Double Taxation in Bali: What you need to know to avoid it.
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Before transferring funds overseas, a business needs to be aware of tax implications. Failure to follow correct procedures will result in double taxation. The business may also have to pay penalties. In this article, you will find out how to avoid double taxation in Bali.
Double taxation is when a taxpayer pays tax on the same income in different jurisdictions.
For example, a Singaporean company has shares in a company in Indonesia. As a shareholder, the Singaporean company will receive dividends. The Indonesian company will then transfer funds to the Singaporean company. If the Indonesian company fails to follow appropriate procedures, they will pay tax in Indonesia and Singapore.
Businesses must be mindful of taxes when transferring funds overseas. If audited and found to have incorrectly paid taxes, the company will have to pay the taxes retroactively. It may also have to pay penalties. Many sources of income are subject to withholding tax.
We detail some common examples of these below.
Withholding Tax on Dividends, Interest, and Royalties
Relevant withholding tax rates apply to income gained from dividends, interest, and royalties. The tables below show tax rates for each of these.
Tax Rate on Dividends
|Income recipient||Portfolio Tax Rate (<25% ownership)||Tax Rate on Substantial holdings(>25)|
|Non-resident corporations and individuals non-treaty||20%||20%|
Tax Rate on Interest and Royalties
|Income recipient||Interest or Royalties|
|Non-resident corporations and individuals non-treaty||20%|
Withholding Tax on Services Provided
Income derived from providing services may also be subject to withholding tax. Such services include the following:
- advertising and marketing;
- related to software, or hardware, or computer systems including service and maintenance;
- website development and maintenance;
- Internet-related services, including internet connections;
- storing, processing, distribution of data, information, and/or programs;
- installation of machines;
- maintenance of machines;
- maintenance of vehicles, land, water, and air;
- security and investigation; etc.
The withholding tax rate for Indonesian tax resident service providers in Indonesia is 2%. This 2% tax rate does not apply for services provided outside Indonesia. The withholding tax rate on non-tax resident service providers is 20% unless supported by:
- Certificate of Domicile (DGT 1 form)
- Certificate of Residence
Proper tax planning is key to avoiding double taxation on overseas transactions. A professional accounting service, like Emerhub, will advise you on relevant tax regulations. We will also make sure to follow procedures for tax exemption to help you avoid double taxation.
Tax Treaties to Prevent Double Taxation
Tax treaties are agreements between two nations to resolve issues with double taxation. With these agreements, taxpayers will pay lower or no taxes on overseas transactions.
Indonesia has double taxation avoidance agreements with 67 countries. Including the following:
- Hong Kong
- New Zealand
- South Korea
- United Kingdom
- United States of America
The tables below show relevant tax rates from selected countries.
Tax rates on Dividends
|Country||Tax Rate (Portfolio)||Tax Rate (Substantial)|
Tax rates on Interest and Royalties
Double Taxation without a Tax Treaty
Note, however, that a lack of a tax treaty does not immediately mean double taxation. It will depend on the regulations of the recipient’s country. Emerhub’s tax experts will advise you on avoiding double taxation with other countries if there any option available.
Companies must apply for tax exemption to enjoy reduced tax rates.
The Process to Apply for Tax Exemption in Bali
- DGT 1 Form and Certificate of Residence. The foreign entity must prepare and present a Certificate of Domicile (DGT 1 Form) and a Certificate of Residence. The foreign entity’s tax authority must issue the certificates. Their tax authority must also sign and stamp the DGT 1 Form.
- Withhold taxes and submit the DGT 1 Form. The company in Bali must withhold taxes and submit the DGT 1 Form. The local company must submit the form no later than the deadline for submitting the withholding tax return.
If the company fails to submit the DGT 1 Form within the allotted period, the relevant amount will be subject to 20% withholding tax. It is important to note that it is not possible to apply for tax exemption retroactively. The business must apply prior to making the transfer.
Emerhub can facilitate the submission of the DGT 1 Form as well as properly computing your taxes. Our team of experts will make sure that you are able to enjoy reduced tax rates on your transfers and avoid double taxation.
Requirements for the DGT 1 Form
The foreign company must also meet certain conditions. Such conditions include the following:
The foreign party must first fulfill the following anti-treaty abuse tests. These are applicable to all types of income generated from Indonesia:
- The entity has the same legal form and economic substance either in the entity’s establishment or the execution of its transaction;
- The entity has its own management to conduct its business, and such management has an independent discretion; and
- The entity has business activity other than receiving dividends, interest, royalties sourced from Indonesia.
The foreign party must fulfill the following beneficial ownership tests if required under the relevant tax treaty when generating income in the form of dividends, interest, or royalties:
- The entity is not acting as an agent, nominee, or conduit;
- The entity has controlling rights or disposal rights on the income, the assets, or the rights that generate the income;
- The entity bears the risk on its own assets, capital, or liabilities; and
- The entity has no contracts which oblige the entity to transfer the income received to residents of a third country.
Emerhub’s accounting team will help you avoid double taxation in Bali. We will assist in preparing and submitting the DGT 1 Form to Indonesian tax authorities. We will also help you compute and report your taxes correctly. Get in touch with us at [email protected].
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