“Comparative Analysis on the

Taxation of Dividends, Interests,

and Royalties under Indonesia
Treaty”
Levi Amanda, Venesse Kristanty, Veronica Grace

Accounting , Binus International University

Abstract This paper focuses on the comparative analysis between

Taxation of Dividends, Interests and Royalties under Indonesia treaty.
The objective is to elaborate the application of the taxation of dividends,
interests and royalties under Indonesia Treaty.
Keywords dividends, interests, royalties

INTRODUCTION Taxes, International Tax Agreements,

Value Added Tax, Luxury- goods Sales
Tax, Customs and Excise, Tax
Indonesian taxation is based
Concessions and Land and Building.
on Article 23A of UUD 1945. The tax is
The currency used in Indonesia is the
exposed on every Indonesian citizen,
Indonesian Rupiah and no foreign
foreigners and residents who have
exchange currencies have controls on
resided for 120 days within a twelve-
this currency. Rupiah has depreciated
month period. There are several
for more than 70% since the economic
stratifications in Indonesian taxation,
crisis in 1997. The calendar year is the
such as Income Tax, Central
base for the tax year in Indonesia and
Government Tax and Local Tax. Every
the fiscal year ends on 31 March. The
types of taxation have different
financial year for the company usually
regulations, and in Indonesian
end on 31 December. For the foreign
taxation there are several types.
companies subsidiary, usually follow
Corporate Income Tax consists of Tax
the financial year of overseas parent.
rates, Profit Margins, Tax residences
and other. Individual Income Tax
consists of Normal Tax rates, Tax
Taxation under Indonesia Treaty
payments, Social Security System and
others. Also there are Withholding
 Based on the Article 23 Income
tax (pph 23), resident taxpayers are
subject to 15% of the gross amounts
on dividends, interests, and royalties.
In addition, based on the article 26
income tax (pph 26), resident
taxpayers, organizations, and
representatives of foreign companies
are required to withhold tax at a rate
of 20% to non-residents on gross
amounts for dividends, interest, and
royalties. On condition where the
beneficiary is resident in a country,
which has a tax treaty with Indonesia,
the withholding tax rates might be
reduced or discharged. Under Double
Taxation Agreement, generally only
the beneficial owner is recognized as
the party accredit to the tax treaty
benefits. (PWC, 2016).
Dividends
A dividend is a circulation of a
part of an organization's income,
chose by the governing body, to a
class of its shareholders. Dividends can
be issued as money installments, as
shares of stock, or other property
(Investopedia, 2016).
Under the withholding tax,
dividends paid to a nonresident are
liable to a 20% withholding tax that is
considered as a final tax, unless the
rate is reduced under a tax treaty.
Dividends paid by a domestic
corporate taxpayer to a resident
company are liable to a 15%
withholding tax, which serve as an
advance payment of tax liability. A
10% final withholding tax is charged
on dividends paid to a resident
individual (Deloitte, 2016).
Under the profit distributions,
tax is subject to be withheld from
dividends as follows:
a. Resident recipients
Dividends established from an
Indonesian company by a constrained
obligation company incorporated in
Indonesia, a state owned company are
excluded from income tax if the
following conditions are met:
 The dividends are paid out of
retained earnings
 For state owned companies and
PTs, the company earn dividends
and holds at least 25% of the paid-
in capital in the company in
distributing the dividends.
If the conditions are not met, the
dividends are assessable to the
company earning together with the
dividends at ordinary tax rate with
other company’s income. After the
declaration, dividends are liable to
Article 23 income tax withholding at
15%. The amount withheld were an
advanced payment of the CIT liability
for the dividends earned by the
company. Dividends established by
resident individual taxpayers are liable
to final income tax at a maximum rate
of 10%.
b. Non-resident recipients
20% (lower for treaty countries) final
withholding tax is collectible on
dividends paid to a non-resident
recipient.
Interest
Interest is the charge for the
privilege of borrowing money, usually
indicated as annual percentage
rate. Interest can also indicate as the
amount of ownership
a stockholder has in a company,
usually indicated as a percentage.
There are simple and compound
interest, which are the two main types
of interests that can be applied to
loans. Simple interest is the amount
rate that the borrower has to pay in
order to have the ability using the
money lent. Compound interest is
interest on principle and compounding
interest paid on the loan. Several
considerations in calculating the type
of interest and the amount that will be
charged by the lender to the borrower
include the opportunity cost, the
amount of expected inflation, the risk
of unable to pay loan back by the
lender because of default, the period
of time that the money is being lent
out for, the liquidity of the loan being
made and the possibility of
government intervention on interest
rates (Investopedia, 2016)
As income earned, commonly
the interest is taxed at the same
federal tax rate, such as (Fidelity,
2016):
 Interest on certificates of deposit
(CDs)
 Interest on an annuity contract
 Interest on deposit accounts
(checking and saving accounts)
 Interest on loans made to other
parties
 Interest on insurance dividends
Moreover, there are interests
that can be exempted from federal
income tax, such as (Fidelity, 2016):
 Private activity bonds
 Municipal bond interest
Under Indonesian Taxation,
interest paid to a nonresident is liable
to a 20% withholding tax, except the
rate is reduced under a tax treaty.
Interest paid by a domestic taxpayer
to a resident normally is liable to a
15% withholding tax, which signifies
an advance payment of tax liability.
Interest paid by a bank in Indonesia to
a tax resident is liable to a 20% final
withholding tax (Deloitte, 2016).
Royalties
Royalty is a payment for the
owner intended for the use of assets
such as patents, copyrighted works,
franchises, and natural resources. A
royalty fee is formed to the authorized
owner of the property by people who
desire to use it for the intention of
developing revenue or other required
activities. Generally, royalties are
aimed to remunerate the owner for
the property’s use and are legally
binding. (Investopedia, 2016). In
Indonesia, a 20% of withholding tax is
imposed on royalties referred abroad,
unless the rate is decreased under tax
treaty. Royalties paid by a domestic
taxpayer to a resident are liable to a
15% withholding tax with the payment
interpreting an advance payment of
tax liability. (Deloitte, 2016).
CONCLUSION
In conclusion, under the withholding
tax, both dividends and interest paid
to a nonresident are liable to a 20%
withholding tax that is considered as a
final tax, unless the rate is reduced
under a tax treaty. In addition, all
royalties, dividends and interest paid
by domestic corporate taxpayer to a
resident company are liable to a 15%
withholding tax, which serve as an
advance payment of tax liability.
However in dividends, under
Indonesian Tax treaty, a 10% final
withholding tax is charged on
dividends paid to a resident individual
while Interest paid by a bank in
Indonesia to a tax resident is liable to
a 20% final withholding tax. In case of
royalties, only royalties from abroad is
imposed by 20% of withholding tax,
unless rate is decreased under tax
treaty.
Reference Lists:
1. Pajak. 2016. Introduction to the
Indonesian Tax System. Retrieved
from
http://www.pajak.net/info/indone
sian_tax_system.htm
2. Deloitte. 2016. Indonesia
Highlights 2016. Retrieved from
http://www2.deloitte.com/conten
t/dam/Deloitte/global/Documents
/Tax/dttl-tax-indonesiahighlights-
2016.pdf
3. PWC. 2015. Indonesian Pocket
Tax Book. Retrieved from
https://www.pwc.com/id/en/pock
et-tax-book/ptb-2015-final-
eng.pdf
4. Investopedia. 2016. Retrieved
from
http://www.investopedia.com/
5. 5. Fidelity. 2016. Interest Income
and Taxes. Retrieved from
https://www.fidelity.com/taxes/ta
x-topics/interest-income