|
Jul Seventa Tarigan |
Indonesia is one of the countries that applies anti-tax deferral or controlled foreign corporation (CFC) rules. In 2008, the minister of finance issued regulation no 256/PMK.03/2008 (PMK-256) and revoked the old one which was in effect since 1995. Indonesian tax residents must now look very carefully at the investment return from their subsidiaries abroad. Wherever a CFC is situated, PMK-256 requires that Indonesian resident taxpayers should recognise dividend income from their subsidiaries.
These are the main characteristics of the prevailing CFC rules:
A resident taxpayer has a CFC if it has at least 50% equity in a company abroad, individually or collectively with other resident taxpayers, except if such company is listed on any stock market. This control test apparently does not cover indirectly controlled subsidiaries.
There is no defined list of white or black countries/jurisdiction where a CFC is situated. Therefore, it does not make a difference whether a CFC is established in a low or in a high tax country/jurisdiction.
In determining the amount of dividend, no CFC income is exempt.
The pro rata share of the whole CFC's undistributed income must be included in the income of the resident taxpayer.
The dividend must be recognised by the fourth month after the CFC's deadline for filing of tax return or, in case the CFC is not obliged to submit a tax return or there has been no defined filing deadline, the dividend must be recognised by the seventh month after the end of the tax year of the resident taxpayer.
This new regulation eliminated the blacklist consisting of 32 countries/jurisdictions which were specified in the old regulation. Consequently, it may affect the taxable income of a resident taxpayer who has established a CFC in the country/jurisdiction that is not included on the blacklist.
On December 15 2010, the Directorate General of Taxes (DGT) issued an implementing regulation for the CFC rules. It stipulates that the amount of dividend is calculated by multiplying the CFC's income after tax and the share of the resident taxpayer. In addition, the CFC's income after tax is defined as the income of the CFC based on the financial statement that adopts the generally accepted accounting standards abroad deducted by the liable income tax.
If the CFC distributes a dividend a few years later and withholds any income tax, such tax may be deducted from a resident taxpayer's income tax of in the year the tax was withheld. Resident taxpayers are also obliged to submit the CFC's consolidated financial statement when they file the annual income tax return to the DGT.
This regulation may affect the amount of the CFC's income after tax, particularly for a CFC that is used as a holding company. It may happen since the income of the CFC's subsidiaries is usually consolidated by the CFC according to accounting principles. Thus, it may increase the amount of dividend significantly. Now, it seems quite difficult to determine whether this CFC rules only cover the directly controlled subsidiaries as it imposes tax on the profit of CFC's subsidiaries.
This means that the prevailing Indonesian CFC rule is stricter and broader than before. It may significantly affect the Indonesian resident taxpayer's decision in investing abroad as they are exposed to higher income tax. For a resident taxpayer who uses a subsidiary abroad as an SPV to obtain financing, special attention is needed to mitigate the effect of this regulation.
Jul Seventa Tarigan (jul.st@pbtaxand.com), Jakarta
PB Taxand
Tel: +62 21 8399 9919 Fax: +62 21 8379 3939
Website: www.pbtaxand.com
