or exploitation of natural
resources, or the supply of any assistance that is ancillary and subsidiary to, or
enjoyment of, any such property or the right as is mentioned aforesaid, or total
or partial forbearance in respect of the use or supply of any property or right
referred to in this paragraph. In agreement under Indonesia-Thailand,
Indonesia-China, and Indonesia-Japan tax treaty, royalties that arises in a
contracting state and paid to a resident of the other contracting state may be
taxed in that other state.
However, the royalties may also be taxed in the contracting state in which they
arise, and based on the laws of that state, but if the recipient is the beneficial
owner of the royalties the tax so charged shall not exceed 15 percent of the gross
amount of the royalties and the tax charged shall likewise apply to the gains from
the alienation of any right or property giving rise to such royalties if such right or
property is alienated by a resident of a contracting state for exclusive use in the
other contracting state and the payment of such right or property is borne by an
enterprise of that other state or a permanent establishment or fixed base
situated therein, according to the Indonesia-Thailand tax treaty. While under
both Indonesia-China and Indonesia-Japan tax treaty, the same rate of tax
imposed by one of contracting states on royalties derived from sources within
that contracting state and beneficially owned by a resident of the other
contracting state shall not exceed 10 per cent of the gross amount of the
royalties. This shows that Thailand also has a higher tax rate in terms of royalties
compared to China, as a developing country, and Japan, as a developed country. It
is explainable, as Thailand is still considered as an emerging country, they are
still struggling with unstable economic and business environment such as
inflation, as this phenomena has been briefly explained before regarding
Thailand’s high rate of interest compared to the developing and developed
countries.
Under all of the treaties being compared, the following laws are equally effective.
The first law being discussed is that the law regarding tax charged if the recipient
is the beneficial owner of the royalties shall not be effective if the beneficial
owner of the royalties, being a resident of a contracting state, carries on business
in the other contracting state in which the royalties arise, may it be through a
permanent establishment situated therein, or performs in that other contracting
state independent personal services from a fixed base situated therein, and the
right or property in respect of which the royalties are paid is effectively
connected with such permanent establishment or fixed base. Another law is that
royalties shall be deemed to arise in a contracting state when the payer is that
state itself, a local authority or a resident of that state. Where, however, the
person paying the royalties, whether he is a resident of a contracting state or not,
has in a contracting state a permanent establishment or a fixed base in
connection with which the liability to pay the royalties was incurred, and such
royalties are borne by such permanent establishment or fixed base, then such
royalties shall be deemed to arise in the state in which the permanent
establishment or fixed base is situated. 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, having regard to the use, right or
information for which they are paid, exceeds 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 abided law 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 state, in each country.
Interests
Under all the tax treaties of Indonesia – Thailand, Indonesia – China, and
Indonesia – Japan, the interests that arise in a contracting state and paid to a
resident of the other contracting state may be taxed in that other state. This
shows that all emerging, developing and developed countries have the same
agreement for this matter. However, there are differences in the rate imposed. In
Indonesia –Thailand, in the case of Indonesia, the tax charged shall not exceed
15% of the gross amount of the interest if the recipient is the beneficial owner of
the interest. While in the case of Thailand, the tax charged generally shall not
exceed 25% of the gross amount of the interest, and shall not exceed 10% of the
gross amount of the interests if it is received by financial institutions and
insurance companies. In Indonesia – China, the tax charged shall not exceed 10%
of the gross amount of the interest. In Indonesia – Japan, the tax charged shall
not exceed 10% of the gross amount of interest. This shows that the rates
imposed by emerging country which is Thailand, is bigger than those of
developing and developed country. There are factors that may affect the big or
small amount of interest rates, the most common one is inflation, where the
higher the inflation, the more likely interest rates are to rise. Another factor is
the government; the monetary policy announced by the governments will affect
the interest rates. Many economists predict the higher rates in Thailand are due
to the country’s central bank that is fighting the rise of inflation. There is a
pressure in the inflation due to rising food prices, and the promised rise of
minimum wage by Thailand’s government. It is also said that developing
countries are the best markets to invest in, since according to International
Monetary Fund estimates, they are expected to grow two to three times faster
than developed nations like Japan. The benefits that investors can get is the
diversification, because “they tend to perform differently than emerging and
developed markets, and have been successful at decoupling from the greater,
longer term woes of the mature economies of the West.” (Forbes, 2015).

The similarities under all three tax treaties are the rates above does not affect
the interests if the interest arising in a contracting state and is obtained by the
“Government” of the other contracting state such as political subdivisions, local
authorities, etc., the Central Bank of the other contracting state or any financial
institutions where the capital is owned by the Government. Under these
circumstances, the interests shall be exempt from tax in the first-mentioned
contracting state. The term “Government” has its own definition in all three
countries, for example, under Indonesia – Japan treaty, it refers to the Bank of
Japan and the Export – Import Bank of Japan in the case of Japan, and it refers to
the Bank of Indonesia and other financial institution where the capital is owned
by the Government and the Republic of Indonesia in the case of Indonesia.
Another case where the rates would not be applied is if the beneficial owner of
the interest, that is a resident of a contracting state, carries out a business
through a permanent establishment situated in the other contracting state or
performs an independent personal services under a fixed base situated in the
other contracting state. All emerging, developing and developed countries apply
the same law for the tax exemption.

Indonesia - Thailand Indonesia - China Indonesia - Japan

Dividends 15%(industrial 10% 10% (at least 25%
undertaking) of voting shares)
20% (other cases) 15% (other cases)
Royalties 15% 10% 10%
Interests 15% (in the case of 10% 10%
Indonesia)
25% (in the case of
Thailand)
Table 2: Comparison of dividends, royalties, and interests rates under the tax treaty
of Indonesia – Thailand, Indonesia – China, and Indonesia – Japan

5. Conclusion
To conclude, from the analysis in this paper, it can be found that there are
similarities and differences in the way dividends, royalties, and interests are
being taxed in emerging, developing and developed countries. Thailand, China
and Japan are chosen as a representative for each emerging, developing and
developed country. Observing from the tax treaties of Indonesia –Thailand,
Indonesia – China, and Indonesia – Japan, the similarities found are that all
countries have the same meaning for the term “dividends”, “royalties”, and
“interests”. Another similarity is that dividends, royalties and interests that arise
in a contracting state and paid to a resident of the other contracting state can be
taxed in that other state. The ways the taxes are being exempted are also similar
in all three countries. There are also differences that can be seen, which are in
the rates that taxes imposed to be charged to dividends, royalties, and interests.
These different rates are caused by some factors, and the most common one is
inflation, especially in Thailand, an emerging country. The high amounts of
interests and royalties rates from Thailand are mainly caused by inflation.
Summing up, Thailand has the highest rates of dividends, royalties and interests.
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